CMLS Financial Ltd.
June 1st, 2020

CMHC Update & Q&A

On May 28th, CMHC announced a new restriction on use of funds as a condition of insurance for market refinance loans for any type of CMHC insured rental housing. Partly a response to concerns regarding the economic effects of the COVID-19 pandemic, and primarily with the view to reinforce CMHC’s mandate to support housing affordability and availability for Canadians, insurance will be restricted to proceeds used for a permitted purpose in relation to residential rental housing.

Permitted uses include financing the purchase, construction or capital repair/upgrades, or securing permanent financing to take out a short-term construction facility. In no event will refinance proceeds fund distributions to equity holders. The changes are not applicable to CMHC MLI Flex or other Affordable Housing program applications.

While significant in its importance, the CMHC announcement was not extensive in detail. Our commitment is to get clarity on the details of these changes and then to find the most effective way to apply the new rules to today’s financing environment and your unique needs. While CMHC financing will continue to form an integral part of any housing provider’s approach, it is clear that conventional financing and other related approaches will play an increasing role going forward. CMLS is uniquely positioned to help clients navigate this change to CMHC’s insurance policy given our advisory expertise and market leading depth of conventional financing options.

A brief Q&A is provided below highlighting key aspects of the new provisions and how CMLS is responding. Please contact your CMLS representative with any questions regarding your existing CMHC applications and future rental apartment financing needs. CMLS is a leading provider of both CMHC-insured and conventional multi-residential financing and will work with you towards the optimal solution for your portfolio.

When do these restrictions take effect?

CMHC’s new approach to refinance loans will apply to any future application and any existing application that has yet to be assigned to an underwriter. CMHC has begun reaching out to Approved Lenders like CMLS regarding applications not yet assigned to an underwriter for confirmation of permitted use of proceeds. In the event the loan is no longer eligible for insurance, the application fee will be refunded in full.

What constitutes a permitted use of funds?

The below items are, according to CMHC, the going forward acceptable intended use of proceeds for insured loans. Additional clarity using specific cases and scenarios is being sought by CMLS:

• To discharge the outstanding balance of an existing mortgage financing on the subject Property (as applicable)
• To secure permanent financing on the subject Property (take-out financing to pay off short-term construction loans)
• To undertake capital repairs/improvements to the subject Property
• To purchase other existing residential rental properties (2 or more units)
• To undertake capital repairs/improvements to other existing residential rental properties (2 more units)
• To construct new residential rental properties (2 or more units)

Can I obtain insurance to repay prior capital expenditures at my property?

The definition of permitted uses pertains to future uses of financing proceeds only.

Is there a prescribed timeframe, post-funding, for the permitted use of refinance proceeds?

No. CMHC will be relying on CMLS as Approved Lender to ensure proceeds are applied to permitted uses. At the time of underwriting, this may include a construction or capital expenditure budget, repair and maintenance plan or signed offer to purchase another rental property. Subsequent to funding, confirmation may be required by invoices, receipts or other proof of payment.

How this will be managed, and the proof required remains another key area of clarity CMLS is looking to obtain from CMHC.

I have an existing application with CMHC. What should I do?

We encourage you to speak with your CMLS representative. CMLS can help you understand whether or not your application meets the required criteria. If you require additional liquidity through the repatriation of equity, we will work with you towards an appropriate conventional first or second mortgage financing solution.

How is CMLS responding to this change?

CMLS remains in close contact with CMHC for clarification regarding these restrictions and next steps. An important distinction, for example, is the treatment of existing mortgage financing and whether the refinance of an existing long-term conventional loan (with no equity takeout) is permitted. CMHC will be conducting a review of all multi-unit loan insurance products over the coming months and will be consulting with lenders and borrowers as part of that review. CMLS commits to providing thoughtful and constructive feedback with the view to continuing to support its clients’ businesses and capital needs. CMLS will be active in industry consultations with CMHC on these changes.

How can I keep apprised of the pending clarifications to this policy?

CMLS will post this message and ongoing updates to this Q&A on our website. In addition, we will have further client communications to keep you informed.

Please contact your CMLS representative with any questions regarding your existing CMHC applications and future rental apartment financing needs.