On May 28th, the Canadian Housing and Mortgage Corporation (CMHC) announced new mortgage loan underwriting guidelines for multi-unit (5+ units) residential properties.
Here is an overview of what the new guidelines permit and restrict when refinancing with using a CMHC-insured mortgage:
At the time of writing, we (Peak Multifamily Investments) have spoken to a leading lender and a CMHC representative about the changes to better understand how to navigate the new guidelines.
Below is a series of questions and answers that have been provided to us by a leading commercial residential lender and through our own inquiry of the new guidelines.
We will continue to update this post as information becomes available.
1. Why is CMHC restricting use of funds for market refinance loans? Why has CMHC decided to implement these changes now?
The COVID-19 pandemic has presented unique risks and concerns to our insurance underwriting relating to multi-unit residential properties, which relies on strength of borrowers, forward looking anticipation of rents and future cash flows. We are seeking to manage this uncertainty and to reinforce that CMHC insured financing is to support housing and affordability. Prompted by a very significant acceleration in applications for refinancing, CMHC is implementing a restriction on use of funds in relation to our multi-unit mortgage loan insurance (5+ units) market refinance product. The restriction on use of funds for refinance loans focuses our activities on the supply and preservation of multi-unit residential housing in the immediate term.
2. When will CMHC begin to require the restriction on use of funds for market refinance applications?
Beginning May 28, 2020, CMHC will include a new restriction on use of funds as a condition of insurance for market refinance loans. This includes future applications and previously submitted applications that have not yet been assigned to a CMHC underwriter for review. If the lender decides to withdraw a previously submitted application, CMHC will refund the full application fee. CMHC will contact the lender to confirm how they wish to proceed with each application.
3. Does the restriction on use of funds apply only to refinance loans for standard rental housing, or does it apply to other shelter models such as retirement housing, supportive housing, student housing, and single-room occupancy?
The restriction on use of funds for refinance loans applies to all shelter models.
4. What are the restrictions? How can the refinance proceeds be used?
Refinance proceeds must be used for a permitted purpose in relation to residential housing. This could include one or more of the following: purchase, construction, capital repairs/improvements, including for increased energy efficiency and accessibility, or securing permanent financing (take-out 2 financing to pay off a short-term construction loan). Certain other uses may be permitted on a case-by-case basis; however, in no event shall equity take-out or distributions to shareholders be permitted, pending industry consultations.
5. How does the lender ensure compliance with the restriction on use of funds?
The lender is expected to act reasonably and prudently in ensuring compliance with the restriction on use of funds for refinance loans. Lenders are to implement appropriate measures to address the requirement. We expect the lender to retain in its loan file, documentation that demonstrates that the proceeds of the loan are used in accordance with the permitted use of funds. There is no prescribed deadline for using the proceeds for a permitted use. Supporting documentation may include but is not limited to a signed offer to purchase, construction plan and budget, or repair and maintenance plan. The lender must ensure that the borrower provides evidence as may be required by the lender of all cash outlays through invoices, receipts, or records as proof of payment and/or for quality assurance purposes.
6. Is it acceptable if the borrower made investments in housing before the refinance request?
Permitted uses and investments in housing must occur after the approval of the refinance transaction.
7. What if final costs are less than the approved insured loan amount?
CMHC recognizes that final costs could be less than what was originally anticipated. The proceeds of the loan must be used in accordance with the permitted use of funds. The lender has the authority to manage these types of situations. This could include, for example, reducing the insured loan amount, or allowing the funds to be used for a permitted use not initially contemplated.
8. Where should inquires related to this announcement be directed?
For general product questions, clients can contact us at FIMulti@cmhc.ca or 1-877-MULTI-GO.
File specific assistance should be directed to the CMHC multi-unit underwriter currently underwriting the mortgage insurance application
9. Is the restriction on use of funds for market refinance loans a temporary measure?
The restriction on use of funds for market refinance loans is being implemented to address specific concerns surrounding the pandemic and the uncertainty and risks that this brings. The immediate suspension of refinancing for equity take-out was necessary to prevent front running of this policy change in the context of already increased volumes. At this time, there are no changes to CMHC’s MLI Flex product – there is already a restriction on use of funds. However, we see no policy justification for government support of borrowing to pay equity holders. Absent a significant market distortion, we expect this change to be permanent. CMHC will be conducting a review of our suite of multi-unit mortgage loan insurance products over the next few months to accelerate achievement towards our 2030 aspiration. The results of this review may result in some product repositioning. It is premature to know what this could look like. 3 CMHC will be looking to consult with lenders and borrowers to help inform the direction of this work.
10. Is a refi for debt consolidation to be allowed e.g. repayment of a first and second mortgage on title?
While CMHC undertakes a broader review of our suite of insurance products, CMHC is prepared to allow borrowers to restructure existing approved lender issued debt on the subject property.
We are also prepared to consider insurance on a loan to restructure existing approved lender issued debt on the subject property (with additional funds) as long as any equity taken out is used for a permitted purpose. These permitted investments in housing are on a go forward basis from the time of the refinance transaction.
Additionally, new construction is the one exception where we are prepared to allow equity take out without restrictions on use of funds in order to encourage additional supply of housing.
11. If takeout is for purchase of another building, does it have to be a rental apartment building or will any type of commercial real estate qualify?
Refinance proceeds must be used for a permitted purpose, which includes the purchase of residential rental housing.
12. On a purchase does applicant have to have a property under contract when they submit application to CMHC or can this come after? If after, is there a time limit on when they should purchase and if they don’t purchase what is approved lender supposed to do with loan? Is loan considered in default?
The client does not necessarily need to have a purchase transaction under contract at the time of the refinance loan submitted to CMHC for insurance. The lender working with the borrower can determine compliance with the use of funds and what is reasonable and appropriate in the circumstance. We are trying to be as flexible as possible, while highlighting what is important to CMHC and what our expectations are.
The lender is expected to retain on file documentation that the proceeds of the loan were used as intended, along with some flexibility if plans do not materialize as expected (e.g. this could include paying down the insured loan or allowing the funds to be used for another permitted purpose not initially contemplated). If the borrower does not comply with the lender’s requirements, CMHC would expect that this information be disclosed to CMHC. Failure of the borrower to comply with such requirements would not invalidate the insurance coverage but it could result in other implications, including but not limited to a preclusion from future insurance applications for the borrower or borrower group.
Note: This is still to be determined by our Credit and Investment committees, as there are complications with securitizing the loans that have yet to be addressed
13. Does refi for purposes of buying out a shareholder or ownership partner in a building qualify?
Purchase and acquisitions are permitted. Details around a dissolution of relationship or acquisitions between related parties should be disclosed to the lender.
14. If funds are to be used for renovations does approved lender treat additional funds same way as a holdback for repairs would be treated?
For insurance purposes holdbacks may be tied to repairs or capital improvements to the subject property if required, which serves as the underlying security for the loan. This is a means of ensuring that funds are not over advanced. This still applies, as applicable.
If the refinance proceeds are being used for repairs or capital improvements to another property, it is a compliance exercise to ensure refinance proceeds are used for a permitted purpose (versus a material risk associated with the loan and valuation of the subject property).