Despite Canada Mortgage and Housing Corporation CEO Evan Siddall warning of a mortgage “deferral cliff,” and a sharp rise in mortgage defaults this fall, data from the country’s key mortgage lenders appear to be telling a different story.
That cliff is looking more like a “slope,” according to Equitable Bank President and CEO Andrew Moor, who reported a decline in mortgage deferrals from 20% of the bank’s portfolio to just 6% as of mid-July.
“Our general feeling is that many of our customers called looking for a deferral just out of an abundance of caution in an uncertain economic scenario,” Moor said during the bank’s Q2 earnings call.
It was a similar story across Canada’s non-Big-Six bank mortgage lenders.
Both Home Capital and First National have seen their mortgages in deferral fall to a third of their peak levels, and both expect more mortgage clients to get back to their regular payment schedules in the coming months.
One of Canada’s two private mortgage default insurers reported a similar scenario, with an optimistic outlook for the remainder of the year.
“Provided the current economic trends continue, we expect the level of reported mortgage deferrals to decline over the second half of the year,” said Genworth Canada President and CEO Stuart Levings.
More highlights from the conference call transcripts from Home Capital, Equitable Bank, First National and Genworth Canada follow below.
Single-family originations: Up 15% YoY (+32% in Ontario; +22% in B.C.; -8% in Calgary and -6% in Montreal)
Mortgage Renewals: $2.5 billion (+19%)
Loans under administration: $114.9 billion
First National’s Mortgage Deferrals
As of May 11: First National approved 33,800 single-family borrowers, or 13.9% of eligible clients, for its deferral program.
As of July 13: That had fallen to 10,473 borrowers, representing 4.5% of First National’s portfolio.
FN reports that about a quarter of borrowers who were initially granted a deferral are now requesting an extension.
First National offered three-month deferrals, with additional three-month extensions granted in cases of “extended hardship.”
Notables from its call:
“The First National team did an outstanding job of responding to the needs of the mortgage broker community and the lending opportunities brokers brought to us,” said CEO Stephen Smit. “Our sense is that brokers have gained market.”
“On our residential side, we experienced substantial origination growth, which in part was due to the COVID-19 disruptions experienced by chartered banks and their branch network and mobile sales force channels,” said Executive VP Moray Tawse.
Loans under administration (retail): $32.3 billion
Net interest margin: 64% (vs. 1.76%)
Provisions as % of gross loans: 13%
Equitable Bank’s Mortgage Deferrals
Equitable Bank saw its peak mortgage deferrals in May at 20% of its total mortgage portfolio (representing $5.6 billion of total loan balances).
As of July 17, that had fallen to just 6% of its portfolio ($1.7 billion of loan balances).
“Our general feeling is that many of our customers called looking for a deferral just out of an abundance of caution in an uncertain economic scenario,” said Equitable President and CEO Andrew Moor. “Our early efforts to transition our customers from a period of mortgage deferral back to their regular payments are showing very positive results,” he added.
Moor said the bank expects a “slope” back to normal circumstances vs. the “deferral cliff” that has been suggested by CMHC CEO Evan Siddall.
Notables from its call:
With 40% of Equitable’s Alt-originations coming from “new” Canadians, Moor addressed questions about the softening of immigration levels due to COVID-19.
“We’re talking about people that have arrived in Canada over the last five years or so… they would be establishing some kind of credit and job track record and tenure. And it might be two to three years before they are actually buying a house. We would consider that to be still kind in our new-to-Canada type book. So, the immediate softening of immigration probably won’t have that much impact on the business.”
Genworth Canada said mortgage payment deferrals are an “effective loss mitigation strategy” by helping borrowers bridge income interruptions.
Genworth’s peak deferral rate in Q2 was 18.9% for mortgages with less than 20% equity (11.9% for those with more than 20% equity).
For mortgages with an LTV above 80%, Alberta had the highest rate of deferrals at 23.9% while Atlantic Canada had the lowest rate at 11.7%
“Provided the current economic trends continue, we expect the level of reported mortgage deferrals to decline over the second half of the year,” said President and CEO Stuart Levings.
“Consistent with the first quarter, approximately 65% of these loans had an effective loan-to-value less than 80%, representing an equity buffer in the event they face ongoing income challenges,” Levings added.
Despite that, Genworth notes it “expects that a subset of insured mortgages with payment deferrals will likely end up in default after the deferral period ends.”
Misc. notables from its call:
Genworth said it saw a significant demand for portfolio insurance worth $13.4 billion for the quarter, “largely due to the introduction of a number of liquidity programs by the Governor of Canada along with a temporary exception to allow for the insurance of refinance and extended amortization mortgages originated prior to March 20 this year.”
Commenting on CMHC’s changing to its underwriting rules, Levings said, “we determined that our risk management framework, dynamic underwriting policies and current risk limits together with ongoing monitoring of conditions and market development allow us to prudently adjudicate and manage our exposure to these loans.”
He added that non-traditional sources of down payment and loans with a maximum credit score below 680 “represent a very small proportion of our in-force portfolio.”
And that the higher debt service ratio business represented “approximately 30% to 35% of our second quarter new insurance written, driven by the prevailing compliance rate and concentration of these loans in economically diverse, but more expensive urban areas, including Toronto and Vancouver.”
Levings noted the company anticipates an increase in market share as a result of not adopting CMHC’s underwriting changes.