Alternative lender Home Capital says it is “preparing for the worst” when it comes to delinquencies, but so far hasn’t seen any issues with borrowers making their payments.
And that’s despite many of its non-prime borrowers renewing at mortgage rates of 7% and 8%, according to Home Capital President and CEO Yousry Bissada.
He noted that much of the company’s near-prime business that was done last year was in the range of 4% to 5%. But, because they were stress-tested at rates two percentage points higher, Bissada said “we know most mortgagers on renewal can handle between 6% and 7%.”
Despite rates currently reaching 8%, Bissada added that “people continue to be very prudent in their payments…We are preparing for the worst, but haven’t seen that yet.”
Since most non-prime mortgage terms are for either one or two years, the company has already seen a large number of those lower-rate mortgages from last year come up for renewal.
“We have seen our renewals to be strong and we have not seen any lack of performance in credit. The arrears are normal,” Home Capital Chief Financial Officer Brad Kotush said on the company’s third-quarter earnings call. “So, we continue to feel that, A, the stress test is important…[and] people are very resilient at figuring out paying their mortgage above all else.”
Kotush acknowledged part of the reason for the company’s high retention is because many clients aren’t currently able to re-qualify under the stress test at today’s rates if they want to switch lenders.
Kotush said they don’t have numbers in terms of how many are in that situation, but said it’s one of the reasons Home’s renewals are up. “Plus, it’s a pain to go get a new mortgage [and] all the documents again, and so on,” he added.
Highlights from the Q3 earnings report
- Net income: $31 million (-28.7% year-over-year)
- Total originations: $1.85 billion (-23%)
- Loans under administration: $26.8 billion (+14.8% YoY)
- Net interest margin: 1.92% (vs. 1.97% in Q2 and 2.58% in Q3 2021)
- Net non-performing loans as a % of gross loans: 0.16% (vs. 0.14% in Q2 and 0.15% in Q3 2021)
Source: Q2 2022 earnings report
Notables from its call:
President and CEO Yousry Bissada commented on the following topics during the company’s earnings call:
- On slowing mortgage originations: “Let’s put this in context. In the first half of this year we reported two of our strongest quarters in single-family originations. A slowdown from that pace is still a meaningful activity level. Our single-family originations this quarter were comparable to Q3 2020 and we considered that a strong quarter.”
- Looking forward: “We are confident about our business model going into this rate cycle. There are some strong drivers underpinning the long-term health of the housing market. We believe the demand for housing has been deferred and not eliminated as buyers adjust to changing borrowing costs and changing prices. Planned immigration levels for the next few years will provide a healthy supply of new homebuyers.”
- On the potential for delinquencies: “Non-performing loans and write-offs are very low. We believe homeowners are making the necessary adjustments in their spending to keep their mortgage payments current. If there is a prolonged downturn, we have the liquidity and capital resources to sustain us.”
- On whether Home is rejecting a higher percentage of loan applications: “Not really anything measurable. We’re definitely getting fewer applications, but we’re accepting about the same amount. Maybe we’re getting a little more cancelling before funding. Because of higher rates [homebuyers are] shopping the market a little bit more. So, our approved funding may have gone down, not something huge, but something that we noticed.”
Chief Financial Officer Brad Kotush also offered up commentary on the following topics:
- On net interest margin: “Q3 margins were slightly below Q2 at 1.92%, but the pace of decline has slowed…We expect our margins to start to improve for the balance of the year and into 2023 as the impact of rate increases on our loans becomes evident over time.”
- On the one-year mortgage terms that are currently coming up for renewal: “Many have come up already for renewal and we’re renewing them at our current market rates, which…could be anywhere between [the] 6% and 8% range. We have seen our renewals to be strong and we have not seen any lack of performance in credit.”
- On the slowdown in volumes: “The market is definitely slower…[it] has slowed in the 40% to 50% range. We’ve slowed less than that. So, we feel we’re getting our fair share of what’s out there. The volumes that we’re doing, there’s still activity. The media makes it sound like people have stopped buying and selling homes, but that’s not true at all. There’s still lots of activity and we’re getting our fair share.”
- On underwriting: “Our underwriting guidelines are prudent. We’re not relaxing them, they are the same and have stayed the same.” Bissada added, “we are more cautious on appraisals, we are more cautious on the income, but we haven’t changed the actual guidelines.”
- Home booked $4.4 million in credit provisions this quarter compared with the reversal of $3.8 million in Q3 2021.
- Year-to-date, Home originated over $6 billion in single-family residential loans and $1.6 billion in commercial loans, which is higher than its originations for all of 2020.
Source: Q3 conference call
Note: Transcripts are provided as-is from the companies and/or third-party sources, and their accuracy cannot be 100% assured.