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PART 1
The Mortgage Industry In Perspective

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Module One | Overview of the Industry

1.1 LEARNING OBJECTIVES
By the end of this chapter, you should be able to:
Discuss the legal and financing history of mortgages in Canada Understand the demand and supply factors that affect real estate Identify and outline the primary mortgage funding sources in Canada List the key players, and their roles and responsibilities

1.2 INTRODUCTION
Mortgage financing is a vital part of the Canadian economy. The Canadian mortgage industry has continued to grow and change over time, with new participants constantly entering the field, and new products being developed. At the end of 2009 there were about $965 billion in existing mortgages in Canada, with about 600,000 new mortgages written each year and about 1.1 million mortgages being renewed. This text, Introduction to the Canadian Mortgage Industry, Fourth Edition, will:
Place the mortgage industry in its historic, regulatory and legal perspective Review the mathematics that is applicable to mortgage financing Explain the mortgage process from the beginning (brokering the deal and taking

a mortgage application) through the lender evaluation (the underwriting process) and on to the closing process Explain the professional standards and best practices that apply in the industry

1.3 HISTORY OF THE MORTGAGE INDUSTRY

While mortgages have existed for hundreds of years, the mortgage marketplace is not static, but rather continues to change and evolve over time. Almost every facet of the industry, from the length of term for a mortgage and the types of repayment options that are available, through to the availability of funds, the interest rates charged, and the sources of these funds, has changed in the past few decades.
FOR YOUR INFORMATION: A mortgage is a legal method by which a borrower (called the mortgagor) can pledge property to the lender (called the mortgagee) as security for a debt.

As the requirements of both borrowers and lenders have become increasingly complex and diverse, mortgage lending practices, processes and procedures have evolved from that of a simple repayment plan to a multitude of complex payment arrangements offered by a wide range of public and private institutions.

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Todays mortgage consumer has a wide array of mortgage choices that are available. These choices and complexity can be confusing to the consumer. This growing diverse marketplace provides opportunities to the mortgage broker to best meet the needs of his or her customer. 1.3.1 Legal History Mortgages have existed for hundreds of years, though the mortgage as we know it today was only developed in the last century. Changes in the financing of land have been associated with changes in the ownership of land over time. Todays mortgage industry can trace its origins to feudal times in England, when private ownership of land became more common. This came about as the power of Royalty and Lords diminished due to the growth and development of the middle class. In those times, just like today, the costs of property were high, and most purchasers needed financing of some kind. In order to facilitate the acquisition of land, loans secured by the right of ownership of the land became common. Under this initial system of mortgage lending it was the seller (the vendor) of the land who supplied credit to the purchaser. No outside parties, such as banks, were involved. In many ways this was similar to todays vendor mortgage, where the vendor sells a property and then takes back or holds a mortgage on the property. This system offered the vendor a considerable measure of security when agreeing to sell property, since the vendor kept title to the property during the period that the mortgage loan was being paid off. Unlike today, where the purchaser of a property can own and occupy a home until the mortgage is paid off, in feudal times the purchaser had no rights to the property until the loan was completely paid off. In addition, if the purchaser fell into arrears in the payment of the mortgage loan, the right to ultimately take possession of the property, as well as any payments made on that property, would be forfeited. This arrangement produced the term mortgage, which comes from the French words: mort, meaning dead or passive; and gage, meaning pledge. Land would be transferred to the purchaser only if certain conditions - like repayment of the debt - would be made. It was absolute, and remained in effect no matter whether or not the land being mortgaged could produce any crops or livestock that could be sold. This was in contrast to a live gage. A live gage was a pledge that was repaid solely from the fruits of the land, that is, from what could be generated by putting the land to use. The fruits of the crops or the livestock were given directly to the vendor, or the money from the sale of the produce or livestock was used to pay the debt. A mortgage, on the other hand, required no further steps to be taken by the vendor, such as acceptance of crops and livestock, for repayment of the debt (and thus it was dead). Gradually, as property ownership and mortgaging became more widespread, the separation between possession of the legal title and possession of the physical property became more distinct. First it was recognized that the purchaser of a property who was granted a mortgage had the right to the profits from the land once it had been purchased. Once this was decided, there was no advantage to the vendor to retain possession of the property.
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The vendors income was seen to come from the interest payments resulting from the mortgage, rather than directly from the property in the forms of accepting crops or livestock raised on the property (the live gage). Vendors did retain possession of the legal title, thereby holding the right to regain possession of the property if the mortgagor defaulted on the mortgage. Over time, the concept of equity of redemption developed. This held that the borrower had the right, for a limited period of time, to repay the loan and retain possession of a property, even if default had taken place. This acknowledged that the borrower was the owner of the property, and the lender merely held the right to obtain possession of the property if the borrower was unable to repay the borrowed funds. This concept holds true today. 1.3.2 Financial History While the previous changes in mortgages involved the evolving concept of who owned the land while the mortgage was being repaid, the twentieth century saw changes in how a mortgage loan was calculated. Initially, mortgage financing was characterized by long-term loans where nothing but monthly interest was paid over the life of the loan. When the loan reached the end of its term (known as its maturity), the main principal amount (the amount that was borrowed) was either repaid or refinanced with another mortgage. These were known as interest only mortgages. Again, this type of arrangement gave great security to the lender. The borrowers income was regarded as security for the ongoing interest payments, while the property itself served as security for the principal. From the borrowers viewpoint, the interest only repayment plan minimized the cash outlays and allowed for the establishment of a savings account to build toward the eventual repayment of the principal. Periods of stable interest rates, low inflation, and stable property values resulted in these interest only mortgage loans being generally regarded as safe and satisfactory investments. The economic collapse of the North American economy during the late 1920s and early 1930s changed the perception of these interest only mortgage loans. During the depression, many lenders found themselves with loans made to individuals who now had no income and whose property was worth considerably less than the amount the borrower owed. Lenders thus discovered the principal risk associated with interest only loans, as they were holding loans where the full amount of the principal was outstanding at the end of the loan. They therefore faced the risk that the market value of the property might be less than the principal amount of the loan at the end of the mortgage term. The purchaser might refuse to pay the principal amount and the vendor would be left with a property worth less than the principal. The mortgage market responded to this newly understood risk by creating what we now think of as a mortgage. In this case the mortgage loan had a repayment plan where periodic payment of both interest and principal occurred during the term of the financial arrangement. No longer was principal repayment deferred until the maturity date of the mortgage. Instead, the principal was repaid bit by bit over the lifespan of the mortgage. In this way lenders reduced principal risk.
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The most common form of these repayment plans was the long-term, fully amortized mortgage. In a fully amortized mortgage each payment (e.g. each monthly payment made by a borrower) is the same for the life of the mortgage and is comprised of interest due plus a partial repayment of principal. At maturity, rather than the full amount of principal being due, the full amount of principal has already been fully repaid. This form of repayment was the rule in mortgage lending, particularly in the residential sector, from the end of the depression to the early 1970s. Another major innovation during this same time (post depression to the early 1970s) was the development of mortgage default insurance. In Canada, this came from the federal governments attempts to stimulate the demand for, and supply of, housing during the post-World War II period. As direct federal intervention in housing is prevented by the Canadian Constitution (and formerly by the British North America Act), the federal government used indirect measures, primarily through the mortgage market, to implement its housing policies. To increase the supply of mortgage money, the federal government attempted to motivate financial institutions to increase the extent of their participation in mortgage lending, particularly by reducing the risk of their loss in the event of default. One method that is still in use today took the form of government insurance against default on mortgage loans granted under the terms of the National Housing Act. In 1946, a Crown Corporation, which is today known as the Canada Mortgage and Housing Corporation (CMHC), was established to administer the National Housing Act. Under this insurance plan, borrowers paid insurance fees into a fund established and managed by the government to compensate lenders when default occurred. The insurance program played a major role in attracting new lenders to the mortgage market, particularly the chartered banks, who were allowed to offer mortgages made under the National Housing Act under amendments to the Bank Act in 1954. Before this time, banks were not permitted to make any mortgage loans, except those under the Farm Improvement Loans Act. The mortgage insurance market has changed and broadened dramatically since 1954. Originally, only National Housing Act (NHA) mortgages were eligible for insurance, and only for properties that were single-detached homes or new rental housing. By 1966 existing homes became eligible for insurance under the NHA. In 1969 the minimum term for NHA mortgages was reduced from 25 years to five years, to three years in 1978 and later to one year in 1980. By 1970 lenders were allowed to make high ratio mortgage loans, provided that they were insured by either a private or public mortgage insurance provider. The mortgage insurance program grew broader still in 1982 as variable rate mortgages became eligible for NHA mortgage insurance. CMHC allowed for 5% down payment on a home under the First Home Loan Insurance Program in 1992 - the same year that the Federal Government allowed for the use of RRSP funds for home down payments. In 1998, the maximum 95% loan-to-value ratio for first time homebuyers was removed. In 2007 the requirement that there must be mortgage default insurance on mortgages with a loan to value of 75% was changed to 80%. In 2008, maximum amortization
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period for government backed mortgages was set at 35 years and the maximum loan to value ratio was reinstated at 95%. In 2010, the federal government instituted a requirement that to be insured, mortgages with terms of less than five years must be qualified using the higher interest rates that are on 5year terms. They also lowered the allowable loan to value on refinanced mortgages from 95% to 90% and required a minimum down payment of 20% on mortgages for non-owner occupied residential rental properties (1-4 units). In 2003, both CMHC and Genworth Financial (which had entered the Canadian mortgage market in 1995 under the name GE Capital) reduced mortgage insurance premiums by 15%, and eliminated the maximum price ceiling for home mortgages. In 2005, they provided further reductions in premiums. In 2008 the three mortgage default insurance companies charged over $2.2 billion in insurance premiums, with two thirds of these premiums charged by CMHC and the balance split between Genworth and AIG UG. Mortgage insurance is available across Canada, for the purchase of new and existing homes as primary residences, for the purchase of second homes and the refinancing of existing mortgages. Mortgage insurance is available for rental housing as well. As a result of these changes, and in combination with government policies which helped to steadily expand the economy while keeping the inflation rate low, mortgage loans remained relatively unchanged between the early 1950s and the late 1960s. The rise in inflation rates, beginning in the 1970s, brought changes to the entire Canadian economy, including the mortgage market. As mortgage rates climbed sharply, mortgage lenders found themselves locked into lending money for long periods of time at rates which were far below the current rate. For example, a lender committing to a conventional mortgage of 9% in January of 1972 found that only three years later they were in an environment of rates that stood at 11.8%. While such a change in interest rates over a three-year period may not seem to be very significant today (given interest rate changes in the 1980s and 1990s), this rise in interest rates came as a shock to lenders who were used to very few interest rate changes during the 1950s and 1960s. See Figure 1. Because of these changing interest rate environments, mortgage agreements were changed to give both borrowers and lenders increased protection against the risk of unexpected interest rate fluctuations. The partially amortized mortgage, which offers such protection, became the most common form of mortgage loan in Canada. This form of repayment plan involves periodic payments (such as monthly payments) of principal and interest, based on a long period of time, such as 20 or 25 years. Thus, the mortgage loan is fully paid off over a 20 or 25 year period. However, the loan matures on a shortterm basis, such as one, two, three, five or seven years. At the end of this mortgage term, the full amount of the outstanding balance must be repaid or refinanced at the then current rate.

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Figure 1: Interest Changes Over the Decades
Canadian Bank Prime Business Loan Rates, 1956-2009 | Source: Bank of Canada
20.00 18.00 16.00 14.00 12.00 10.00 8.00 6.00 4.00
Per Cent

2.00 0.00 1956 1961 1966 1971 1976 1981 1986 1991 1996 2001 2006

Note: The prime business loan rate is the interest rate charged to the most credit-worthy borrowers.

To follow this example further, a mortgage that will be fully paid off over a 25 year period (for example), will have a mortgage term (with a set interest payment) of only 5 years (for example). At the end of this five year period, the remaining balance will then be amortized for the remaining 20 years, but the life of the mortgage loan (and the interest rate set for a fixed amount) will be set for another 5 year term. This partially amortized mortgage permits both lenders and borrowers to share the risk of possible fluctuations in the long-term lending rate. Rates on these shorter term mortgages (one, two, three, five or seven years) were generally less than rates on the longer term mortgages (reflecting the risks of fixing the interest rate for a longer term). Some borrowers, for example, might prefer the lower interest rates associated with a mortgage term of only one or two years. On the other hand, borrowers who want rate security over a longer term have found it is necessary to pay a premium in the form of higher mortgage interest rates for the security of a five or seven year term. Government actions during this same period beginning in the 1970s focussed on expanding housing options for a broader range of Canadians. A growing range of programs sought to either build, or help finance housing for particular groups, such as seniors, or low income households. In the mortgage market, lending institutions were allowed to enter the high ratio mortgage field (where a mortgage exceeded 75% of the propertys value) if the excess was either insured by CMHC or a private mortgage insurer. Today, a high ratio mortgage is one which has a loan to value of 80% or higher. In the 1970s there were three private mortgage insurance companies, while today there are two: Genworth Financial Canada and Canada Guaranty. The federal government has also taken steps to stabilize the flow of mortgage funds by attempting to attract more investors to the mortgage market. In 1986, CMHC created a new financial instrument called NHA Mortgage-Backed Securities (MBS).
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Mortgage-Backed Securities were designed to help provide a steady flow of mortgage funds into housing in Canada (see section 1.5 of this chapter, Mortgage Funding Sources, for more information). In 1992, the Home Buyers Plan was introduced by the federal government in order to help individuals buy a home. It allows most Canadians to withdraw up to $25,000 from their Registered Retirement Savings Plans (RRSPs) on a tax-free basis to purchase a home. Since then, millions of Canadians have participated in the program, placing over $15 billion into the housing market.

1.4 MARKET SIZE AND TRENDS

The residential mortgage market in Canada is large and growing. At the end of 2009, the total amount of residential mortgage credit outstanding in Canada was estimated to be about $965 billion, of which about $700 billion is for owner-occupied principal residences, and the remainder is investment properties and second homes. Will Dunning, CAAMPs Chief economist, estimates that mortgage credit will reach $1 trillion by mid2010, and will rise by 6-7% per year during 2010 to 2012. Over the past 15 years, the volume of outstanding residential mortgages has expanded by 184%, for an average growth rate of 7.2% per year. Growth was very robust during the second half of the 2010s, averaging 9.9% per year. Figure 2: Residential Mortgage Credit in Canada
Outstanding Residential Mortgage Credit | Source: Bank of Canada / Will Dunning
$1,400 $1,200 $1,000 $800 $600 $400 $200 $0 1990 1994 1998 2002 2006 2010

Actual Forecast

Today, almost one-half (48%) of Canadas mortgages are held by the chartered banks, and 30% are held as NHA mortgage-backed securities.

$ Billions

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Figure 3: Residential Mortgage Credit by Category of Lender, December 2009 Category of Lender Chartered Banks NHA Mortgage Backed Securities Credit Unions and Caisses Populaires Non-Depositary Intermediaries Securitization Companies Life Insurance Companies Pension Funds Trust and Mortgage Loan Companies Total
Source: Bank of Canada, Weekly Financial Statistics, March 12, 2010

$ Billions $465.8 $292.1 $120.3 $26.2 $15.9 $15.1 $15.9 $10.8 $965.3

% of Total 48.3% 30.3% 12.5% 3.0% 1.7% 1.6% 1.6% 1.1% 100.0%

In 2008, over 1.2 million mortgage loans were approved across Canada, for a total amount of about $216 billion. Figure 4: NHA and Conventional Residential Mortgage Loans - Annual Approved 2008 Total $ Amount Total # Units
Source: CMHC, amounts rounded

$ 216 Billion 1,228,000

The chart below illustrates the relatively flat mortgage activity during the second half of the 1990s compared to the sharp rise during the past decade. Total approvals for 2008, at $216 billion, is about three times the volumes seen during the second half of the 1990s.

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Figure 5: Residential Mortgage Loans Approved in Canada
Annual Approvals | Source: Canada Mortgage and Housing Corporation
$250

$200

$150

$100

$50
$ Billions

$0 1995 1998 1991 2004 2007

1.4.1 Mortgage Trends - CAAMP Mortgage Survey The Canadian Association of Accredited Mortgage Professionals (CAAMP) has conducted market research on the behaviours and attitudes of Canadian mortgage consumers for many years. Two major reports are produced each year. Both are based largely on surveys of Canadian consumers. The fall report generally reviews the state of the Canadian residential mortgage market, reviewing recent trends as well as providing forecasts for future activity in the housing and mortgage markets. The spring reports generally profile choices made by consumers in the mortgage market. The most recent survey (Fall 2009) indicates that about 20% of mortgage holders had renewed their mortgages in the past year, and the total amount renewed was about $129 billion for 2009. About 7% of mortgages were newly initiated, for a total amount of about $65 billion in 2009. The vast majority of mortgage holders had no activity during the year (73%, with the total principal of their total mortgages estimated at $511 billion in 2009). Mortgage brokers are most active in initiating new mortgages. In 2009, mortgage brokers were involved in about $39 billion of new mortgages and $25 billion of mortgage renewals.

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Highlights from the Fall 2009 research report are:
Canadians are highly satisfied with the terms of their mortgages. On average,

the satisfaction rate is 7.6 out of 10. The survey found that 19% are very highly satisfied, giving a rating of 10 out of 10. Only 9% are dissatisfied to some degree (giving scores of 1 to 4 out of 10). Satisfaction ratings for the mortgage experience are similar, with an average rating of 7.7 out of 10. Among those who renewed or refinanced an existing mortgage, 12% changed lenders while 88% remained with the same lender. The total value of owner-occupied housing in Canada is estimated at $2.69 trillion. Among home owners who have mortgages, the average equity is $142,000, or about 52% of the average values of their homes ($273,000). About one-in-five (18%) of mortgage borrowers took equity out of their home in the past year. The average amount is $41,000. These results imply that the total amount of equity take-out during the past year has been $41 billion. The most common uses for the funds from equity take-out are debt consolidation and repayment, which accounts for $17 billion of the total take-out. This part of the total equity take-out would result in corresponding reductions for other forms of consumer debt. Renovations accounted for about $12 billion of the equity take-out. Concerning types of mortgages, fixed rate mortgages remain most popular (68%). A significant minority (27%) are variable and adjustable rate mortgages. Just 6% of mortgages are a combination of fixed and variable rates. With regard to mortgage amortization periods: two years ago the survey found that 9% of mortgages in Canada had amortization periods of more than 25 years. The most recent CAAMP survey found that 18% of mortgages now have an amortization period of more than 25 years and the share is now quite high (47%) among home owners who have, during the past year, taken out a new mortgage on a newly purchased home or condominium. The survey also sheds light on the extent of mortgage rate discounting in Canada. Borrowers who have taken five year, fixed rate mortgages during the past year have an average mortgage interest rate of 4.74%. Typical advertised rates averaged 5.97% over the same period these borrowers have negotiated discounts that average 1.23 percentage points below typical advertised rates. Mortgage holders received, on average, 1.91 quotes when they obtained their current. Among borrowers who have taken out a new mortgage during the past year, 55% obtained the mortgage from a bank, 34% from a mortgage broker, and 11% from other sources.

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Figure 6: Average Satisfaction Ratings for Mortgages by Age Group Age Group 18-24 25-34 35-44 45-54 55-64 65 and Over All Ages
10 point scale with 10 being extremely satisfied Source: Maritz survey for CAAMP, Fall 2009.

With Terms of Mortgage 6.9 7.1 7.4 7.7 8.0 8.5 7.6

With Mortgage Experience 6.8 7.1 7.6 7.7 7.0 8.3 7.7

1.5 UNDERSTANDING REAL ESTATE AND MORTGAGE FUNDING

The previous section has described the size of the mortgage market in Canada. Mortgages, however, are just a part of the overall real estate market. It is important for a mortgage broker to understand the social and economic factors that affect real estate, since it is land and the buildings on it which form the basis of the mortgage agreement. The demand for housing is affected by a complex array of factors, including demographic factors, economic factors, and consumer preference factors. The way that these factors interact with each other results in changes in the characteristics of households and what they demand in a house. All of this leads to countless opportunities for a mortgage broker, as one household can move, change houses, and vary its composition over its lifetime. This section concludes with a look at the sources that are available to provide mortgage funding. 1.5.1 The Factors Affecting Real Estate While there are many approaches to understanding the real estate market, the traditional way is to look at real estate in the same way that other commodities (from oil to food) are examined: in terms of supply and demand. Supply means the total number of housing units that are available for purchase in a given area at a particular point in time. Demand refers to the number of households who both wish to purchase housing and have the financial means to do so.

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1.5.1.1 Demand Demand for housing is affected by a number of factors. The complex interaction of these factors in an area is what produces the total demand for housing. These factors include:
Demographics - the age, income, sex, education, occupation, and other

characteristics of the population Economics - broad economic forces affecting interest rates and growth in the economy Consumer Choice - the types of housing people prefer to occupy Demographics The basic demographic variables are population size and population growth. Generally speaking, the greater the population, the greater the demand for housing will be. Population growth results from two factors: natural growth (resulting from the number of children being born), and immigration (people moving into an area) and emigration (people moving away from an area). When looking at natural growth, it is important to understand the dimension of time. For example, in Canada and in many developed nations, fertility rates are generally below replacement levels (at around 2.1 children per household). In other words, people are not having babies in sufficient numbers to eventually replace them in the population when they die. Therefore, population levels will increase for many years, as people have babies, but then will decline decades in the future as people die and there are not enough growing children to replace them. However, this type of decline will not occur if the population grows because of other factors like immigration offsetting the possible trend. Immigration and migration are very important to forecasts of population growth, and therefore of housing demand. Areas in Canada that are doing well economically tend to attract immigrants to this country, and to a lesser extent migrants from other parts of Canada. For example, immigrants are drawn more strongly to southern Ontario rather than the Maritimes. Thus, areas of growth tend to act as magnets for future population and economic growth. Canada is considered to be an attractive country by many immigrants. As a result, about 250,000 people immigrated to Canada in 2009. There are many other demographic variables which affect the housing market. Canadas slowly aging population is leading to increasing demand for seniors housing, and other assisted living options. The rate of what is known as household formation is also important. In housing economics, unlike general economic models, the basic unit of study is not an individual, but rather the household. It is households that demand housing, with the general rule being one household per house. A household can be made up of an individual, a couple, or either one of these with children. Marriage rates and divorce rates have a great influence on household formation (a divorce, for example, creates two new households where there used to be one household).

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Economics also affects household formation. In good economic times, an increasing number of households tend to form (for example, as grown children leave to form their own household). In slow economic times, by comparison, the number of households either stays the same or decreases as individuals double up: individuals find roommates or housemates, grown children move back in with parents, and seniors move in with their children. Economics Forces that affect the broad economy, as well as individual households, affect the housing marketplace. Because of the relatively high cost of real estate, few homes are bought for cash. This means that mortgages are needed for the vast majority of purchases. Low interest rates on those mortgages make housing more affordable, and thus help to increase demand since home ownership is available to more people. The availability of credit (i.e. mortgage lenders willingness to lend money) also spurs housing demand. As was noted in Section 1.3.2, Canadian banks were not always allowed to make mortgage loans: a restriction that limited overall demand. Interest rates are affected by a broad range of factors. These include the roles of governments and business investment, since government deficits and a boom in business investment raise the demand for capital, and thus force up the price paid for that capital as reflected through interest rates. The Bank of Canada also has an impact through its raising and lowering of short-term interest rates. Inflation, which comes about when money is plentiful and is being circulated through the broad economy faster than goods and services can be produced to match it, also impacts interest rates. Lenders will have to charge a greater interest rate on their loans to make up for the loss in the purchasing power of their money caused by inflation over the duration of the loan. Inflation also increases the price of housing. Housing is seen as an inflation hedge, generally increasing in value to match overall inflation levels in the economy. The increasing price of housing resulting from periods of inflation, as well as increasing interest rates, is usually viewed as a negative factor for housing demand. This is because households find that their wages may not be rising fast enough to pay for high interest mortgages on real estate that is rapidly increasing in value. At the household level, economic factors including low unemployment levels and rising household incomes are all beneficial to housing demand. People with steady jobs and increasing incomes will have more money to spend on all items, including housing. Consumer Choice The type of housing that consumers demand is a function of demographics, economics, and a broad range of social and consumer preference variables. Households look for different types of housing as they age; perhaps beginning with rental housing, moving to a starter home, then moving to a larger home to accommodate a growing family, and then finally trading down to a smaller condominium. Owning a home has been a strong consumer preference in North America for at least a century. There is no indication that this preference exhibited by many households will be changing any time soon.

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Economics is a very important factor in consumer choice. Generally, as households become wealthier, they tend to consume more housing, and at a higher quality. As household incomes increase, Canadians typically prefer owner-occupied housing to rental housing. Changes in consumer preferences are often reflected in where housing is produced in a city. After the Second World War, there was strong consumer preference in North America for new housing located in suburban areas. More recently, however, there has been a preference shown by some consumers (mostly the young, and the empty nesters) for downtown or other prime areas in select cities, where housing is typically provided in the form of high-rise condominiums. 1.5.1.2 Supply The supply of housing is affected by a number of factors, including the demand factors noted above. For example, the demand factors that produced a preference for accessible downtown homes in larger cities spurred the creation of a supply of downtown condominiums to meet this new demand. Government Governments affect supply in many ways. As noted in Section 1.3.2, the federal government has acted on many occasions to make mortgage financing more plentiful, which acts to increase housing demand. Broader economic actions influenced by the federal government, such as policies to keep inflation and interest rates low while spurring economic growth, also positively affect housing demand and supply. Land-use regulations Land-use regulations at the municipal level also affect housing supply. Land-use regulations in many areas either restrict, or regulate the ability to add another unit on a property (e.g. the creation of a basement apartment or other form of second suite). They also restrict changes in the type of residential development allowed in an area (e.g. a single-family home is usually not permitted to be demolished and a high-rise residential condominium built in its place). Builders Housing supply is created by a large number of builders and developers across Canada, who are typically highly local, and usually produce or specialize in only one type of housing (e.g. move-up suburban homes, high-rise condominiums). Because of these characteristics of suppliers of housing, as well as the fact that it can take several years for housing to be produced (i.e. from the period that a developer purchases a piece of land, through the time to achieve municipal approvals, through to construction and completion), supply and demand do not always match in the way that text-books predict. In hot markets, there can be periods when there is not enough housing on-stream to meet current demand, resulting in existing housing being bid up in value. On the other hand, there are times when supply can be too great for the demand, as shown by the condo glut that many cities had in the early 1990s. Eventually, such periods of over-supply will lead to a lowering of prices, which will act to increase demand.
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1.5.2 Mortgage Funding Sources A key part of a mortgage originators job is being aware of the sources of mortgage funds that are available. By understanding the full range of funding sources that are available in Canada, the mortgage broker can best meet the needs of his or her clients. For mortgage lenders, a key part of the lenders job is to recognize changes that are happening in the mortgage marketplace, and create products that meet the needs of consumers. As we saw in Section 1.4, Market Size and Trends, the major sources of mortgage funds in Canada are the large financial institutions. These include banks, trust companies, credit unions / caisses populaires, life insurance companies, and mortgage and finance companies. Private individuals and governments tend to be thought of as secondary lenders, either meeting the excess demand for mortgage funds or investing in markets where the various financial institutions do not or cannot lend. Figure 6: Mortgage Funding Source Breakdown, 2009
Mortgage Holdings by Type of Lender

Chartered Banks Credit Unions and Caisses Populaires NHA MBS

Other (1)

Source: Note:

Bank of Canada, Weekly Financial Statistics, March 12, 2010 Other includes trust and mortgage loan companies, life insurance companies, pension funds, non-depository credit intermediaries and other financial institutions, and special purpose corporations.

1.5.2.1 Financial Institutions The largest share of mortgage funding comes from institutional lenders, such as chartered banks, trust companies, credit unions / caisses populaires, life insurance companies, (mortgage) loan companies, and pension funds.

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The difference between these financial institutions comes about mostly as a result of government regulations. Banks are federally regulated and chartered according to the Bank Act. Trust companies can be incorporated and regulated at either the federal or the provincial level. Credit unions are regulated at the provincial level. Banks Chartered banks are currently the largest single source of institutional mortgage funds in Canada. They presently hold about 48% of total residential mortgages. Their dominance results from their large market share in the residential mortgage field; their activity in non-residential mortgages such as mortgages for commercial buildings is less significant. The Bank Act recognizes and governs three distinct types of banks. Schedule I banks have shares that are widely held (by individuals who purchase shares on stock exchanges, and by groups such as mutual funds and pension funds), with no shareholder permitted to own more than 10 percent of the banks shares. These domestic banks are authorized under the Bank Act to accept deposits, which may be eligible for deposit insurance provided by the Canadian Deposit Insurance Corporation. Schedule II banks are more closely held, either by a foreign bank which is a parent company, or by related financial institutions (such as American Expresss ownership of the Amex Bank of Canada). They are also authorized under the Bank Act to accept deposits. Schedule III banks are foreign bank branches of foreign institutions that have been authorized under the Bank Act to do banking business in Canada, though under restrictions.
FOR YOUR INFORMATION: Selected Examples of Schedule I, II, and III Banks Schedule I banks include BMO Bank of Montreal, Citizens Bank of Canada, RBC Royal Bank, CIBC, Canadian Western Bank, Laurentian Bank of Canada, National Bank of Canada, Scotiabank, and TD Bank Financial Group. Schedule II banks include Amex Bank of Canada, Citibank Canada, ICICI Bank Canada, Bank of China (Canada), HSBC Bank Canada, ING Bank of Canada, and MBNA Canada Bank. Schedule III banks include ABN Amro Bank, Bank of America, Deutsche Bank, and State Street Bank and Trust Company. For a complete listing of all Schedule I-III banks, visit www.cba.ca. From the home page, go to Our Industry and from there to Banks in Canada.

The Office of the Superintendent of Financial Institutions (OSFI) oversees the operations of Banks in Canada. Much of the growth in market share of the chartered banks is a result of changing government regulations. One of the key changes to the Bank Act occurred in 1967. Until 1967, under the terms of the federal Bank Act, chartered banks were not allowed to charge interest rates on mortgages above 6% per year. For several years previous (from 1960 to 1967), market interest rates were above 6%, with the result being that banks were left out of the mortgage lending market. With market interest rates above
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6%, no rational bank would lend money when the maximum interest rate they were allowed to charge was 6%. In 1967 the Bank Act was amended to remove the 6% interest rate ceiling. For details on other significant changes to the Act, refer to Section 2.4.1 of the text. While the core services of banks are still deposits and loans, banks have expanded their services to offer many different products and services to a diverse clientele. In the last two decades, banks have become the most important source of mortgage funds, surpassing trust companies, life insurance companies and mortgage loan companies. By 1978 the chartered banks became the largest single source of new residential mortgage funds, and in 1979 they became the largest source of all mortgages, including both residential and non-residential, in Canada. Trust Companies Trust companies can be incorporated and regulated at either the federal or the provincial level. By law, only trust companies are allowed to provide trustee functions (holding, managing or investing assets for the benefit of another person), which is what gives them their name. While a bank has full commercial lending powers, trust companies must have more than $25 million of regulatory capital to receive full powers with the approval of the Office of the Superintendent of Financial Institutions (OSFI). Trust companies were the largest source of mortgage funds in Canada from 1967 to 1978. The changes to the Canadian financial services landscape in the 1980s and 1990s saw many trust companies being bought out by rivals or merging with banks, as institutions attempted to grow larger to effectively compete with other growing financial institutions, or to compete internationally. The latest and largest of these was the merger of TD Bank with Canada Trust. Trust companies, together with loan companies presently provide only about 1% of residential mortgage. Credit Unions / Caisses Populaires Credit unions (known as Caisses Populaires in Quebec) are different from banks and trust companies in that they are fully provincially regulated. Credit unions are owned by their members and are typically established to serve a particular group of people based on a geographic area, ethnic background or employer. Credit unions are a co-operative of individual branches, which in turn are made up of individual members who deposit and borrow funds from their own organization. Some credit unions are general, serving a specific area, much like a bank or trust company. In other cases, membership is often based on a common bond of association, such as profession, place of employment, geographic community, religion or cultural background. Credit Unions and Caisses Populaires currently provide about 12% of residential mortgage financing in Canada. Life Insurance Companies For many years, life insurance companies were the most important source of mortgage financing in Canada. Their large size and significant assets allowed for economies of

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scale in the administration of mortgage portfolios. In addition, because of the longterm nature of their liabilities (the money they would eventually pay out to holders of insurance policies) and their annual net inflow of funds from premiums, they were traditionally not very concerned with liquidity (the ability to convert assets quickly and easily to cash). This enabled the insurance companies to seek out the relatively high interest rates on mortgages. As inflation rose during the 1970s and 1980s, and insurance policies were written with inflation and cost-of-living protection for policyholders, the fixed dollar yield on mortgages made this form of investment less attractive for the life insurance companies. In other words, the money the insurance companies paid out to holders of insurance policies would increase as inflation rose. Thus, insurance companies needed to find an investment that would also be linked to rising interest rates. Residential mortgages that were fixed for a period of many years did not provide any inflation protection. This desire to link investments to current interest rates led to the rise of shorter term mortgages. To continue offering 25 year, self-amortizing term mortgages, lenders such as life insurance lenders required higher returns and thus set higher rates. Consumers resisted paying higher rates so they were prepared to accept shorter term mortgages, such as mortgages with 5 year terms but a 25 year amortization period. Banks also moved in this direction, matching mortgage terms to the typically shorter terms of deposits. As well, insurance companies turned to non-residential mortgage loans and equity participation in commercial property in order to obtain some form of constant dollar protection for their policyholders. From the mid 1960s to the late 1980s, life insurance companies dropped from providing 60% to 13% of the funds for new residential loans, and from 27% to 6% of the funds for mortgage loans on existing residential property. As of 2001, the percentage of funds for residential mortgages dropped to 3.7%, and at present the share is less than 2%. Increasing competition from other financial institutions, especially the banks, also eroded the market share of life insurance companies. Other Financial Lenders As mentioned above, while the major sources of mortgage funds in Canada are the large financial institutions, the amount of funds available through unregulated capital is growing rapidly (unregulated, in this case, refers to institutions that are not restricted by the regulations of the Bank Act or the regulations that apply to trust companies and life insurance companies). This group includes finance companies, mutual funds, mortgage banking companies, private and public mortgage investment corporations and Canadian subsidiaries of multi-national corporations. Lenders such as MCAP, Merix Financial and First National offer prime mortgage products using the same or similar criteria as federally regulated Financial Institutions. If they hold the mortgages on their own balance sheet or do a private syndication or securitization, they are not required to insure any risk over 80% loan to value. However, if they are going to sell these mortgages to the federally regulated financial
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institutions or securitize under the Canada Mortgage Bond (CMB) program, they must meet the same regulatory requirements as these financial institutions, including insuring with mortgage insurance as required. Some lenders in this category do offer non-traditional products and assume different levels of risk and are not required to carry mortgage insurance as they do a private securitization. Investment and mortgage companies are an important source of mortgage funds. These firms often specialize in mortgages in their local market. Many prefer to focus on second or third mortgages, or in subprime transactions. Pension funds are another source of mortgage financing. Because they are used to dealing with only large sums of capital, pension funds do not usually finance individual residential mortgages. Usually they have been active in the secondary mortgage market, purchasing packages of mortgages from primary lenders or brokers who continue to manage the loans for the pension fund. They are also active in the commercial mortgage market sector where the amounts of money lent are much larger. Finance Companies also offer mortgage funds. Finance companies in Canada can be specialized by either their activity or the industry that they operate in, or they can be more broadly diversified. Examples of finance companies are Macquarie Financial, Citifinancial, and Wells Fargo Financial. 1.5.2.2 Mortgage Backed Securities Home mortgages are often thought of as an illiquid investment (remember that liquidity is defined as the ability of an asset to be converted into cash quickly and easily). This contrasts with shares of a company which are listed on a stock exchange, and are highly liquid. Individuals can buy 1, 100, or 1,000 shares of a company that is listed on a stock exchange like the Toronto Stock Exchange. They can easily find out how much these shares are worth, on a minute by minute basis. These shares can also be easily sold by phoning a stock broker or by submitting an electronic order. The same is not true if you invest in mortgages. The creation of the Mortgage Backed Securities (MBS) market in Canada has provided extra liquidity in the mortgage marketplace. This has resulted in more institutions, such as pension funds being able to invest in mortgages. Thus, indirectly, MBSs are a source of mortgage financing. A Mortgage Backed Security represents an interest, or a share, of a pool of insured residential first mortgages. Individual residential mortgages are grouped together into pools of several million dollars each. Investors are able to purchase parts of this pool. Canada Mortgage and Housing Corporation (CMHC) guarantees timely payment on Mortgage-Backed Securities. CMHCs guarantee means that investors receive timely payment of both principal and interest on the mortgages that are held within the MBS. When borrowers fail to make timely payments on their mortgages, CMHC and the securities issuer ensure the necessary funds are available and that monthly payments are made to investors. This greatly reduces the risk for investors.

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To investors, the MBS Program provides a different investment opportunity in the form of a large pool of mortgages, with a guarantee of payment of both the principal and the interest. To consumers, the more investors who are involved in the residential mortgage market, the larger the pool of mortgage funds that are available. This, in turn, lowers the costs for financing mortgages.
FOR YOUR INFORMATION: There is more than $296 billion outstanding in MBS today, up from $75 billion in 2006. Source: Bank of Canada

The benefits to MBS investors include:

Guaranteed timely payment of all principal and interest Monthly cash flow Attractive yield Highly liquid (tradable) investment, unlike traditional mortgages An investment that is fully government guaranteed to any maximum

There is, however, one major disadvantage to investors in the MBS program. This disadvantage comes from the fact that borrowers can make partial or full principal prepayments on their mortgages and, on specific occasions, can increase the monthly rate of principal payments. The consumer who is borrowing this mortgage money likes the flexibility of making full or partial principal prepayments. If the consumer comes into an inheritance, for example, he or she can use this newly found money to pay off the mortgage principal, often with a penalty payment of just a few months interest. However, when seen from the side of the lender, the flexibility available to the borrower means that the mortgage lender will face very unpredictable cash flows. This is also true for an investor in the MBS program, as the underlying mortgages may be repaid early, leaving the investor with very unpredictable cash flows. In June 2001, CMHC introduced the Canada Mortgage Bonds Program (CMB) to eliminate this cash flow uncertainty for potential investors. Canada Mortgage Bonds were created by Canada Mortgage and Housing Corporation to provide a product with interest payments made semi-annually over the term of the bond and repayment of principal on a specified maturity date. Like NHA Mortgage Backed Securities, the timely payment of interest and principal to investors is guaranteed by CMHC and backed by the Government of Canada.

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FOR YOUR INFORMATION: As of January 2010, the Canadian Mortgage Bonds program has $173.5 billion outstanding, up from $54 billion in 2004. Source: CMHC

Products such as Mortgage-Backed Securities and Canada Mortgage Bonds benefit the residential mortgage finance industry by making more funds available. This, in turn, increases competition amongst mortgage funders and helps to keep rates lower. 1.5.2.3 Government Loans Government mortgage loans are those for which a government or government agency acts as the source of mortgage funds. Government mortgage loans differ from loans provided by lending institutions that are insured by government agencies. CMHC, for example, can insure the mortgage loans that are made by traditional financial institutions. Both federal and provincial governments provide mortgage loans, primarily for the residential sector, through many programs and agencies. 1.5.2.4 Private Lenders Private corporations and individuals making mortgage loans are also providers of mortgage funding. They represent the smallest share of the Canadian mortgage market. Mortgages initiated by these non-deposit taking companies or individuals are generally referred to as private mortgages. Since the advantages of large-scale operations favour large financial institutions, private lenders often concentrate on lending areas that are under serviced by the institutional lenders. This includes mortgages that institutions cannot accept because of law or corporate policy, mortgages or properties that are below institutional standards and mortgages that represent a higher proportion of the lending value than the institutional lender can or will accept. The amount of private lending activity in the mortgage market is difficult to determine, as it tends to focus on small segments of the market and changes as market conditions change. The following is a partial list of potential private lenders:
private individuals investing funds vendors of property who grant a mortgage loan on the property they are selling

(i.e. a vendor take-back mortgage). syndicated investment groups (groups of individuals who pool their investment funds), mortgage corporations (public or private limited liability companies), trust account pools and finance companies that offer mortgage investment programs.

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1.5.2.5 Subprime Lending As was noted above, different lenders have differing definitions of the types of mortgage loans that are acceptable to them. The mortgage industry has developed a general classification system, dividing the market into prime lending and subprime lending. Prime lending is also known as A lending. Subprime deals are further divided into B deals also known as non-prime or alternative, and beneath them, C deals or true subprime. All of these classifications have to do with the payment risk that the lender faces. A mortgage lender on any deal faces the risk that the amount of money being lent will not be repaid, or will not be repaid promptly, and that the residential property being pledged by the borrower (and which can be seized upon default by the borrower) will not hold its value and cover the loan principal that was lent out. Traditionally, an A or prime deal would qualify for financing at most major financial institutions. While we will discuss how a mortgage deal is analyzed in greater detail later on in this text, at this point it is sufficient to say that with a prime deal, most lenders are convinced that the borrower can repay the mortgage, that the amount of the mortgage is not out-of-line, and that the land and the house backing up the mortgage are of good quality. A subprime loan is not of the same high grade or quality. The borrowers ability or intent to pay may be viewed as less certain, the amount of the mortgage (relative to the value of the property) may be seen as excessive, or the property pledged as security may be seen to have a lower value. Typically, lenders may accept loan applications with poor or no credit but strong real estate or vice versa, acceptable credit but weak real estate security. All of these variables are taken into consideration when making the decision to approve the loan. As the Canadian mortgage market grew and matured, the subprime lending market became more visible. There was an increased interest amongst mortgage lenders to specialize or accommodate the subprime market and do so prudently, so the number of Canadian subprime lenders grew until 2008. In that year fears over the quality of subprime mortgages skyrocketed and Canadian subprime lenders were not able to continue, causing many of these lenders to cease operations.

1.6 KEY PARTICIPANT ROLES AND RESPONSIBILITIES

There are many participants involved in the process of putting the mortgage deal together. Their roles and responsibilities are outlined below. 1.6.1 Mortgage Originator There are always two essential parties to a mortgage transaction: the borrower and the lender. Only when the requirements of both are satisfied can a mortgage transaction be successfully completed. It is the function of the mortgage originator to ensure that both parties to the transaction are satisfied. Originator refers to any mortgage professional engaged in the acceptance, completion, and/or submission of mortgage loan applications to an underwriting lender.
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Mortgage orginators work for both the borrower and the lender. Mortgage origination consists of obtaining, assisting in obtaining or attempting to obtain a mortgage loan for a borrower from a mortgage lender, in return for consideration or in anticipation of consideration. There are three different categories of mortgage originators mortgage brokers, mortgage agents, and lender-employed mortgage representatives. Mortgage brokers are individuals authorized to deal in mortgages and lend money using real estate as security. Mortgage brokers are senior level originators and they are legally obligated to honour the contract with the borrowers. Mortgage agents, alternatively called mortgage specialists, mortgage consultants, or mortgage sub-brokers, are individuals authorized to deal in mortgages on behalf of mortgage brokers. This means that mortgage agents must have the technical expertise to arrange mortgages between borrowers and lenders. Financial institutions have mortgage representatives whose function it is to develop new business leads from their contacts within the community. Many of these representatives are commissioned or bonus-based. As employees of financial institutions, mortgage representatives are governed federally under OSFI, not provincially as are mortgage brokers and agents. In all cases, the mortgage originators business comes from many sources, such as from real estate agents and other real estate professionals (see below) and from previous customers. Financial institution branches, on occasion, will refer business to their internal mortgage representatives when clients are unable to visit the branch or to mortgage agents who may have access to a broader range of mortgage products to meet the clients needs. Any analysis of the functions of a mortgage originator in a normal lending transaction should clarify the positions of both lenders and borrowers and, at the same time, illustrate the range of services that a mortgage broker performs. When mortgage transactions are completed, there should be three satisfied parties: borrowers because they have received loans that suit their requirements; lenders because they have given loans that enhance their portfolios; and mortgage originators who have satisfied both parties and earned their commission. 1.6.2 Lender The lender is any person, group of persons or institution who make mortgage funds available to borrowers. These can range from financial institutions to governments, to private individuals. The lender for a mortgage is referred to as the mortgagee. 1.6.3 Borrower The borrower is the person or people seeking the mortgage loan. The borrower in a mortgage is referred to as the mortgagor.

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1.6.4 Real Estate Agent A real estate agent is defined as a person duly licensed by provincial statute, who, on behalf of another, offers or attempts to acquire or dispose of real estate. The real estate agent undertakes this for, or in expectation of a fee, gain or reward, directly or indirectly, from any person. With proper disclosure the real estate agent is duly licensed to solicit properties for sale, market properties for sale, and work with willing buyers. The real estate industry is governed by provincial regulations and most real estate agents are members of a local real estate board, a provincial real estate association and the national association - Canadian Real Estate Association (CREA) - and adhere to the corresponding guidelines and code of ethics. 1.6.5 Property/Mechanical Inspector A Property / Mechanical Inspector is a home inspector who will evaluate a property and provide a written report on the interior and exterior structure, including plumbing, electrical work, insulation, heating and cooling systems, roof and structural stability. Typically, the potential purchaser of a property will contact and pay for a property inspector, but such an inspector may also be retained by the seller of a property. 1.6.6 Real Estate Appraiser A real estate appraiser determines the market value of the house based on its condition and the selling price of comparable homes recently sold in the area. The estimate of market value determined by the appraiser helps the lender decide if a given mortgage transaction meets their risk appetite. 1.6.7 Lawyer In any real estate transaction, the lawyer is responsible for the following:
Assisting with and reviewing the Contract of Purchase and Sale Assisting with the preparation and review of mortgage documents Ensuring all closing documents have been completed properly, including title

search and title insurance Explaining all closing documents, obtain signatures, and record all documents with the appropriate local governments Validating the identity of the borrowers through the acceptance of adequate identification Collecting the transaction fees and disbursing funds to the appropriate parties Preparing and presenting a final Statement of Adjustments

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1.6.8 Mortgage Insurer In Canada, institutional, high-ratio mortgages (those representing more than 80 percent of a propertys value) must be insured against default by either the Canada Mortgage and Housing Corporation (CMHC), Canada Guaranty or Genworth Financial Canada. The borrower, as part of the mortgage borrowing process, will obtain and pay for the insurance, which the lender obtains on the borrowers behalf, ultimately to protect the lender against default. 1.6.9 Title Insurer Title insurance has been an important part of the Canadian real estate market for over a decade. Title insurance compensates the insured for losses resulting from the title not being as stated in the policy. For a one-time fee, title insurance protects the lender against survey error, contravention of municipal by-laws, defects in title, fraud or forgery, and other related problems. 1.6.10 Mortgage Servicer Or Administrator A mortgage servicer is any person or firm who receives, or causes to be received or transferred for another, instalment payments of principal, interest or other amounts placed in escrow pursuant to a mortgage loan. Service departments, whether in-house or outsourced, are responsible for maintaining the client relationship once the funds have been advanced and the mortgage registered. Mortgage servicers process minor increases, renewals, discharges, amendments to mortgage terms, and simple information requests (although many requests can now be handled online). Additionally, the mortgage servicer or administrator often manages the collection and default processes for the lender.

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Module 1 1.7 CHAPTER REVIEW

SUMMARY Discuss the legal and financing history of mortgages in Canada. Mortgages have existed for hundreds of years. Initially it was the seller of the land who supplied credit to the purchaser. In feudal times the purchaser only received possession once the full amount of the purchase price and interest had been paid off. Over time, the separation between possession of the legal title and possession of the physical property became more distinct. Initially mortgage financing was characterized by long-term loans where only interest was paid over the life of the loan. At maturity the principal was either repaid in full, or refinanced. The onset of the depression created the modern mortgage loan, where periodic payment of both principal and interest occurred during the financial arrangement. Rising inflation in the 1970s led to the creation of the partially amortized mortgage, which we still have today. Understand the demand and supply factors that affect real estate. Demand factors include demographic factors such as population size, population growth, immigration and migration, and household formation. Economic factors include interest rates, credit availability, and inflation. Consumer choice factors reflect changing preferences as households age, preferences with respect to location, and preferences for or against home ownership. Supply factors include government actions affecting the economy and land-use regulations at the local level, and the activities of builders and developers. Demand and supply constantly interact with each other. As supply increases, prices will tend to fall. This in turn spurs demand, which can create an increase in supply Identify and outline the primary mortgage funding sources in Canada. Mortgage funding sources include financial institutions (banks, trust companies, credit unions/Caisses Populaires, life insurance companies and other lenders such as investment, mortgage, and finance companies and pension funds), Mortgage-Backed Securities, Canada Mortgage Bonds, government loans, and private lenders. Today, banks represent the primary source of mortgage funding in Canada. List the key players, and their roles and responsibilities. The participants include the mortgage broker, the lender, the borrower, other mortgage representatives, the real estate agent, the property/mechanical inspector, the real estate appraiser, the lawyer, the mortgage insurer, the title insurer, and the mortgage servicer.

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KEY TERMS You should now be able to define and give an example relevant to each of the following terms: Canada Guaranty Canada Mortgage and Housing Corporation (CMHC) Canada Mortgage Bonds Canadian Association of Accredited Mortgage Professionals (CAAMP) Credit unions Default Demographics Equity of redemption Fully amortized mortgage Genworth Household formation Immigration and migration Interest rate risk Inflation Land-use regulations Liquidity Maturity Mortgage Mortgage agent Mortgage broker Mortgage representative Mortgagee Mortgagor Mortgage Backed Securities (MBS) Mortgage originator Partially amortized mortgage Principal Principal risk Private mortgage Schedule I Bank, Schedule II Bank, Schedule III Bank Second or third mortgages Subprime transactions Trust companies
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APPLICATION EXERCISES 1. How did the modern mortgage come about?

2. What actions has the Government of Canada taken over time to increase housing availability for all Canadians?

3. How is the aging baby boom generation impacting the housing market?

4. What are the differences between the prime and subprime markets?

5. Paula Jones, a friend of yours, approaches you at a party. She is interested in buying her first home, but doesnt know where to begin, and doesnt know who does what in the real estate and mortgage field. How do you explain to her the principle actors in the mortgage industry?

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