6 Institutions operating senior mortgage underwriter cover letter Canada that have exposures to sovereigns meeting the above criteria may use the preferential risk weight assigned to those sovereigns by their national supervisors. Entities that are, in the judgement of the host government, significantly in competition with the private sector. Institutions should look to the host government to confirm whether an entity is a PSE in competition with the private sector.
The PSE risk weight is meant for the financing of the PSE’s own municipal and public services. Where PSEs other than Canadian provincial or territorial governments provide guarantees or other support arrangements other than in respect of the financing of their own municipal or public services, the PSE risk weight may not be used. PSEs in foreign jurisdictions should be given the same capital treatment as that applied by the national supervisor in the jurisdiction of origin. These include banks, trust or loan companies and co-operative credit societies.
The term bank refers to those institutions that are regarded as banks in the countries in which they are incorporated and supervised by the appropriate banking supervisory or monetary authority. In general, banks will engage in the business of banking and have the power to accept deposits in the regular course of business. For banks incorporated in countries other than Canada, the definition of bank will be that used in the capital adequacy regulations of the host jurisdiction. The risk weight applied to a claim on a bank is dependent on the credit assessment of the sovereign in the bank’s country of incorporation. The bank risk weight is one notch less favourable than that which applies to its sovereign of incorporation.
Claims on parents of DTIs that are non-financial institutions are treated as corporate exposures. 10 Otherwise, such claims would follow the rules for claims on corporates. No claim on an unrated corporate may be given a risk weight preferential to that assigned to its sovereign of incorporation. Small business loans extended through or guaranteed by an individual are subject to the same exposure threshold. Residential construction loans that do not meet the above criteria must be treated as a corporate exposure subject to the risk weights in section 3. Investments in hotel properties and time-shares are excluded from the definition of qualifying residential property. Residential mortgages are risk weighted according to the requirements and risk weights in paragraphs 27 to 30.
Mortgage insurance in Canada is considered a guarantee and institutions may recognize the risk-mitigating effect of the guarantee where the operational requirements included in Chapter 5 for guarantees as well as the additional operational requirements for mortgage insurance are met. Reverse mortgages are non-recourse loans secured by property that have no defined term and no monthly repayment of principal and interest. The amount owing on a reverse mortgage grows with time as interest is accrued and deferred. CMHC are legal obligations of the Government of Canada. The underlying mortgage pool contains only mortgages that are fully performing when the mortgage-backed security is created. The securities must absorb their pro-rata share of any losses incurred.