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Home Capital Q2 earnings

First National Sees Single-Family Originations Fall in Q1 as Market Slows, but Renewals Surge

First National kicked off the first-quarter earnings season among mortgage lenders, reporting a decline in single-family originations in the face of a slowing real estate market and increased competition.

The country’s largest non-bank lender reported a slight decline of 3% in single-family originations, while overall originations were up 2%. Renewal business, on the other hand, surged 25% year-over-year to $1.5 billion.

“We entered 2022 expecting to see a reset in Canadian housing activity brought on by rising interest rates and, with this change, lower single-family production,” said President and CEO Jason Ellis during the company’s earnings conference call. “After four months, we have seen some evidence that this expectation is playing out.”

Looking forward, Ellis said origination growth is likely to slow further.

“Given what we know today, including what we see in our commitment pipeline, our short-term expectation is…for moderately lower origination than last year,” he said. “Downside risks to our forecast include stronger-than-expected inflation pressures and accelerated interest rate increases.”

Q1 earnings overview

  • Net income: $53.6 million (+1.9%)
  • New originations: $6.3 billion (+2%)
  • Single-family originations: $4.3 billion (-3%)
    • “The Company attributes this to a slowing real estate market together with a more competitive marketplace,” First National said.
  • Mortgage renewals: $1.5 billion (+25%)
  • Loans under administration: $124.7 billion (+4%)

Source: Q1 2022 earnings report

Notables from its call:

Ellis made the following comments on a variety of topics:

  • On rising market share: “From a business model perspective, we gained competitive advantage in part because of our market reach as a leader in the mortgage broker channel. This channel gives us direct consumer intelligence and access to a broad spectrum of origination opportunities.”
  • On changing market trends: “Current market dynamics will also have a bearing on refinancing, prepayment activity and renewals. To the degree we can project it, I would say that as we move through 2022, the advantages of refinancing for borrowers will lessen with the correspondingly favourable impact to the company and reduced prepayment speed on our portfolio.”
  • On funding: “We continue to see robust demand for First National’s mortgage with institutional investors and securitization markets remain strong. As you know, we are a mature user of the CMHC securitization program. And as we move forward, we intend to continue leveraging those programs to their fullest extent.”
  • On growth prospects of First National’s alternative single-family originations through its Excalibur program: “We’re still very much in a growth phase with the Excalibur program. And so we’re looking forward to significant growth in those origination volumes throughout the year. We’ve already begun our expansion out west, with sales and underwriting staff in our Vancouver office and we’re seeing good traction there. So I think that despite perhaps the overall market calling for moderation in origination volume, the Excalibur platform should be a source of growth for us this year.”
  • On any changes to underwriting due to the slowing market: “we certainly haven’t detected any kind of trend as it relates to any kind of fraud whether it’s fraud for shelter or otherwise. And we’ve made no explicit changes to our underwriting or eligibility criteria. I’d like to think that we’ve always underwritten cautiously, and we haven’t made any specific adjustments.”
  • On arrears: “Our arrears rates are at absolute record lows. There’s very little activity in terms of arrears on the book right now. Looking ahead, one of the advantages of the tremendous run-off we’ve had in housing prices is that even on our conventional book…if you look at some of the statistics in the market a lot of those borrowers have added material amounts of equity as a result of housing prices increasing.”
  • On broker fees, Ron Inglis, Chief Financial Officer, said this: “In dollar terms, these increased 1% year-over-year on 5% growth in origination volumes funded with institutional investors. The increase in broker fees lagged the increase in placement activity due to product mix sold. Shorter-term Excalibur loans with lower broker fees made up a larger portion of mortgages placed. Generally, we do not see any structural change in broker expenses which are tied to volumes and loyalty. We continue to enjoy strong market share in the broker channel and provide good compensation and good service.”
  • “Structurally, our mortgage broker partnerships are strong as is our channel share giving us good access to available opportunities,” Inglis added. “Our funding sources are broad and deep. We continue to take steps to create value for shareholders over the long-term through our securitization activities and have now created a $35 billion securitization portfolio.”

First National Q1 conference call