It was already known heading into the first-quarter earnings season that year-over-year growth for the broker channel’s key lenders was going to be hampered by B-20’s impact on origination volumes in Q1 2018.
This is because originations surged at the end of 2017, with some spillover into the first quarter of 2018, as buyers rushed into the market before the stress test rules took effect.
With that in mind, two of the three lenders we follow still managed to grow originations in Q1.
Highlighting the importance of Home Trust’s 4.9% growth in originations this quarter, CEO Yousry Bissada said, “Last year’s originations included funding commitments pulled forward in advance of B-20 taking effect. In the absence of that effect in this quarter, a year-over-year increase marks meaningful progress.”
Similarly, Street Capital recorded a 6% increase in prime originations compared to last year.
First National had a comparatively tougher quarter, with single-family originations down 15%, although it still managed to increase mortgages under administration by 5%.
More highlights from the conference call transcripts from Street Capital, Home Capital and First National are below.
Single-family originations were up 11.3% year-over-year to $933 million.
In explaining the growth, Bissada said, “Our investments in helping our broker partners understand how best to work with us and emphasizing a service culture with our own people is improving the home customer experience. That combination is driving high-quality, appropriately priced business volume.”
“Home has a very high quality of borrower in our single-family residential mortgage product,” said Chief Financial Officer Brad Kotush. “There has been much discussion lately about the potential for a decline in home prices in Canada. The potential impact at Home is mitigated by the low loan-to-value ratio of our mortgaged loans, which was 70% on origination this quarter and 59% for the portfolio at Q1 2019, evidence of our disciplined underwriting and risk management principles.”
Non-performing loans increased slightly to 0.49% in Q1 from 0.47% in Q4.
Asked about comments from the Bank of Canada that it is looking into the possibility of fostering a private mortgage-backed security market in Canada, Kotush replied: “We’re continually examining alternative funding channels… we have added some other financing facilities that will enable us to smooth out some of the peaks and valleys of the deposit business. And so…we would say that’s a very encouraging statement from the Governor of the Bank of Canada. And we would work towards…developing that funding channel.”
“Our renewed go-to-market strategy and focus on cost management drove meaningful improvement in the quarter, particularly in our prime mortgage business,” said CEO Duncan Hannay. “This strategy, which we outlined in Q4 2018, calls out three important areas of focus: first, prime new mortgage originations; second, prime mortgage renewals; and third, loan origination systems and processes.”
Explaining the 6% year-over-year growth in prime new mortgage originations, Hannay said Street Capital is “placing renewed focus on new broker onboarding, deepening share of wallet and improving the end-to-end customer experience to drive new prime origination volume growth across both the insured and uninsured segments.”
Hannay cited the latest Q4 market share data showing Street moved up two spots to sixth position with a market share of 6.8%.
On prime mortgage renewals, which stand at 71% of eligible mortgages, Hannay said, “Our team entered 2019 with the benefit of better processes and an enhanced capability to target offers to renewing customers. Our focus here is retention and overall contribution versus the absolute renewal rate. While gain on sale rates remained pressured on renewals in a highly competitive environment, we are nonetheless satisfied with our performance in the first quarter.”
On loan origination systems and processes, Hannay said Street has “assembled teams focused on middle-office transformation and digital delivery to improve throughput, customer experience and the overall efficiency of the company’s mortgage origination platform, with the objective of solidifying our competitive advantage and growing overall market share.”
While Street Solutions mortgage originations were up 22% from last year and Street continued to make progress on gaining access to third-party broker deposit platforms, Hannay noted, “in order for the bank to grow its portfolio of Street Solutions mortgages on balance sheet, it needs a commensurate increase in its level of regulatory capital given the bank’s current internal capital targets. In 2019, the management team and Board of Street Capital continue to be keenly focused on deepening the bank’s sources of funding and, importantly, strengthening its capital base so that we can grow our Street Solutions book and solidify our plans to deliver sustainable profitability.”
“First National remained profitable in the first quarter and increased mortgages under administration to a new record,” said CEO Stephen Smith. “However, tighter mortgage spreads, a volatile interest rate environment and lower single-family originations produced results that were somewhat disappointing.”
Single-family mortgage originations saw a 15% drop, “exaggerated by the fact that in last year’s first quarter we realized the benefit of higher fundings related to commitments made in late 2017 prior to the implementation of revised B-20 guidelines,” Smith noted. “This year there was no such pull forward and instead what we saw was B-20 doing what it was intended to do, moderate borrowing activity.”
Originations were down most in Vancouver and Calgary, which saw year-over-year declines of 35%. “…the ongoing economic pressures and burdens have added to the challenges caused by regulatory interventions in the housing market,” Smith said. Ontario saw single-family originations down a more modest 1%, “because Excalibur continued to produce positive results.” Excalibur is First National’s alternative single-family mortgage product.
Nationally, single-family renewals were down year-over-year.
“2018 also represented the tightest period for mortgage spreads in the last 12 years,” noted Rob Inglis, Chief Financial Officer.
“Moving into the second quarter, we actually feel pretty positive,” said Moray Tawse, co-founder and Executive VP. “Single-family mortgage commitments in March were ahead of 2018 levels by almost 10%. Meantime, mortgages with wider spreads, which were originated during the first quarter, will be securitized in the second quarter and the prime BA spread, which affects returns on floating rate mortgage securitization, returned to normal levels.”
“…we continue to forge relationships with mortgage brokers and have had great success in diversifying our funding sources and these factors will be instrumental in sustaining First National’s market leadership going forward,” Tawse added.
Inglis confirmed roughly 20% of First National’s asset book is comprised of floating rate mortgages.
Commenting on B-20’s effects on mortgage originations, Smith said commitments were up 10% in March. He noted that underlying macro conditions, such as unemployment, are still strong, and that following regulatory impacts, like that of B-20 throughout 2018, [the market] tends to normalize again and people start to adjust.”
Note: Transcripts are provided as-is from the companies and/or third-party sources, and their accuracy cannot be 100% assured.