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Insights From First National

First-National First National just posted a record 2nd quarter.  It originated $3.5 billion of mortgages from April to June, up 9% YOY and up 75% from the 1st quarter.

Chairman, Stephen Smith, attributed this to three things on First National’s conference call:

  1. Low mortgage rates
  2. The return of consumer confidence
  3. Cheaper housing prices

Mortgage spreads “continue to remain wide,” he said.  In addition, investor appetite has grown for mortgage securities in the last three months. Those two things boosted First National revenue by about $15 million in the quarter.

First National also included some interesting factoids in its earnings report, saying:

  • Liquidity and credit concerns have increased the cost of funding for most, if not all, of the Company’s competitors, particularly the five large Canadian banks.
  • Given these increased costs, mortgage rates have not fallen in step with Government of Canada bond yields, such that spreads on prime single family mortgages are at historically wide margins.
  • In the spring of 2007, such spreads for discounted five-year mortgage rates were approximately 1.25
    percentage points. (i.e.  normal)
  • For most of 2008, comparable spreads increased to as high as 3.00 percentage points.
  • In the first quarter of 2009 mortgage spreads began narrowing as the banks have once again become more competitive, perhaps in part to sale of mortgages through the liquidity provided by the federal government’s reverse auction facility.
  • Despite the tightening, these spreads were still
    approximately 2.00 percentage points at the end of the second quarter.

Like various other lenders, Smith said that First National sells mortgages at prices based on Canada Mortgage Bond (CMB) and mortgage-backed securities (MBS) rates, not Government of Canada bond yields.  Therefore, CMB yields, for example, are more indicative of First National’s base funding costs than government bond yields.

Smith said spreads also continue to be wide in the commercial market.  He told analysts that First National is “still seeing some good gains” off those products.

In closing, Smith noted that things have slowed noticeably following a rip-roaring May and June.  July mortgage commitments are “down substantially” (20%) YOY, he said.  (Commitments generally fund 30-45 days out.)

First National is Canada’s biggest non-bank lender.  It was recently ranked as the #1 lender in Canada by Brokers. (MBN Survey)

First National’s underwriting turnaround times were ranked head and shoulders above other lenders in the survey.  That’s a key metric. Turnaround time has become critical to brokers given that some lenders have not been honouring their normal stated underwriting times these past few months.