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Lender earnings

First National saw Q1 residential mortgage originations fall 20% as competition in the broker channel intensified

Canada’s largest non-bank lender continued to see a slowdown in its residential mortgage originations in the first quarter, which were down 20% from last year.

This follows a similar decline for First National in the previous quarter, and was in line with previous guidance market conditions, notably increased competition in the broker channel.

Single-family mortgage originations totalled $3.5 billion in the quarter, down 20% from $4.4 billion in both Q4 and from a year earlier.

“While the housing market remains very stable, pricing competition, principally among bank lenders in the broker channel, has been particularly acute,” President and CEO Jason Ellis said during the earnings call. “First National, however, has always taken a disciplined approach to pricing, which has contributed to lower residential origination in the quarter.”

The earnings report specifically referenced “two large lenders” in the broker channel that have been offering discounted rates and higher broker incentives in order to gain more market share.

“Around this time last year and leading into this time last year, Scotia Mortgage Authority had quite deliberately and transparently stepped back from…its usual competitive stance in the broker channel,” Ellis explained. “As we moved into this year they reversed that, and the competitive pressure comes from them regaining share.”

Ellis said Scotiabank had traditionally held around 20% of market share in the broker channel and that it is now “competing hard to win that back.”

On the commercial side, First National saw big gains, with total originations including renewals up 39% from last year.

“This reflected continued demand for insured multi-unit apartment mortgages and was in line with our expectations as we continued to fund the large number of commitments we entered into last year,” Ellis noted.

Overall, First National continued to grow its mortgage books with Mortgages Under Administration up 5% on the residential side and 17% on the commercial side.

That translated into a 20% year-over-year jump in revenues, to $518 million in the quarter, while net income was up 13% to $49.9 million.

“This growth was attributable to the advantages that accrue from growing mortgages under administration and our diversified sources of income, including our third-party underwriting business, despite a temporary reduction in single-family originations,” Ellis said.

Q1 earnings overview

Q1 2023Q4 2023Q1 2024
Net income$35.7M$44.2M$49.9M (+13%)
Single-family originations (incl. renewals)$4.4B$4.4B$3.5B (-20%)
Commercial originations (incl. renewals)$2.2B$3.8B$3B (+39%)
Mortgages under administration$133B$143.5B$145.1B (+9%)
Source: Q1 2024 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 origination volumes outlook:

  • “Today, competition in the broker channel remains fierce and our commitments to fund mortgages are down from a year ago. This signals that single-family originations, including renewals in the second quarter will be lower than last year’s $4.3 billion. Year-over-year comparisons will suffer because we benefited from a temporary acceleration in housing market activity during the April through June 2023 period, when there was a widespread belief that the Bank of Canada had stopped raising its overnight interest rate.”
  • “For commercial mortgages, we anticipate steady origination volumes to continue in the second quarter based on a robust pipeline of mortgage commitments and as owners and developers of multi-unit residential housing take advantage of government incentives, including removal of the GST on newly completed apartment units. The challenge is that the multi-unit space is becoming more competitive as other lenders capitalize on the recent $20 billion annual increase in financing available through the Canada Mortgage Bond Program.”

On its alternative lending portfolio:

  • “When the Alt-A space in the broker channel did not experience the same competitive dynamic in the first quarter as our prime business, our Excalibur originations were also lower as potential borrowers faced higher prevailing interest rates. Other government changes designed with first time homebuyers in mind such as 30-year amortizations and the recent increase in allowable RRSP withdrawals to cover down payments are subtle improvements to affordability for those who qualify.”

On mortgage arrears:

  • “In the past 12 months, 90-day plus arrears on the prime book have increased from six basis points at March of last year to just seven basis points now. Excalibur arrears rates, however, have increased more measurably since Q1 of 2023. The shorter terms and faster renewal into higher rates are the likely explanation. Nonetheless, with a stable housing market, including prices, which are up 5.6% year-over-year, there were no realized loan losses in the quarter.”

On OSFI’s portfolio limits on highly indebted borrowers:

  • “Beginning next year, OSFI regulated institutions must limit the number of mortgages on their books that exceed 4.5 times of borrowers’ annual income. This loan-to income ratio will be a factor when considering new applications. While there is some expected flexibility for borrowers and relatively higher cost regions of the country, it does add to existing qualification rules. At the margin, we believe this change could increase the addressable market for non-OSFI regulated mortgage lenders and demand for Alt-A mortgages such as Excalibur.”

On prepayment speeds:

  • “Growth in MUA was again assisted by prepayment speeds that were slower than recent years. To put that in context, the annualized liquidation rate for our portfolio of fixed rate and HMBS between 2021 and 2022 averaged 12.8%. The pace of liquidation slowed to 5.5% in 2023 and has averaged just 3.2% year-to-date.”

On First National’s third-party underwriting services:

  • “The presence of non-origination-based revenue is helpful and First National is generating it through our third-party underwriting business. We see our third-party business as a sound way to leverage our platform, including our MERLIN technology and add value and stability through diversification.”

First National Q1 conference call

Note: Transcripts are provided as-is from the companies and/or third-party sources, and their accuracy cannot be 100% assured.