The issues plaguing Home Capital dominated the lender’s last earnings call, but according to Home’s management it appears to finally be turning a corner and bringing confidence back to the market.
Incoming President and CEO Yousry Bissada took part in this quarter’s call, which was decidedly more optimistic than Q1, despite Home still reporting a quarterly loss of $111 million.
Meanwhile, new Department of Finance mortgage insurance rules have also been taking a toll on fellow lenders Street Capital and First National.
First National CEO Stephen Smith reported an overall 21% drop in insured single-family originations, with declines of 30% in B.C., Alberta and Quebec.
“We had an estimate of what we thought the insured originations would go down and they went down a lot more than we thought, and a lot more than the Department of Finance thought,” he said during the conference call.
Highlights from the conference call transcripts from Street Capital, Home Capital and First National are below. The comments in blue deserve particular attention.
Home Capital reported a loss of $111 million, or $1.73 per share. Interim CFO Robert Blowes explained that the loss was due to elevated costs associated with the repositioning of the business totalling $234 million.
“As we move into the second half of the year, we do expect expenses to moderate,” Blowes said. “However, we will continue to experience some elevated costs associated with the liquidity event.”
On a positive note, he said, “After reviewing the company’s business plan and our cash flow forecast at the end of the quarter, this all suggests that the company’s current liquidity level and current facilities for credit are sufficient for the ongoing business for the foreseeable future. Consequently, we are all of a view that there is no longer a material uncertainty that casts significant doubt as to the ability of the company to continue as a going concern, and we’ve removed that language from our quarterly report.”
Total loans under administration declined 4.8% to $25.9 billion, down from $27.2 billion in Q1 and down 2.1% from the end of 2016.
As anticipated, non-securitized traditional single-family residential mortgages were down 6% to $10.7 billion from $11.4 billion at the end of Q1.
Provisions for credit losses in the mortgage portfolio remain “very low and stable,” Blowes reported. Provisions for credit losses as a percent of gross uninsured loans was 7 bps compared to 8 bps a year ago.
He added: “Looking ahead, we are focused on maintaining our liquidity and deposit stability. While it’s too early to tell when we will be able to get back to historical levels in terms of performance, we have been encouraged by the healthy level of mortgage renewal activity that we’ve seen and we’ve started to rebuild our mortgage pipeline.”
Pino Decina, EVP, Residential Mortgages, added that residential mortgage originations are moving in a positive direction. “Though certainly we are in the early stages, mortgage brokers and referral partners are certainly sending us deals, reflecting their confidence in Home and the fact that we’re an important provider in this underserved market. And we want to be there for our brokers and customers by originating more loans, so we’ll continue to make strides towards coming back to market across much of our product offering.”
Decina noted that Home revised its matrix of pricing and lending criteria on July 17 to offer more competitive pricing (particularly in the Greater Toronto Area, for example) on its traditional business, the classic uninsured program. “Next we will look to revise the pricing of our insured loan program and come back to market with a more competitive Accelerator product,” Decina said, adding that the ACE Plus product has been discontinued as the pricing was no longer economical.
Asked about what material changes have been introduced since the broker fraud incident of 2014, COO Chris Whyte spoke about “significant” technology investments in Home’s origination platform, as well as a “secondary-level” quality control document and application overview by a separate group of people. “So we now have, I’d say, a much more robust quality control/quality assurance process that is also part of our normal business flow,” he said. “(And) as part of that division of duties, we made sure that our staff that are responsible for decisioning and underwriting are not really incented on volume anymore; they’re incented on the quality of the work that they do…”
Asked whether any clients who came on board during the fraud issue of 2014 are still on the books, Blowes said this: “So we identified a large part or population that had come through brokers that might have had–that we had identified issues with, and then we narrowed that down. So a small portion would be borrowers today, but they were requalified, and no reason to think there was anything problematic with them. Ones where we thought (needed) further investigation (and) might be problematic, we did not renew.”
Some of Home Capital’s key achievements from the previous quarter as outlined by Bonita Then, Interim President and CEO:
Closed the first tranche of the equity investments from Berkshire Hathaway
Repaid the Berkshire Hathaway credit line, “which should significantly help our net interest margin going forward. We are focused on bringing money in via GICs, which are safest from the liquidity point of view, and it’s working”
Daily inflows are now once again at levels that are in line with historical norms
There’s been a “significant” buildup in liquidity through deposit flows and asset sales. Total liquidity now stands at $3.9 billion, which includes the $2-billion undrawn backstop line with Berkshire
The increased funding has allowed Home to increase its origination
Key points from incoming President and CEO Yousry Bissada:
“We’re in a position where we can look forward and make fresh decisions about the kind of company we want to be, and how we want to achieve our goals.”
“…I am not yet in a position to expand on exactly what that may look like, but let me tell you how I am approaching this: I plan to have a number of discussions over the coming weeks about our plans and strategic direction. I’ll be talking to employees, customers, brokers, regulators, investors and many of our stakeholders, and I’ll be listening closely. Then I’ll use the information to work with the team to create a new plan.”
“For me, ensuring that we have the right culture is critical. This is key. So our commitment to doing the right thing–that’s got to be front and centre. We’re also going to make sure this company is innovative and delivers the best customer service. We look to be innovative in how we fund while always keeping in mind that job #1 is stable funding.”
Street originated $2.7 billion of new mortgages, 19% below the first six months of 2016 and due to last fall’s mortgage insurance rules, said Marissa Lauder, Chief Financial Officer.
Street originated $10.2 million in Street Solution mortgages in the quarter at an average rate of 5.0%.
“As expected, our renewal volumes have begun to accelerate and prime renewals moved significantly higher during Q2,” Lauder said. Renewal volumes were $463 million, up 52% over last quarter and 22% over last year. Renewal rates for the quarter came in at 72% versus Street’s 75-80% target, partially due to seasonal norms, according to management.
The average LTV on Street Solutions originations is just under 72% and the average Beacon score is 703.
During the second quarter, Street underwent a workforce reduction of 10% that will result in savings of between $1.5 and 2 million annually. “We identified some positions that could be eliminated and some areas where new skills will be required over the mid-term. The change reflects our commitment to continuously evaluate our needs to ensure we’re driving long-term returns for shareholders,” said CEO Ed Gettings, adding that Street is forecasting “at this point a 20% to 30% reduction in the prime insured or uninsurable segment…”
Gettings said the following about Street’s performance in the quarter: “As projected, we started to see significant benefit from our prime renewals during Q2, with renewals up roughly 22% from Q2 last year. Renewals can be more than two times (more) profitable the new originations and we expect them to be a significant contributor to our earnings profile over the next three years. However along with our industry peers we continue to face pressure on the prime side of our business due to the mortgage insurance rules introduced by the Department of Finance last year. As a result prime originations were down approximately 30% year-over-year in Q2 and we expect them to be 20% to 30% lower for the full year.”
He also spoke about Street’s prime uninsured liquidity gap and the company’s efforts to seek funding “…with our industry-leading credit quality and we believe that we are in a very strong position to attract it. As part of this process we continue to investigate the market for non-government-sponsored residential mortgage-backed securities, as well we are in discussions with investors who are willing to purchase prime uninsurable mortgages and hold them on their balance sheets.”
In order to participate in the growing uninsured mortgage market, Street launched its Street Solutions Program to a small pilot group of brokers. “We purposely limited the rollout to a small group of brokers. I think it was started with 30 then it went up to 70. We were focused on Ontario,” Gettings said. “We wanted to test and learn in terms of lending areas, what the pricing is, what the credit quality was going to be and we have recently expanded to all of our brokers in Ontario and select brokers in Alberta and B.C. and we have gone from, I will say $2 million a week in commitments to over $20 (million) right now. So we’re very happy with that, there’s a lot of demand for that product. The brokers are enthusiastic about another lender being in the marketplace…”
Gettings touched on Street’s outperformance of its arrears rates: “In Q2 our serious arrears rate was 11 basis points compared to the average of the large Canadian banks in the markets where we operate at 24 basis points.”
Regarding OSFI’s proposed changes to its B-20 guidelines, Lauder said: “…we believe, if implemented with no changes, there could be an overall decline in uninsured mortgage activity in the regulated space. Along with buyers adapting their borrowing habits, for example, perhaps choosing less expensive properties or accumulating larger down payments or adding co-signers to the loan.”
Notables from its call:
Mortgages under Administration in Q1 increased 3% year-over-year to a record $99.5 billion.
Single-family originations were down 21% from a year ago to $3.2 billion. The biggest drop in volumes was seen in B.C., Alberta and Quebec (down about 30%), while Ontario and the Maritimes saw declines of around 5%.
“It’s never possible to predict market activity, but it’s safe to assume that single-family originations will remain much lower in the second half of 2017,” CEO Stephen Smith noted.
Smith also reported “intense” competition for insured product in Q2 in a contracting market. “In order to take advantage of the traditional seasonal uplift in demand that accompanies the summer break, First National was aggressive and introduced various temporary promotions for our mortgage broker partners in the second quarter that increased their compensation for new single-family mortgage originations,” he said.
Summarizing First National’s outlook, Executive Vice President Moray Tawse said: “In the third and fourth quarters, we believe new mortgage insurance rules, additional underwriting restrictions recently announced by OSFI, regional government interventions, such as Ontario’s foreign buyer tax, and, of course, the incremental increase we saw in the Bank of Canada’s lending rate earlier this month, will continue to exert downward pressure on the market for residential mortgage credit and accordingly on First National single-family origination opportunities. Our current thinking is that residential originations could be down year-over-year by a rate similar to the decline we experienced in the second quarter. Single-family origination cost will also rise as a result of greater competition and the various temporary promotions we put in place in the second quarter.”
Tawse added: “Overall, we’ve entered a challenging period in the marketplace. While we intend to continue employing strategies to mitigate that impact, there is no getting around the fact that residential mortgage credit growth has been tempered by recent government policy actions.”
On the impact from the Department of Finance’s latest mortgage changes announced last October, Smith said this: “…we had an estimate of what we thought the insured originations would go down and they went down a lot more than we thought and a lot more than the Department of Finance thought. If you look at the insurance numbers, insured originations went down to 20% to 25% range, we thought it was going to be under 10%, (and) I know Finance thought the same thing, then they were a lot bigger. In the end, we have to deal with the way it is.”
Asked about the increase in broker compensation and what impact that has had on origination volumes, Smith said this: “I think, what we feel is in general, we’re picking up market share relative to some of the monoline lenders that are funded by aggregators. If you’re a monoline lender funded by an aggregator, you no longer have a conventional product. We have a conventional product through the benefit of our institutional buyers and our ABCP conduits. We have a competitive conventional product. We think that what is happening is, if you’re a mortgage broker, you’ll maintain a relationship with maybe two at least, perhaps three different lenders, usually one of those lenders is a Sched 1 bank and the other one might be a monoline. If a broker has a monoline lender that can no longer provide a whole service solution, can no longer fund conventional mortgages, they’ll move to a monoline lender like ourselves, that does provide a complete solution. But we think we’re getting a bit of market share.”
Note: Transcripts are provided as-is from the companies and/or third-party sources, and their accuracy cannot be 100% assured.
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