CMT: We’re here today with Stephen Smith, President
of First National, the country’s largest non-bank mortgage lender. Stephen, thanks for sharing a few minutes of your day. Great to have you with us.
STEPHEN: Thanks for having me, Rob.
CMT: I believe congratulations are in order. It’s been 25 years since you have been in business?
STEPHEN: 25 years from March 31st, 1988, that’s right. We’re very proud.
CMT: Exciting. Now when you and Moray first started First
National, did you anticipate the company reaching the mass and revenue that it has today?
STEPHEN: Not in our wildest dreams, Rob. In our first year, I think our total revenue was $200,000, and I think we underwrote $50 million worth of mortgages. It took us six years to get to $400
million of assets under administration, and I guess now we would do $400 million in a good week. So it’s certainly totally exceeded our expectations or any plans that we had.
CMT: Wow, and now you’re a public company…
STEPHEN: We are public, we went public in 2006, and we are on the Toronto Stock Exchange, and we have a market capitalization of about a billion dollars.
CMT: Now, what are the main things that you think First National has done right to become the biggest non-bank lender in Canada?
STEPHEN: Well, I think there were a couple things. I think the first thing was that we choose to work exclusively with mortgage brokers and the mortgage broker channel. We originated all our mortgages from mortgage brokers back in 1988. Back then, that was a small or marginal channel, certainly under 5%, and we felt that that was going to be a growing channel. And the growth of First National is due to the growth of the mortgage broker channel.
And I think the second thing we did is we certainly invested in a high level of service and good technology. We have the reputation of having some of the best technology in the industry, and we feel in a differentiated or, rather in a market that is commodity based, we had to differentiate ourselves by good technology and good service. So those are the two things that we did, focus on mortgage brokers, focus on service and technology.
CMT: Now if you had to go back and take a mulligan on any one
business decision of yours, what would you do differently?
STEPHEN: You know I don’t, I’ve thought
about that question. I can’t think of too many things. If I had to go back, I think maybe just generally we were at times a little bit too conservative in terms of growing. I think we could have grown a little bit more aggressively and a little bit faster. But Moray and I, I think by nature, are a little bit cautious and a little bit conservative so we tended to take baby steps perhaps when we could have taken giant steps. But in reality, if you look where we started with a few employees, and given our size now, I guess there’s not too much to regret.
CMT: Now in terms of originations today, where are you at today
if you can quantify it in billions?
STEPHEN: Yes. I would say last year in 2012, we originated about just over $14 billion worth of mortgages, and that would make us the sixth largest single family residential lender in the country and the largest commercial lender in the country, and that’s excluding renewals, too.
CMT: Apart from the rise of brokers, what are the biggest differences that you see in today’s mortgage market versus when you first started?
STEPHEN: Well, I think there are two differences. One, certainly one has to look at the Internet. Today, the Internet has been transformational in the way that people do business. Now consumers are very, very well informed, and they come in to any transaction knowing where the best rates are and knowing what they can get on the Internet. So that puts challenges for both lenders and for brokers to provide a value-added proposition to consumers. The Internet hasn’t taken away the importance of relationships.I think it’s actually extenuated it.
And the other thing is, the big change would be the advent of securitization. When we started in 1988, NHA MBS was in its infancy, ity only started a year before. And over the past 25 years, we’ve had the advent of asset-backed commercial paper in the mid-90s, commercial mortgage-backed securities in the late-90s, and the Canada Mortgage Bond in 2001. All those securitization vehicles have provided funding which has fuelled our growth, and it fuelled the growth of the mortgage broker channel.
CMT: And you know as much about securitization as anyone, so on that, how important is securitization to Canada’s mortgage market? And, let me throw a hypothetical out there. If CMHC stopped guaranteeing MBS for example, what would happen to the mortgage market as we know it?
STEPHEN: Well, the banks have dominated mortgage lending before securitization. They still dominate it now. The advantage of securitization is that it provides an alternative source for mortgage brokers and for smaller lenders, like ourselves who don’t have large balance sheets, to fund their mortgages. So it’s extremely important. This started with CMHC introducing NHA MBS and then I guess further developed with the commercial Canada Mortgage Bond.
If CMHC, which I just don’t see that happening–that’s a very hypothetical question–decided no longer to do NHA MBS, that would probably have a very negative impact on the mortgage broker
channel, but it would have a negative impact on the mortgage market because the securitization provides an alternative source, and I think it keeps the pricing competitive and provides an alternative way for Canadian consumers to get their mortgages, other than at large financial institutions.
CMT: Then securitization in some ways is a key to driving competition
in our market.
STEPHEN: Very, very important. I would say when CHMC introduced NHA MBS and again the Canada Mortgage Bond, notwithstanding the fact that Canada actually has a very good mortgage market, this provided just another form of competition to balance sheet lenders. So it’s been a great way to ride a counterbalance to the large FIs.
CMT: Do you think that non-banks without deposits will be able to
successfully compete long term with banks?
STEPHEN: Oh I think so. I think so. We’ve had what
I’d say is a pretty consistent situation for the last four or five years where the, I’d say the mortgage broker channel
and non-depositing lenders like ourselves–I think we would probably be the best example of that–have been able to compete successfully with the banks. The banks are very, very tough competitors. They have good rates; they have a lot of capital; they are efficient in what they do; they have economies of scale.
But notwithstanding that, I think one can compete with them and offer a better alternative product, which consumers would select.
CMT: Now, banks being so important in the mortgage money market,
is there any chance do you think that some day they might look at the
competitive landscape and simply decide to throttle back on their funding of competitors like non-bank mortgage lenders?
STEPHEN: You know, it’s interesting. I would say that there are players in the market that are not dependent on banks to fund. There are aggregators that are not part of the – are not dependent on the banks for the funding. Non-bank lenders can fund directly in the Canada Mortgage Bond without necessarily the support of the big banks. Notwithstanding the fact there are aggregators that are within the shell of the, I guess under the umbrella of, the larger banks. I just don’t see that happening.
The aggregation business and the ability to sell into the CMB is a profitable business, and I think if the bank for whatever
reason were to leave, and it wouldn’t be because they are not profitable but maybe for other reasons they might leave, I think there would be other people that would step in and take their place.
CMT: That’s good to hear. Now to change gears slightly and talk a
bit about your model as a lender. You know, unlike many lenders, the First National in the broker channel doesn’t discriminate based on a broker’s volume. So in other words, you do business even with small brokers without asking for a big set amount of volume per year. Now, as a side commentary, I think that’s a fantastic service to the industry, and I wish more lenders would do it…
STEPHEN: Yeah, thank you.
CMT: But why did you choose that model when over 80% of the volume
comes from 20% of the brokers?
STEPHEN: Well, I guess for a couple of
reasons. I think we remember when we were small, we remember when there were four or five people and we were struggling just to do business, and I think we remember that people helped us on our way up, and those relationshipsmatter a lot to us. So I think we feel we want to help the new mortgage broker get established. And again, in the early days of one’s career, that’s not always easy to do. So, and if you have volume thresholds, it even makes it more difficult. So I think we take the long view. People are starting; they start relationships, and today’s upstart is going to be tomorrow’s successful broker, and we hope they remember us when they are successful.
And the other thing would be is, I think, our technology. We have probably the most efficient underwriting system in Canada. It’s entirely paperless. We don’t print out faxes or everything comes in. We can handle big volumes, and we can handle volumes from individuals or from the person sending us 10 deals a year or 500 deals a year. So our technology lets us process those fairly efficiently. So I think that gives us a competitive advantage that lets us deal with the individual on the same basis as a big producer. Perhaps some of our competitors don’t have that flexibility.
CMT: Last question here, a little bit about mortgage rates. So, we’ve seen improvements in the variable rate pricing this year. Do you think that we’ll ever see anything like Prime minus 0.90 again?
STEPHEN: Well, I think it is possible, and it just gets down to the marketplace. One of the reasons Prime minus 0.90 was there for a while because of bank funding cost. Banks will issue senior debt and they will swap that back to floating rate. When we hit the financial crisis, that moved up well over Prime because the bank funding cost moved up. It got tight again, and then they moved back up again.
It’s possible. I think it just really depends on where the
market is. Right now, senior bank debt trades at a wider
spread than NHA fixed rate, NHA MBS, and that’s one of the reasons why we are not seeing the same discounts as we used to in the floating rate market. But it’s possible.
that is something that consumers will be happy to hear.
CMT: Excellent insight
STEPHEN:that’s a wrap for today. I
want to thank you for being with us once again.
STEPHEN: Thank you very much, it was a great
pleasure talking to you Rob.