ECHMB has established standards for mortgages, which are eligible for purchase. The following eligibility criteria applies in respect of approved mortgages:
1. Purchase of Mortgages
Primary lenders from whom mortgages are purchased are required to conform to the eligibility criteria established by ECHMB as follows: -
· The mortgaged property must be residential and owner occupied.
· Funding must be used to purchase or construct the property, and the property must be mortgaged as security for the said loan.
· The maximum loan should not exceed EC$1.25M
· The maximum Loan to Value ratio is 90%.
· The maximum amortization period is thirty (30) years.
· The property must be insured, with an acknowledged assignment of Fire/Peril Insurance and Life Insurance, along with confirmed annual renewals.
· Gross Debt Service Ratio should not exceed 40% and Total Debt Service Ratio 45%.
· Basic underwriting practices apply with regards to borrower’s credit rating, job stability, and ability to service the debt.
In order to provide maximum liquidity to the mortgage market, the ECHMB adopts and promotes the use of standard credit and property underwriting criteria, uniform mortgage instruments as well as standard credit and property appraisal forms. This requirement may be waived perhaps, in the initial year(s) only, for Primary Lenders who want to sell mortgage loans already in their portfolios. In addition, the mortgage loans will be purchased by the execution of a standard Sales and Administration Agreement between the ECHMB and the Primary Lender, which formalizes the relationship between the two institutions. Thereafter, a standard Sales and Administration Supplemental Agreement will be executed every time a subsequent purchase is made. The details of the mortgage(s) relevant to the purchase will be attached as a schedule to the relevant Agreement.
3. Lien Security
Each mortgage purchased must be secured by valid first lien on the property subject only to exceptions which are customarily acceptable to mortgage lending institutions generally and which do not materially affect the value or marketability of the property.
i. Maturity: The ECHMB will establish a maximum maturity, not in excess of 30 years, unless otherwise determined by the ECHMB’s Board, on the mortgages it will purchase. In order to meet the needs of the market, the ECHMB will purchase loans with the longest maturities possible, consistent with the terms, mix, and stability of its funding sources.
ii. Loan-to-value-ratio: Maximum loan-to-value ratio will also be set, not in excess of 90% unless otherwise determined by the ECHMB’s Board. The ECHMB will also require insurance, by a mortgage insurer, against loss to the ECHMB of that portion of the unpaid principal mortgage loan balance that exceeds 75% of the value of the mortgaged property. The ECHMB will purchase loans with the highest loan-to-value ratios consistent with its expectations concerning its ability to recover its principal and cost in the event of default. The borrowers’ income or net worth will also be considered in the event that the loan-to-value ratio is greater than 90%.
iii. Interest Rate: The ECHMB will reserve the right to change the interest rate upon three months’ notice to the borrower but will limit the degree and frequency of interest rate changes, weighing the ability of the borrowers to absorb this risk against the term, mix, and interest rate variability of its funding resources as well as its ability to hedge this risk. Any changes in interest rates to borrowers on loans already purchased by the ECHMB, must be mutually agreed by the ECHMB and the Primary Lender.
The ECHMB reserves the right to re-price the mortgages already purchased or to change the Administration Fee paid to a Primary Lender under these circumstances, to prevent undue loss of yield on the pool of mortgages.
iv. Insurance: The ECHMB will establish requirements relating to title and hazard insurance as well as standards and warranties, which must be made by the Primary Lender.
5. Eligibility Criteria for ECHMB approved Primary Lenders
From the inception of ECHMB’s commercial operations in April 1996, the Bank has applied the following key eligibility criteria in determining an approved financial institution:
i. Capital adequacy shall be determined both in terms of an absolute amount of $3.0 million and a Capital to Asset Ratio of not less than 8% or leverage of 12.5 to 1.
ii. The primary lender must also be subject to regulation by an approved regulatory body such as the Central Bank, Registrar of Insurance or Registrar of Co-operatives, Single Regulatory Units (SRU's) or Regional Regulatory Unit (RRU). In this regard, the primary lender should be subject to regular off-site surveillance or review, and periodic on site examination/inspection or audit.
iii. The primary lenders should have at least three years of satisfactory experience in mortgage origination, property appraisal, administration of mortgages and general mortgage underwriting, or alternatively, demonstrate their ability to make sound underwriting judgements and service mortgage loans to the satisfaction of the Company.
iv. Once a review of a company is undertaken and proven to have met the aforementioned criteria, the Company’s application will be submitted to the Board of Directors of the ECHMB for final approval.
v. ECHMB has established an interest rate benchmark at which it is feasible to conduct business. Traditionally, ECHMB has been purchasing Fixed Rate mortgages with interest rates above 8.5%. Mortgages could also be purchased at a premium or a discount depending on the specific situation. In addition, the building must be constructed using concrete, wood, wood and concrete and steel. ECHMB will not engage in the purchase of Chattel Houses.
vi. In its agreement with ECHMB, the approved Primary Lender agrees to administer and service the purchased mortgages for an administration fee. The Primary Lender administers the portfolio of the purchased mortgages in such a manner as to minimize arrears, and should act promptly to collect from mortgagors the arrears that may occur. The Primary Lender receives a fee for administering the pool of mortgages; this administration fee is a percentage of the outstanding balance of the portfolio, which is determined by the Management of the ECHMB.
vii. A “First Charge” must be held on all properties as security for the loan originating from the primary lender. The ECHMB does not consider a “Second Charge” on properties offered for sale.
6. ECHMB’s Mortgage Underwriting Standards
Prior to purchasing a pool of mortgages loans, ECHMB will carryout a review of the primary lender’s origination practices and procedures, as well as test the loans for compliance with ECHMB’s established guidelines. The primary Lender’s basic underwriting principles are expected to accord with ECHMB’s with respect to property appraisal, property ownership, mortgage documentation (preparation and registration), draw-downs and advances, assignment of insurance, and renewal of such insurance, assignment of salary. In general these loans have been approved by lending officers who have undertaken training programs conducted by ECHMB, and thus have become familiar with its underwriting standards.
ECHMB has been collaborating with Canada Mortgage and Housing Corporation (CMHC) and Real Estate Institute of Canada (REIC) to undertake training programs aimed at improving mortgage-underwriting standards among, the lending institutions. The program provides personnel with the required skills to carry out risk assessment of mortgages based on the standards generally accepted by the international financial institutions.
7. Principles Underlying the Underwriting Standards
ECHMB’s underwriting standards are primarily intended to evaluate the value and adequacy of the mortgaged property as collateral for the proposed mortgage loan and the borrower’s credit standing and ability to make the required repayments when they fall due.
However, on a case by case basis, ECHMB may determine that prospective borrowers, who do not strictly qualify under the specific guidelines, may warrant an underwriting exception based on compensating factors. Compensating factors may include the following:
i. low loan-to-value ratio
ii. low debt-to-income ratio
iii. stable employment and time in the same residence
ECHMB’s underwriting guidelines focus on the borrower’s ability to repay, but it requires loan-to-value ratio up to 90% as a loss mitigation tool. In accordance with the following underwriting criteria. ECHMB will carry out the following exercises:
i. verify the loan applicant’s sources of income;
ii. Calculate the amount of income from all sources indicated in the loan application.
iii. Review the credit history of the applicant.
iv. Calculate the debt to income ratio to determine the applicant’s ability to repay the loan.
v. Review the appraisal of the mortgaged property for compliance with ECHMB’s underwriting standards and practices.