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While OSFI’s Guideline B-20 was creating headaches for most lenders, it spelled opportunity to RFA Capital. The regulatory change, one of Canada’s biggest ever, drew Executive Chairman Ben Rodney and his team right into the business.

RFA began in 1997 and launched in the broker channel this September. Leading up to that, Rodney’s firm was party to over $15 billion of Canadian commercial mortgage, securitization and real estate transactions. RFA has also been a residential MBS investor since 2014.

“We viewed B-20 as an opening to come into the market,” said Rodney, who adds that RFA has access to “large amounts of unregulated capital.” That capital will help it compete against lenders hamstrung by the stress test.

“The bet that we’re making in the market is that the government wants to take risk away from [itself] and put more risk on the private side.” RFA was designed to facilitate that.

We spoke with Rodney last week on how the new lender will operate. Here was his take:

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On why he started a broker-channel lender versus going direct:

“Trying to go to consumer direct is a fool’s errand. Brokers are an established channel. We’ve been looking at the space for the last 23 years. We had a couple of monolines in contract to purchase,” but neither worked out, he explained. “We said if we can’t buy it, let’s build it… We feel we can compete with the incumbents.”

On why the market needs another broker channel lender:

“We recognize how competitive the space is, but we know our competitive advantage is unregulated capital. “We think RMBS is going to be a big theme going forward…MCAP is on the forefront of that and we think it will open up to more participants…B-20 accelerated our plans to move into the market.”

“There is more [regulator] scrutiny now with equity-based lending,” Rodney adds. “Having unregulated capital will be an edge.”

On RFA’s pricing competitiveness:

Like most new lenders, RFA is running some promo rates to drive launch volumes (e.g., prime – 1.15% paying a point on insured deals). “Our game plan going forward will be remaining competitive in light of the incumbent monolines in the space.” Unlike the pricing of so many other new lenders, “We’re not going to be out of market in two months,” he promised. RFA is also “in the process of crafting a broker volume incentive program for 2019.”

On how RFA’s mortgages are funded:

Like a typical monoline, the firm’s insured business is funded mainly by aggregators. “There is nothing really different about how RFA funds its [insured] mortgages.” (Side note: The company requires a 720 beacon for best rates, higher than some other lenders in the channel. The minimum beacon score requirement is 650 for insured/insurable and 700 for prime uninsurable. )

For its uninsured non-prime business (coming in 2019), RFA will be partnering with “institutional investors,” Rodney says.

On why RFA doesn’t offer competitively priced short terms:

“One- and two-year terms are proportionately more expensive to fund than a 5-year… We don’t anticipate funding a lot in those terms. Duration pays. On 1- and 2-yr paper, with the cost of the broker side, it’s tough to make short duration economical unless you’re a Scotia with a balance sheet and ancillary products.”

On why longer terms don’t appeal to RFA:

“A 10-year [term] includes an option to break after 5 years…[The poor economics of longer terms] also has to do with the investor market—where 10-year bonds are always tougher to place than the five…..There is just less institutional appetite for longer duration on the mortgage side.”

On why RFA limits buydowns to 10 bps:

“Typically, on the back end, funding is dictated by the coupon. Nuances of the CMB require an issuer to set the coupon based on lowest rate in the pool,” he says, so RFA tries to keep its mortgage rates in a tight range.

On the online broker trend:

“You can see the impact on rate competitiveness from some of the internet brokers that are driving [this trend]. I think we’re going to see more of it. The market is going to become more competitive the more people rate shop…”

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