Under what circumstances can a conventional mortgage (with 20% or more down payment) still require mortgage default insurance?

Q: What is the correct answer to: Under what circumstances can a conventional mortgage (with 20% or more down payment) still require mortgage default insurance?

The correct answer is When the lender chooses to securitize the mortgage. Option B is correct because lenders can choose to obtain portfolio insurance on conventional mortgages when they want to securitize them. This allows the lender to sell the mortgage to CMHC or package it into mortgage-backed securities. Even though the borrower has put down 20% or more, the lender may still require default insurance to facilitate the sale or securitization of the mortgage. The borrower typically pays the insurance premium, and this practice helps lenders manage their capital and risk exposure.

Q: What background knowledge is needed for this Mortgage & Real Estate Finance question?

Mortgage default insurance protects lenders against borrower default. In Canada, it's mandatory for high-ratio mortgages (less than 20% down) but can also be used for conventional mortgages through portfolio insurance. Portfolio insurance allows lenders to insure conventional mortgages for securitization purposes, enabling them to sell mortgages to CMHC or create mortgage-backed securities. This practice helps lenders manage capital requirements and risk exposure. The insurance premium is typically paid by the borrower, even though the insurance primarily benefits the lender's business operations.

Q: What is a good way to remember the answer to this Mortgage & Real Estate Finance question?

Remember SELL: Securitize Existing Loans with Lender choice. Even conventional mortgages can require insurance when lenders want to SELL them to CMHC or package them for securitization. The lender's desire to SELL the mortgage drives the insurance requirement, not the borrower's qualifications. When you see questions about conventional mortgage insurance requirements, think SELL. Ask yourself: 'Is the lender trying to SELL or securitize this mortgage?' If yes, insurance may be required regardless of the down payment amount.

Q: What exam tip applies to this Mortgage & Real Estate Finance question?

Focus on the lender's motivations, not just borrower qualifications. Conventional mortgages can require insurance for securitization purposes, allowing lenders to sell mortgages or create mortgage-backed securities.

Q: How does this Mortgage & Real Estate Finance concept apply in real world practice?

A bank approves a conventional mortgage for a client with 25% down payment. Six months later, the bank decides to free up capital for new lending by selling a portfolio of mortgages to CMHC. To make these mortgages eligible for sale, the bank obtains portfolio insurance on the conventional mortgages, including this client's loan. The client receives notice that mortgage insurance premiums will be added to their payments, even though they provided a substantial down payment.

Question

Mortgage & Real Estate FinancePortfolio InsuranceMEDIUM

Under what circumstances can a conventional mortgage (with 20% or more down payment) still require mortgage default insurance?

Answer Options

A

When the borrower is self-employed

B

When the lender chooses to securitize the mortgage

C

When the property is a condominium

D

When the amortization exceeds 20 years