What We Offer – Credit Enhancement

What is Credit Enhancement?

We help people secure housing loans from banks by using tools like the Credit Enhancement Facility.

The Credit Enhancement Facility is a financial backup for housing loans guaranteed by a First Nation. If a borrower can’t repay, the lender first asks the First Nation for compensation. If the First Nation can’t pay, the lender can request payment from the Fund up to the amount set aside for loans in that community. It’s important to note that the Fund doesn’t give out loans itself.

Why you need Credit Enhancement

Credit Enhancement is necessary for several reasons. One major issue with market-based housing on reserves is the limited access to financing due to restrictions on property seizure under the Indian Act and specific self-government agreements. This poses challenges for private sector lenders, restricting access to financing, limiting housing activity on reserves, and blocking the economic development of First Nations.

Another obstacle arises from the communal land ownership on reserves, affecting the security of tenure. Efforts are needed to improve tenure security and support market-based housing solutions on reserves.

Additional barriers include:

  • Lack of housing charges or rental systems in some First Nation communities
  • A high level of band ownership of housing
  • Insufficient serviced lots
  • The absence of an effective resale market

Credit Enhancement plays a vital role in addressing these challenges and fostering solutions for housing on reserves.

Eligibility

Participation is voluntary for both First Nations communities and lenders. Those who choose to apply must meet the qualification criteria set by the Fund, and First Nations undergo assessment based on the Fund’s Access Criteria to determine eligibility.

The Fund is available to First Nations communities nationwide, without regional divisions. Individual First Nations can apply directly to the Fund to access the Credit Enhancement Facility. The specific amount of financial support provided is determined after the eligibility assessment.

Please note that individual First Nations members do not apply directly to the Fund. Instead, after their First Nation is approved, they can apply to participating lenders for housing loans.

How much Credit Enhancement is available for my community?

Each approved community qualifying for the Credit Enhancement Facility will receive a First Nation Housing Loan Guarantee Credit (HLGC). The HLGC represents the potential lending support the Fund can offer for housing in that specific community. Determining the HLGC involves considering factors like:

  • The expected demand for housing loans within the First Nation
  • The financial capacity of the First Nation
  • Willingness of the community to guarantee housing loans under the program

The Credit Enhancement provided by the Fund is set at 10% of the principal value of eligible housing loans disbursed. This is subject to the maximum amount approved by the Fund for the community, as represented by the HLG.

Chart showing Backstop provided by 10% FNMHF Credit Enhancement Accumulates as the volume of loans expands

While the Credit Enhancement is fixed at 10% per loan, the compensation in case of default is based on each lender’s “Accumulated Coverage” within the community. As a lender’s business volume grows—specifically, its pool of eligible, certified housing loans—the accumulated coverage also increases.

This accumulated coverage acts as a resource for compensation, allowing lenders to request reimbursement from the Fund at any point during the loan’s term if a claim arises. In the event of a claim, the lender can seek compensation from the Fund up to the amount of accumulated Credit Enhancement.

So, how does it work?

The Fund supports qualifying First Nations by backing housing loan guarantees provided to eligible lenders. If borrowers can’t repay their housing loans and the First Nation can’t meet its guarantee obligations to the financial institution (due to reasons like economic downturn or significant events affecting the community’s finances), the financial institution can request reimbursement for part of its losses from the Fund.

Important to note: The Fund’s support doesn’t excuse the borrower from repaying the loan or the First Nation from fulfilling its payment to the lender if the borrower fails to do so.

For a visual explanation of how the Fund works, you can refer to the provided diagram by clicking here.

What happens if the First Nation defaults?

If a First Nation defaults and the Fund pays a claim, additional housing loans will only be approved in that community once the First Nation repays both the lenders and the Fund. However, any unclaimed accumulated Credit Enhancement coverage for the community will still be available to the lender or insurer for previously approved loans.

Where is Credit Enhancement available?

The Fund aims to help on First Nation reserve lands and, when appropriate, on settlement lands where borrowers face difficulties providing mortgage security to financial institutions for obtaining loans to purchase, build, or renovate homes.

Important: the Fund’s Credit Enhancement is unavailable to lenders for land designated under the Indian Act, as these loans can be secured against a leasehold interest.

What types of land tenure and housing loans are eligible?

The Fund is flexible, allowing qualifying First Nations to set eligibility criteria for borrowers, lenders, lands, loan purposes, tenure, and loan characteristics in their community. However, a First Nation’s leadership can restrict the types or characteristics of loans they are willing to guarantee for the community. Loan eligibility is determined by the terms and conditions specified in agreements between each First Nation and its lender(s).

Please contact us for further information or clarification on the Fund’s eligibility framework.

Eligible Borrowers

  • First Nation Individuals
  • Wholly Owned First Nation Entities
  • Partnerships where First Nation individuals or entities hold the majority share.
  • Borrowers must qualify financially, and lenders are expected to use due diligence based on normal market practices.

Eligible Lands

  • First Nation Reserves
  • Settlement Lands with loan security restrictions beyond the First Nation’s control
  • FNLMA Lands with loan security restrictions beyond the First Nation’s control

Eligible Loan Purposes

  • New construction
  • Purchase of Existing Units
  • Renovations (minimum $5,000)
  • Refinancing to increase the outstanding loan amount for housing purposes (maximum 25% of the HLGC for the community)

Eligible Tenure

  • Homeownership
  • Rental
  • Cooperative
  • Condominium

Eligible Loan Characteristics

  • All amortizing loans are eligible; no Lines of Credit or interest-only loans
  • Maximum amortization of 25 years
  • No minimum loan term
  • Fixed and variable-rate mortgages are eligible
  • Non-residential space is limited to 20% of floor space and up to 20% of lending value
  • Homes must adhere to the applicable Building Code (with the National Building Code being the minimum standard) and be inspected by qualified professionals
  • Environmental Site Assessments (ESAs) for homeowner loans are required only when contamination is known; for rental loans, ESAs are required for projects with seven or more units.

Are all lenders eligible for Credit Enhancement?

Not all lenders are automatically eligible for Credit Enhancement. To qualify, a lender must have a formal agreement with a First Nation, where the community guarantees housing loans made by the lender. Lenders interested in participating with the FNMHF must apply, and the Fund may request the completion of an application to ensure the lender possesses the necessary competence, capacity, and experience in residential lending to become an eligible lender.

The Lender Application Form can be found here.

 

How does a First Nation apply?

To apply, a First Nation can access additional information on assessing its readiness to participate in this market-based housing approach by clicking here.

 

Need more information? Contact us.