Genworth & First National Nuggets

Last week saw two earnings reports of note in the mortgage business:

There are always little treasures in these reports and this time was no exception. Below are some snippets of interest (our comments in italics):

First-NationalFirst National

  • “FN’s $4.3 billion of Q3 Mortgage originations were 29% higher than forecast, despite a 7% y/y decline in housing market activity in Q3,” says National Bank Financial.
  • Mortgage originations jumped 25% YOY
    (First National can thank CIBC for closing the shutters on FirstLine.)
  • The company snatched a massive 6.5 percentage points of market share in brokered mortgages in the first half of this year.
  • Here’s a look at First National’s mortgage spreads over time. These reflect 5-year fixed mortgage rates, less the 5-year Government of Canada bond:
    • Prior to 2008: 1.25%
    • During the credit crisis in 2008: 3.00%
    • June 2011: 1.46%
      (“Between 2009 and mid 2011, spreads gradually tightened as liquidity issues at financial institutions diminished and the competition for mortgages increased,” said the company.)
    • September 2012: 1.80%
      (“With renewed global economic turmoil in 2012, spreads generally have widened again.”)
  • “…The Company sees the low interest rate environment continuing and healthy mortgage spreads for the remainder of the year.”
  • “Canada Housing Trust (CMHC) has indicated that it will not unduly increase the size of its (Canada Mortgage Bond) issuances…” (This is a significant constraint for non-bank lenders competing with the majors.)
  • First National sold 82% of its Q3 mortgage originations to institutional investors, much more than analysts expected.

Genworth-FinancialGenworth MI Canada

  • Its mortgage application volumes are down approximately 15% since the tightening of mortgage rules, said Genworth.
  • “Many potential homeowners appear to be sitting
    on the sidelines watching interest rates and home prices and adopting a wait-and-see approach before buying.”—Brian Hurley, Genworth MI Canada, Inc. – Chairman & CEO
  • “…Over 80% of borrowers we qualify for a 30-year term could qualify for a 25-year term,” says Hurley. (CMHC’s findings are likely similar. This counters those who claim that mostly fringe borrowers take extended amortizations.)
  • Genworth expects the government to raise the cap on insurance-in-force for private mortgage insurers to $300 billion, from $250 billion today. The company hopes that will happen by “early 2013.” RBC Capital markets estimates that private mortgage insurers have, collectively, ~$200 billion in insurance-in-force.
  • Genworth’s delinquency rate has fallen for six quarters in a row to a long-term low of 0.15%.
  • Genworth wrote a more “typical” $11 million in bulk insurance in Q3, versus an abnormal $47 million the prior quarter. (That $47 million occurred from pent-up demand after CMHC started rationing bulk insurance.)

Rob McLister, CMT

  1. Hi Banker,
    The ceiling was raised for private insurers when the government passed legislation to change its guarantee framework. That happened during the 2011 budget–well before the CMHC cap became front page news. Now it’s a question of when the feds will deliver on it.
    Cheers…

  2. ” “…Over 80% of borrowers we qualify for a 30-year term could qualify for a 25-year term,” says Hurley.”
    Confirming that (at least) 20% of their mortgages don’t qualify under the new rules isn’t very comforting. And at what point in time was that referring to? 3 months ago? 6? 24? Were today’s lower Service Ratio ceilings also used? More importantly, what percentage of the much more popular 35 year amortization terms would qualify for the new 25 year? And how quickly do both those percentages drop as rates increase? It’s a can of worms ..x2 (including CMHC) ..x2.5 (including Canada Guaranty). What is the actual number of borrowers that would not (do not) qualify for their existing mortgage today? (here at the bottom of interest rates with no place to go but up). That’s Not an attractive nugget.

  3. There is a difference between not qualifying under today’s new rules and not being able to pay your mortgage. Don’t confuse the two.

  4. Genworth calculates IIF differently than CMHC. Genworth reported $295B of IIF in Q3, but this is based on original principal + insurance premiums. CMHC’s number is based on current principal. I don’t have Genworth’s exact CMHC-equivalent measure handy but I think it was a bit over $200B at year-end 2011.

  5. I could not have afforded a 25 year amortization at the time my wife and I applied for our mortgage. She wasn’t earning enough money. We ended up getting a 35 year mortgage and since then we’ve made $16,000 in extra payments. I really think amortization is overrated to be honest. For people like us it had no bearing on our ability to afford a mortgage.

  6. Don’t kid yourself. The largest problem with Canadian mortgages is the typical 5 Year Term. Banks know which clients are likely “non-qualifiers” and they’re not in the habit of discounting Posted Rates at Renewal when they don’t have to. That could easily mean twice the payment for some variable holders especially and certainly affects ability to pay. That’s here at the bottom of interest rates.
    The big question is still “What is/will be the actual number of borrowers”? When do they come up for Renewal?
    For example, how many 40 yr or 35 yr amortization ..or Stated Income ..or Alt A 90% LTV ..or no GDS consideration mortgages were completed Nov. 2007 and beyond by all 3 insurers? That’s just an insured sampling (not to mention the conventional non-qualifiers).
    The 20% “nugget” (presumably only referring to mortgages insured between Mar. 18 2011 and Jul. 9 2012) is just that, a small piece of a larger problem that has not been fully quantified ..at all.

  7. Actually “darkselling” given that he refers to a small sampling of the potential non-qualifiers in the renewal pipeline (and only one cause for not qualifying), it should read “at Very least 20%”.

  8. You are absolutely right darkselling.
    Let’s_Be_Honest, you are reading too much into it. Brian’s point was simple. Four out of five people could qualify for a 25 yr am but chose a 30 yr am. That is consistent with other figures I’ve seen on this topic.

  9. VJ, could you post the links to those other figures please. I haven’t seen any on how many people don’t qualify for their current mortgages after the most recent B-20 changes. Thanks.
    Btw no offence to him but Brian’s point is a cherry picked statistic for one (last) year. To be relevant, all 3 Insurers should run the model with today’s reduced GDS, TDS, amortization, programs etc. over the past 5 years of files to offer some number of likely non-qualifiers coming up for renewal. BEFORE rates rise and/or values decrease. Maybe then we’d hear less “Don’t worry be happy, rates won’t rise for this reason or that” and more “Decent financing options are steadily disappearing you’re on track to be roasted at renewal next year.”
    Looking forward to seeing those figures.

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