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Mortgage borrowers renewing a mortgage

First National reports no issues with its mortgage renewals so far

Canada’s largest non-bank lender says it has not yet encountered any issues with its mortgage borrowers renewing at higher interest rates.

In its first-quarter earnings release, First National said it hasn’t seen any signs of stress among its adjustable-rate and fixed-rate borrowers.

“We’re not seeing any issues [within the adjustable-rate portfolio], and as it relates to the fixed-rate borrowers who are now renewing into a higher rate environment than they were five years ago, we’re not seeing any issues,” said President and CEO Jason Ellis. “And we’re not currently engaged in any programs to relieve borrowers who are having any problems, because we’re not seeing it yet.”

Despite a 15% year-over-year decline in originations and renewals, First National reported a 7% increase in its total mortgages under administration.

“We continue to expect that second-quarter originations will fall short of the $12.2 billion we generated in last year’s comparative period with year-over-year reductions in both residential and commercial volumes,” he added.

The lender saw single-family mortgage volumes decline 25%, or $1.4 billion, although Ellis pointed out that volumes are still $1.7 billion above pre-pandemic levels in Q1 2019. “In light of today’s realities, and perhaps return of traditional winter seasonality, we are very happy with Q1 2023 originations.”

Short-term fixed rates lead in popularity

First National also reported a shift in product preferences, with a majority of new borrowers choosing a fixed-rate mortgage. Just 9% of new originations had an adjustable rate in the first quarter.

“Notable in the quarter was increased borrower interest in 3- and 4-year term fixed rates,” Ellis noted. “Typically, the preferred term for prime borrowers is five years. This shift in term may reflect borrowers’ views that fixed rates will have declined by 2026, allowing them to renew sooner into a lower mortgage coupon.”

Q1 earnings overview

  • Net income: $35.7 million (-33%)
  • Single-family originations (incl. renewals): $4.3 billion (-25%)
  • Mortgages under administration: $133 billion (+7%)

Source: Q1 2023 earnings release

Notables from its call:

First National President and CEO Jason Ellis commented on the following topics during the company’s earnings call:

  • On broker relationships: “We continue to enjoy strong relationships with mortgage brokers and continue to offer competitive mortgage rates and broker incentives that reflect our position as a leading lender in the broker channel.”
  • On mortgage renewals: “We…continue to realize that our mortgage renewal opportunities, and in the first quarter we saw a modest increase in retention rate. Notable in the quarter was increased borrower interest in three and four-year term fixed rates.”
  • On First National’s alternative mortgage program, Excalibur:“…we expect prime mortgages to dominate our single-family lending, complemented by continued contributions from our Excalibur Alt-A business. Excalibur has not reached a point of maturity, so the portfolio has room for expansion…As a result of the market for this product and our expanded distribution, we think Excalibur volumes in 2023 will compare favourably to 2022. Despite the relatively small portfolio size, our limited credit exposure and the strong historical performance, there does seem to be a disproportionate amount of attention paid to the Excalibur program by some interested parties.” First National also confirmed that Excalibur is an exclusively fixed-rate program.

    Ellis added that First National’s alternative lending portfolio boasts an average credit score of 750 and an average loan-to-value of 68%, with originations limited to “primary and secondary centres where there is a high degree of housing liquidity.”

    “…the portfolio continues to exhibit strong credit performance with no realized losses in all of 2022 or year-to-date. We are not currently forecasting any change in the credit quality or performance of the Excalibur program.
  • On an improved housing market in H2 of 2023: “[In our 2023 outlook,] We also expressed our view that a more constructive housing market would emerge in the second half of this year. Our view in this respect is unchanged as well. We are already seeing signs of price stabilization and increased activity in the housing market. We still expect improvement in origination volumes in the second half. This constructive second half outlook assumes that the Bank of Canada will not raise interest rates again this year, that reduced uncertainty will encourage buyers to act and that employment levels will remain strong.”
  • On a return to ‘normal’ housing demand: “In general terms, we are expecting increased housing activity. But absent the incentive of extremely low interest rates, we’re also expecting a reset to more traditional pre-pandemic origination volume.”
  • On potential government changes to CMB funding: “As an approved issuer of NHA-MBS and seller into the Canada Mortgage Bonds program, we use securitization to minimize our funding costs. So it is noteworthy that the recent federal budget included a paragraph on the CMB indicating that the government is reviewing the program in relation to its regular borrowing strategies…The government has promised additional details in its fall 2023 economic statement. We would surmise from this announcement that some funding will continue to be available, and we hope that the government’s new strategy will be as effective in providing stable and predictable funding as the CMB has been for the past 22 years.”

    “As far as our utilization of the CMB, I would say [its] probably fair to say that we maximize our utilization every quarter,” Ellis added. “Changes to the CMB structure or the way funding related to the CMB is delivered should be manageable.”
  • On growing MUA with renewal activity: “…originations including renewals are important in the maintenance and growth of mortgages under administration, and we can grow MUA in the short term even without growth in origination. Additionally, originations are not always material to earnings in the quarter in which they occur. Both points were illustrated in Q1 and form useful context for our Q2 outlook.”

First National Q1 conference call