Second quarter earnings from Canada’s biggest non-bank lenders are now in the bag.
We learned (no surprise) that improving customer retention rates continues to be a priority for at least two of the lenders, and that Home Capital is making a concerted effort to improve service levels to mortgage brokers.
“Service levels are not where we think they should be for the mortgage broker, with slower turnaround times on commitments and verification of income, however, we are improving the process and momentum is picking up,” CEO Martin Reid said during the conference call.
We’ve pulled all these and many more tidbits from the transcripts of three non-bank leaders, First National, Home Capital and Street Capital. Here’s a rundown of it all, with highlights inblue.
Street sold $2.54 billion of mortgages in Q2 vs. $3 billion last year.
Street says it renewed nearly 75% of its mortgages that were available for renewal.
The company’s market share was at 8.4% in the quarter, making it the fourth largest non-bank lender.
As of the end of June, the average beacon score on its portfolio was 749, the average loan-to-value ratio was 81.2% and the average total debt service ratio was 36.1%.
“This year we are focused on putting the pieces in place to drive revenue growth starting in 2017,” said CEO Ed Gettings. “We have three primary objectives in 2016. Our first objective is to advance our Schedule I bank application through to completion… Our second objective is to grow mortgages under administration and hold our market share in the mortgage broker channel. Originations were lower than what we would have liked during the quarter, as the underwriting adjustments we made in Q1 2016 had some spillover effects in the second quarter of 2016… Our third objective for 2016 is to continue to generate renewal volumes of 75 to 80% of loans eligible for renewal.”
“We continue to expect that on a full-year basis, gains as a percentage of mortgages sold will be in the range of 178 to 182 basis points,” said Marissa Lauder, Chief Financial Officer. “Our acquisition expense ratio was 106 basis points in the quarter; this compares to 102 basis points last year. The increase reflects lower relative renewal volume year-over-year and a broker incentive program we launched late in Q1 2016 that increased the acquisition cost in the quarter.”
Lauder added: “We continue to expect 2016 renewal volumes that are approximately 15% lower compared to (last year). But in 2017… we expect the upper trend in renewal volumes to resume. With renewal volumes expected to exceed to 2015 renewal volumes by 10% to 15% and 2018 renewal volumes (that) are expected to increase by 30% to 40% over a strong 2017 providing a real revenue boost in these years.”
Speaking on the quality of Street’s credit quality, President Lazaro DaRocha said, “… the serious arrears rate on our portfolio of mortgages was 11 basis points, well below the CBA performance. This is also well below last year which had 16 basis points..”
Asked to explain Street’s forecast for 2016 originations to match 2015, Gettings said: “…we’re looking at our current pipeline and we’re feeling good about the fact that we think we have turned the corner on those operational issues that we were dealing with in Q1 and Q2. Market share during the quarter went up as well from 7.6% in Q1 to 8.45%… so we believe that we are building momentum, and we’re clearly headed in the right direction.”
Asked whether there was any indication of declining demand overall or from first-time buyers in the heated Toronto and Vancouver markets, Gettings replied, “The broker channel itself is growing at between 4% and 5% year-over-year on a year-to-date basis. For first-time buyers, yes, the price points are being stretched for them. And what I understand is happening is that instead of buying houses they’re focusing on condominiums because the price point’s more attractive for them.”
In the last quarter, staff levels rose to 241 from 215 and was “primarily, if not all, within our underwriting and QA area,” said DaRocha.
On Street’s now discontinued broker incentive program, CFO Marissa Lauder said the program increased acquisition costs on a net basis by 5 bps for certain products. DaRocha added the program was a reaction to what Street’s competitors had in the market at the time. “We’re never the lowest rate or the highest commission, but we need to be competitive. So this was a reaction to others’ moves.”
On Alberta origination volumes, Gettings said: “It’s a slight decline on year-to-date originations. We would have had 15% of the book in Alberta last year; it’s dropped down to 14%. So it’s definitely a function of the market in Alberta, as well as some of our underwriting guidelines.”
Asked what is behind Street’s 75-80% renewal target, Gettings replied: “We definitely have a retention team in place that if we see a customer calling in that has a desire for a payout statement or something like that, we’ll immediately flip them to an in-house retention team and we’ll have a dialogue with the customer to understand what their needs are. If they’re looking to negotiate a bit on rate, we’ll take that into account.”
Asked how Street is managing the hot B.C. market, Gettings answered: “…we are really not targeting that high-end segment of the marketplace. Like other lenders, we have a sliding scale. So as you go up in loan amount we reduce the loan-to-value that we’ll lend to you as a customer. You have to have more skin in the game.” He said, for example, a borrower looking to buy a $1-million home would have to put down 20%, or $200,000. “We might consider lending you that full amount, depending on a number of underwriting criteria…the maximum that I will lend is in the $1.8, $1.9 (million) range, which takes our loan-to-value down into the 60% to 65% range. So we’ve got lots of capital protection in case of a default or a downturn in the marketplace. Our average loan size is in the $375,000 range.”
Home Capital reported net non-performing loans of 0.33% of gross loans as of year-end, unchanged from Q2 of last year.
It also reported combined traditional and Ace Plus and insured single-family residential mortgage originations of $1.37 billion for the quarter, up 5.7% from last year.
Noting that 2014 was Home Capital’s “high water mark” for originations, CEO Martin Reid said: “On a total origination basis, we are ahead of 2014, showing we are on the right track and within our different product lines there is room for improvement and we are working hard towards those improvements, particularly as it relates to our traditional mortgage product.”
He added: “Service levels are not where we think they should be for the mortgage broker, with slower turnaround times on commitments and verification of income, however, we are improving the process and momentum is picking up. We believe this is our biggest impairment to greater success on the residential side and a number one priority for management. Our investment and broker portal and digitization of internal process will help to address those issues and we hope to see the positive impact of that in the coming quarters.”
Talking about Home’s new uninsured product, Ace Plus, which is geared towards borrowers who just miss qualifying for a prime mortgage, Reid said: “We moved quickly to serve these borrowers by rolling out Ace Plus late last year and we are seeing the positive results. We originated $115 million of Ace Plus last quarter, significantly higher than we what we did in the first quarter.”
“We have launched our new broker portal and loyalty program to improve service and turnaround times in the mortgage origination process,” Reid said. “…This is a major effort that will improve how we do business. We will be able to process more business, more correctly with more control and a better customer and broker experience. The benefits will really start to flow toward the end of the year and into 2017…”
“…we are not seeing any unusual credit issues with the mortgages related to the 45 suspended brokers. We are now over 90% through our review of the portfolio originated by these brokers, so we are well on our way to finishing that up before the year end as we have previously stated,” Reid said.
Offering his take on current market conditions, Reid said, “We see a much more moderate market ahead of us rather than the double-digit price increases that have characterized Toronto and Vancouver recently with the better balance between supply and demand. We don’t see any significant move lower in prices.”
Responding to a question about an increase in run-off of mortgage originations, Reid said, “we were probably under-resourced in addressing some of that runoff. So we’ve addressed that…brokers like to sort of turn over their clients and they are very quick to try and sort of move clients from one institution to another and what we will do there is look for the early warning signs and then address it and try and keep that customer. So we have addressed that. We think we are going to get a little bit better traction, so I am not sure I would look at that runoff in the last couple of quarters as being indicative of future quarters.”
Asked about Home Capital’s plan to increase net profit, in the face of several quarters of continued year-over-year declines in net income, Reid answered: “…we had started doing some changes internally as it relates to our residential business and then we had the fraud situation, which accelerated a lot of those changes, so we spent a lot of time, a lot of money and a lot of energy from our employees in terms of implementing those changes. In the process of that I would say the biggest downfall has been our service level to the mortgage broker. So that’s really what’s impacted originations the most I think is that service levels of the mortgage broker, and these are mortgage brokers that we always dealt with and still deal with today. So for us… we continue to invest in technology, redefine process and do it in a way that we are putting the right risk and control framework in place, but trying to get that customer service to the mortgage broker back to where it needs to be. And that’s where we are seeing progress on originations if you look at the residential, consecutively we’re up about 25% from Q1 to Q2 and we do see that continuing to improve as we improve our service levels for the mortgage broker.”
Notables from its call:
Mortgage originations in Q2 were up year-over-year by 8% to $5.5 billion.
Mortgages Under Administration or “MUA” increased another 7% year-over-year to a record $96.6 billion. This increase was attributed to “success in mortgage originations and renewal retention,” said CEO Stephen Smith.
“The only moderating factor was lower activity levels for our Calgary office, which was to be expected given the economic slowdown in Alberta,” Smith noted.
“Mortgage servicing income was 23% higher in the second quarter, reflecting higher revenue earned from First National’s third-party underwriting and fulfillment processing business,” said Rob Inglis, Chief Financial Officer.
Moray Tawse, Executive Vice President, spoke about the areas of focus going forward: “As we look ahead, we have significant renewal opportunities to take care of this year and that is one area of particular focus. Another is our underwriting and fulfillment processing business. We have an opportunity to continue to add to First National’s earnings by sustaining high levels of mortgage broker service in this area and we believe we have the resources in place to deliver.”
“…we will keep an eye out for changes in the landscape including government policy changes, but from our vantage point right now, it’s business as usual,” Tawse added.
Asked for his take on B.C.’s new foreign buyer tax, and the prospect of a similar tax being adopted in Ontario, Smith said: “…our average mortgage size is in the $300,000 range. We’re not particularly lending in the range of properties that are targeted by this tax. The issue of taxes both here and potentially in Ontario, that starts to be a more public policy issue. I think there’s a concern in B.C. A legitimate policy concern is that you don’t want your housing stock in your major cities to start to become a store of value for people outside the country. And that has overreaching policy concerns that probably just don’t necessarily affect us as a mortgage lender. I think we’ve always been prudent in the way we lend. And we make sure that the people have the down payment; the down payment comes from identifiable sources, that the people have the income and have a job to be able to support that income. Do I think [B.C.’s new tax] is going to affect the market particularly? I think it’ll have an effect in the market. You’ve just (increased) the prices by 15% for foreign buyers. But I don’t think it’s going to have a material effect at First National.”
Note: Transcripts are provided as-is from the companies and/or third-party source, and their accuracy cannot be 100% assured.
Steve Huebl & Robert McLister
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