Canada’s largest non-bank lender says it hasn’t seen any signs of stress among its adjustable-rate nor fixed-rate borrowers who are renewing at higher rates.
During the company’s recent fourth-quarter earnings release, President and CEO Jason Ellis said he remains encouraged that not only is the 90-day arrears rate still low, but the 30-day arrears rate—a leading indicator—is actually down from the previous quarter.
“At this point, all of our adjustable-rate borrowers have absorbed their new higher payments with a great deal of resilience,” he said during the company’s earnings call.
“As it relates to the fixed income borrowers, who have been renewing into this environment, they’re renewing out of mortgages that are anywhere from 200 to 300 basis points lower than today’s market,” he added. “We’re seeing renewal rates consistent with our historical renewal rates and we’re not seeing any stress at the time of renewal from borrowers who are choosing to perhaps not renew or renew away. So, so far it would seem the Canadian borrower has adjusted well to the new environment.”
First National seeing no rush by borrowers to secure mortgages ahead of potential OSFI changes
Ellis was asked if First National has seen any material changes in the makeup of its mortgages—such as a rise in debt-to-income levels or Total Debt Service ratios—ahead of potential new underwriting restrictions from OSFI, to which he said there has been no noticeable change.
“Our key metrics as it relates to our residential mortgage underwriting have not changed in any material way throughout the pandemic and into 2023. Debt service ratios, loan-to-values and credit scores are all very comparable,” he said. “I would say that if there is any sense of increased leverage, it may have been the function of extremely low rates during the pandemic facilitating loans-to-income that maybe were higher on average.”
Ellis offered his take on OSFI’s proposed “four-to-one” loan-to-income benchmark that is currently in the market for discussion right now.
“I think the idea of a four-to-one loan-to-income, or some other kind of loan-to-income metric, won’t have a significant impact on new originations going forward because at the new higher rates, debt-service ratios, gross debt and total debt service ratios actually end up being the constraining factor,” he said.
“I think a loan-to-income metric introduced by OSFI at this point future-proofs the industry against borrowers in another low-rate environment, possibly running away with perhaps unmanageable debt.”
Ellis added that he believes any future rule changes will likely still allow “quality exceptions where loan-to-value, borrower credit assets or other things help justify the underwriting.”
The Office of the Superintendent of Financial Institutions (OSFI) is continuing to solicit feedback from industry stakeholders partners as part of its consultation period to inform its policies, which runs until April 14, 2023. Any proposed changes—including potential alterations to the stress test—will not be finalized until after that time.
Q4 earnings overview
- Net income: $42.7 million (+1.6%)
- Single-family originations: $3.6 billion (-31%)
- Mortgage renewals: $1.9 billion (+27%)
- Loans under administration: $131 billion (+6%)
Source: Q4 2022 earnings report
Notables from its call:
First National President and CEO Jason Ellis commented on the following topics during the company’s earnings call:
- On volume forecast: “We expect mortgages under administration to grow in 2023, despite lower demand for credit to start the year. That expectation is based on three main assumptions. First, although we will experience a reduction in new originations in the first half of 2023 in comparison to the same period last year, we believe there will be a return to a more constructive market in the second half of the year…Second, with higher mortgage rates, prepayment speeds have moderated and renewal opportunities will increase as more mortgages reach maturity. Finally, we anticipate continued strength in commercial originations attributable to First National’s market-leading position in the insured multi-family mortgage market.”
- On First National’s alternative mortgage program, Excalibur: “…our plan for 2023 includes continued expansion of our Excalibur program with focus on Western markets…There is a need for Excalibur and other so-called alternative mortgage products, which are not fully addressed by the big banks. We feel very comfortable in providing credit in the alternative space due in part to our proven underwriting skill sets.”
- On First National’s underwriting standards: “We have always had a rigorous underwriting process and there are no plans to make changes to our risk management approach to accommodate today’s market environment. This is borne out by arrears rates, which remained near all-time lows throughout 2022. Notably, our portfolio of adjustable rate mortgages continues to perform in line with the broader portfolio with no signs of stress related to higher mortgage payments.”
- On any anticipated issues with mortgage renewals: “[The mortgage portfolio is] actually very, very encouraging. So whether we look at the portion of the portfolio that is securitized or the portion of the portfolio that has been originated and sold to third parties in the aggregate, our 90-plus-day arrears rate continues to be at all-time lows. And that’s true both of our Prime and our Excalibur program. It’s true of our high-ratio and our conventional program. So, right now, we’re not seeing any signs of stress anywhere in the portfolio, and most notably on the adjustable-rate portion of the portfolio of mortgages under administration, we are not seeing any difference in performance from an arrears perspective.”
- On broker compensation: “I would say our planning for 2023 includes the assumption that extra incentives will remain fairly common across the industry. We will continue to monitor the market in this respect, and I can tell you our objective is unchanged. We will offer industry-best service and ensure we’re competitive with rates and incentives using a disciplined approach to both.”
- On the size of its underwriting team: “In the face of a still strong market to start 2022, we continued to grow our underwriting teams only to see demand pullback significantly in the last half of the year. Through natural attrition and deliberate action, we did reduce our residential underwriting capacity in the fourth quarter.”
- On 2022 mortgage activity: “When we talk about our expectations for next year, it really is the tale of two different years within one. The first half of 2022 featured a strong pipeline of mortgage commitments and pre-approvals that had been issued at the prevailing low interest rates predating the Bank of Canada’s rate hiking activity. And as a result, we saw significant pull through and actually relatively good activity and funded mortgages through the first half. As we looked at the second half of 2022, that’s where we saw the more significant decline in residential activity as the impact of the bank’s activities in policy really started to take hold.”
- On the 2023 outlook: “When I look ahead to 2023, I see two things. One, I see a first half of originations that will have a very challenging comparison relative to the first half of 2022, and then a second half of 2023 where two things are happening. One, a less challenging comparison. So year-over-year I would say it will look stronger, but I do expect to see improved activity in absolute terms in the second half relative to the first.”
- On a decline in mortgage-servicing income: “I would say our traditional mortgage administration revenues grew in sympathy with assets under administration, and the change in the total mortgage servicing line would be attributable to lower origination volumes by our third-party underwriting clients.”
