First National Financial says recent government mortgage policy changes, including extending amortizations to 30 years and a higher cap on insured mortgages, could provide a slight boost to its margins.
During the company’s third-quarter earnings conference call, President and CEO Jason Ellis explained how the changes could expand First National’s pool of eligible borrowers and support profitability.
“Regarding the recent changes in mortgage regulations – the possibility of a 30-year amortization for all first-time home buyers and for all newly constructed home buyers – will actually be somewhat constructive at the margin ” he said.
Unlike traditional banks that use deposit financing to compete in the uninsured mortgage space, First National leverages CMHC-sponsored mortgage insurance and securitization programs, which has led to a higher proportion of loans high-ratio mortgages, Ellis noted.
“I don’t think it’s a game changer, but it’s definitely constructive and will probably increase the addressable borrower market for us,” he added.
Ellis explained that while the $1.5 million cap on insured mortgages could expand the potential market slightly, it will likely have a limited impact given the high income level required to maintain mortgage payments on properties at this price level.
“When you think about how much mortgage you could take out to purchase a home for $1.5 million on a high ratio basis, the required payments suggest you would need an income approaching $300,000, which definitely becomes a rare income. the air,” he said.
Regarding OSFI’s recent decision to remove the stress test requirement for uninsured mortgage transfers effective Nov. 21, Ellis said it “probably does not represent a measurable change.”
“Like any lender, we win some transfers and we lose others,” he said. “In practice, the change allowing a conventional borrower to change lenders without requalifying did not actually pose a barrier to movement that…might have been perceived.”
First National reports lower originations in third quarter as competition intensifies
First National reached a major milestone this quarter, with its mortgage loans under administration (MUA) surpassing the $150 billion mark. “We have often talked about the importance of MUA to franchise value,” said CFO Robert Inglis. “This is not only an important milestone, but the foundation of profitability for many years to come. »
However, both single-family and commercial origination volumes saw significant year-over-year declines in the third quarter, driven by intensifying competitive pressures in the broker channel.
Total single-family mortgage originations, including renewals, fell to $6.7 billion in the third quarter of 2024, down 20% from the same quarter last year. The company attributed the decline to increased competition in the mortgage broker distribution channel, where bank lenders offer competitive rates and significant broker incentives.
Additionally, Ellis added that “the impact of the largest lender’s active re-engagement in the broker channel has been significant,” but consistent with guidance included in First National’s 2024 financial plan. This was a reference to the fact that Scotiabank returned to its more competitive position in the market late last year, after choosing to slow the growth of its mortgage portfolio and focus on expanding its deposit base.
He said the decline in single-family title originations in the third quarter should be viewed in that context. “Essentially, we’re comparing to a period where the largest lender was absent from the broker channel,” he said.
Despite the decline in issuance volumes year-over-year, single-family home originations increased by nearly 10% sequentially between the second and third quarters. “In fact, there is evidence to suggest that First National actually improved its relative position to rank second in terms of funding and new commitments in the third quarter,” Ellis noted.
Third Quarter Results Overview
| Q3 2023 | Q2 2024 | Q3 2024 | |
|---|---|---|---|
| Net income | $83.6 million | $54.1 million | $36.4 million (-56%) |
| Single-family origins (including renewals) | $8.3 billion | $6.1 billion | $6.7 billion (-20%) |
| Commercial originations (including renewals) | $3.3 billion | 5 billion dollars | $2.7 billion (-17%) |
| Mortgages under administration | $141.9 billion | $148.2 billion | $150.6 billion (+6%) |
Notables of his appeal:
- Brokerage fees in the third quarter fell 35% to $29.9 million due to a 38% decline in single-family home originations placed with institutional clients, despite unit brokerage fees approximately 3% higher. % from one year to the next.
- Last year, higher rates led to significant prepayment penalties from borrowers, increasing First National’s net interest margin. However, recently, as rates have fallen, this inflow has diminished, with fewer prepayments and penalties affecting MBS pools, noted CFO Robert Inglis.
- In the third quarter, mortgage servicing revenue fell 7% year over year, totaling $71.1 million.
First National President and CEO Jason Ellis commented on the following topics during the company’s earnings conference call:
On the resilience of borrowers:
- “In the worst case scenario, where a borrower is unable to meet their new payment obligations, they have significant equity in the property and have been able to sell it. But this has not happened significantly, as we do not see our retention levels decrease as a result of this type of activity. The good news is therefore the media articles and the concern caused by this large cliff of renewals in an environment of higher rates does not materialize in stress for our portfolio of borrowers.
On upcoming renewal opportunities:
- “Due to the extraordinary volumes of new originations during the pandemic years, we are heading into a period of significant renewal opportunities in our single-family mortgage portfolio, positioning ourselves to serve our borrowers for a second mortgage term is always a priority. and we look forward to an increase in renewal volumes over the coming years.
- “From a renewal and retention perspective, I would say that throughout this year we have had a retention rate on single-family home renewals comparable to our long-term average. We have not seen any measurable change upward or downward in this regard and we certainly have no reason to believe… that this would change.
On its alternative loan portfolio (Excalibur):
- “Excalibur mortgage volumes were also lower than last year, but only marginally. We believe the Alt-A market has been relatively unaffected by the recent competitive dynamics seen in the prime space. From a credit perspective, the Excalibur program continues to outperform expectations.
On the outlook for the 4th quarter:
- “In stark contrast to the year-over-year decline in funded mortgages, new residential commitments issued during the quarter were 50% higher compared to the same period in 2023. This bodes well for mortgage growth. new issues from one year to the next in In the fourth quarter, these new commitments are transformed into financing.
- “…the arrival of tailwinds in the form of interest rate cuts and a growing pipeline of residential commitments should result in higher productions year-over-year in the fourth quarter and a strong start to 2025.”
- “First National did not change our sales or service strategies to increase engagement levels during the quarter. Between the actions of the Bank of Canada and the new homeownership incentives announced by the federal government, it seems that the real estate market is preparing well for the quarters to come.
On the commercial lending activity:
- “Over the first nine months of 2024, commercial production is 17% higher than last year despite the impact of interest rates on transactions and new development activity. CMHC’s incentives to build multiple rental housing stock and create affordable housing have kept our clients active.
- “Commercial originations in the fourth quarter will likely slow slightly from last year’s particularly strong quarter, but we expect to close out 2024 with record annual commercial mortgage volumes.
On potential constraints in securitization after reaching $11.2 billion in securitized volume this year:
- “We are experienced users of CMHC programs, particularly TH NHL. And we will use, as we move through the fourth quarter, all available MBS collateral fees that we have access to… We are seeing mortgages run out as quickly as we add them in some cases, so no immediate constraints.
On the impact of the expanded Canada Mortgage Bond (CMB) program:
- “The availability of financing through a larger OHC has provided an efficient source of liquidity for industry lenders, including First National. The larger CMB, with financing dedicated to multifamily housing, has attracted new lenders to the market and had a tightening effect on margins.
First national conference call of the third quarter
Note: Transcripts are provided as is by the companies and/or third party sources, and cannot be guaranteed to be 100% accurate.
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Last modification: November 2, 2024