1. What is an NHA Mortgage-Backed Security?
The NHA MBS represents an undivided interest in a pool of NHA-insured residential mortgages. As mortgages, these financial instruments are secured by the value of the underlying real estate.
CMHC provides Mortgage Loan Insurance on all pooled mortgages and an unconditional guarantee under the National Housing Act (NHA) of timely payment to NHA MBS investors.
These securities, as investments, combine the investment qualities inherent in both real estate mortgages and Canadian Government bonds.
2. What is the National Housing Act?
The National Housing Act (NHA) is the federal government legislation that was introduced in 1944 to improve housing and living conditions for Canadians.
3. Who is involved in the NHA MBS program?
CMHC, the administrator of the NHA MBS program and the guarantor of timely payment on behalf of the federal government — This Government of Canada agency approves all NHA MBS issues.
Investors — Individuals and institutions, such as pension funds and corporations — both Canadian and foreign — purchase NHA MBS issues.
MBS Issuers — These include financial institutions that are already operating as Approved Lenders of NHA-insured mortgages: banks, trust companies, insurance companies, loan companies, credit unions and caisses populaires. Other financial institutions that are not originators of the underlying mortgages, such as investment dealers, may become issuers.
All issuers must be approved by CMHC. Investment dealers, stock brokers and financial advisors — Canada`s investment industry and other financial organizations are active participants in the program. Central Payor and Transfer Agent (CPTA), Computershare.
Custodians — Organizations authorized by CMHC to hold the mortgage assignments (the security for the NHA MBS pools) on behalf of the investors and CMHC.
4. What is the role of the Central Payor and Transfer Agent (CPTA)?
The main tasks of the CPTA are to collect payments of principal and interest monthly from the issuers and forward these on to the registered NHA MBS investors. The CPTA also maintains ownership records, replaces certificates when sold or lost, maintains information to support secondary market pricing and assists CMHC in monitoring issuer performance. The CPTA has offices across Canada.
5. How is an NHA MBS created?
An NHA Mortgage-Backed Security is created by a CMHC Approved Issuer. The Approved Issuer brings together a pool of mortgage loans insured under the National Housing Act, which must meet specific eligibility requirements.
Then CMHC obtains an assignment of the residual interest in the mortgages. All mortgage papers and supporting documentation are given to an arm’s length custodian acceptable to CMHC. The investor buys an undivided interest in this pool. The issuer also establishes a CMHC approved P & I trust account for monthly payments from the pooled mortgages. The issuer then carries out its plan to sell and deliver the securities to investors. NHA MBS issues are sold to investors by investment dealers or may be sold directly by the issuer.
6. What makes NHA MBS unique as an investment?
CMHC guarantees, on behalf of the Government of Canada, the timely payment of principal and interest on securities. This is the key innovation in the NHA MBS. Regular monthly payments are made to the NHA MBS investors whether or not payments from mortgagors are actually received by the issuing financial institution.
Principal and interest payable by the mortgagors of houses and apartment buildings on which insured mortgages are issued are passed through to the registered NHA MBS investors by the CPTA (Central Payor and Transfer Agent). The principal is distributed based on an expected actual pass through approach, while interest payments are calculated and credited at the coupon rate of the securities. Similarly, any lump sum prepayments, including any applicable interest bonus payable by the mortgagors in the case of some pool types, pass through to the investors. Since each NHA MBS pool may have different prepayment conditions, a review by the investor of the Information Circular relative to each pool should be standard practice.
This guarantee of timely payment is the essential feature that makes NHA MBS an important part of the range of investments available in Canada for financial planning.
While there are other investments based on a pooling of mortgages, NHA MBS issues are the only such investments that CMHC guarantees on behalf of the Government of Canada.
7. How does it benefit the economy?
NHA MBS provide new sources of funds for residential mortgage financing that have demonstrated lower interest rates. Homebuyers have more mortgage financing available to them. The housing and construction industries will, in turn, benefit. In addition, the NHA MBS add greater stability to the mortgage market by providing longer term mortgages and flexible prepayment privileges.
Also, the securitization of Social Housing mortgages under the NHA Mortgage-Backed Securities Program has been instrumental in reducing the associated financing costs of these projects, which ultimately results in savings for Canadian taxpayers.
For more information contact:
Phone: (778) 668-9320
Fax: (778) 294-2239
Email: [email protected]
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*Information from the CMHC website