First National Financial says recent government mortgage policy changes, including the extension of 30-year amortizations and a higher cap for insured mortgages, could provide a small boost to its bottom line.
During the company’s Q3 earnings call, President and CEO Jason Ellis explained how the changes could widen First National’s pool of eligible borrowers and support profitability.
“With respect to the recent changes in mortgage regulations—the availability of a 30-year amortization to all first-time homebuyers and for all buyers of newly constructed homes—will be actually somewhat constructive at the margin,” he said.
Unlike traditional banks that use deposit funding to compete in the uninsured mortgage space, First National leverages mortgage default insurance and CMHC-sponsored securitization programs, which has led to a higher proportion of high-ratio mortgage originations, Ellis noted.
“I don’t think it’s a game changer, but it is definitely constructive and probably increases the addressable market of borrowers for us,” he added.
Ellis noted that while the $1.5-million cap on insured mortgages could expand the market somewhat, its impact will likely be limited due to the high income needed to support mortgage payments at that level.
“When you reflect on the size of a mortgage that you might take in order to purchase a home for $1.5 million on a high-ratio basis, the payments required would suggest that you would need an income approaching $300,000, which is definitely getting into rarefied air,” he said.
Regarding OSFI’s recent decision to remove the stress test requirement for uninsured mortgage switches effective November 21, Ellis commented that it “probably doesn’t amount to a measurable change.”
“Like any lender, we win some switches and we lose some switches,” he said. “Practically speaking, the change to allow a conventional borrower to switch lenders without re-qualifying actually hasn’t been the barrier to movement that…may have been perceived.”
First National reports Q3 drop in originations as competition rises
Digging into its third-quarter performance, First National reached a new milestone as its Mortgage Under Administration (MUA) surpassed the $150-billion mark.
“We’ve often spoken about the importance of MUA to franchise value,” said Chief Financial Officer Robert Inglis. “This is not just a milestone, but the foundation of profitability for several years to come.”
However, both single-family and commercial origination volumes saw significant year-over-year declines in Q3 as competitive pressures heightened in the broker channel.
Total single-family mortgage originations, including renewals, fell to $6.7 billion in Q3 2024, down 20% from the same quarter last year. The company attributed this drop to intensified competition in the mortgage broker distribution channel, where bank lenders have been offering competitive rates and large broker incentives.
Additionally, Ellis added that “the impact of the largest lender in the broker channel actively reengaging was significant,” but aligned with forecasts included in First National’s 2024 financial plan. This was a reference to Scotiabank resuming its more competitive stance in the market late last year, after it had previously chosen to slow its mortgage book growth and focus on expanding its deposit base.
He said the Q3 drop in single-family originations should be viewed in that context. “Essentially, we are comparing to a period when the largest lender was absent from the broker channel,” he said.
Despite the lower year-over-year origination volumes, single-family originations did grow sequentially between Q2 and Q3 by nearly 10%. “In fact, there is evidence to suggest that First National actually improved its relative standing to rank second in both funding and new commitment activity in the third quarter,” Ellis noted.
Q3 earnings overview
| Q3 2023 | Q2 2024 | Q3 2024 | |
|---|---|---|---|
| Net income | $83.6M | $54.1M | $36.4M (-56%) |
| Single-family originations (incl. renewals) | $8.3B | $6.1B | $6.7B (-20%) |
| Commercial originations (incl. renewals) | $3.3B | $5B | $2.7B (-17%) |
| Mortgages under administration | $141.9B | $148.2B | $150.6B (+6%) |
Notables from its call:
- Third-quarter broker fee expenses fell 35% to $29.9 million due to a 38% drop in single-family originations placed with institutional customers, despite per-unit broker fees being around 3% higher year-over-year.
- Last year, higher rates led to significant prepayment penalties from borrowers, boosting First National’s net interest margin. Recently, however, as rates have dropped, this inflow has tapered off, with fewer prepayments and penalties impacting MBS pools, noted Chief Financial Officer Robert Inglis.
- In Q3, mortgage servicing income dropped 7% year-over-year, totalling $71.1 million.
First National President and CEO Jason Ellis commented on the following topics during the company’s earnings call:
On borrower resilience:
- “In the worst case that a borrower was unable to meet their new payment obligations, they have significant equity in the property, and they’ve been able to sell it. But that has not been happening in any significant way as we’re not seeing our retention levels fall as a result of that kind of activity. So, the good news is the stories in the media and the concern around this great cliff of renewals in a higher rate environment is not materializing into any stress for our book of borrowers.”
On the coming renewal opportunities:
- “As a result of the extraordinary volumes of new originations during the pandemic years, we are moving toward a period of significant renewal opportunities in our single-family mortgage book, positioning ourselves to service our borrowers for a second mortgage term is always a priority, and we look forward to increased renewal volumes in the next few years.”
- “From a renewal and retention perspective, I would say that throughout this year, we have had a retention rate on single-family renewals that is comparable to our long-term average. We haven’t seen any measurable change up or down in that respect and certainly have no reason to believe…that would change.”
On its alternative lending portfolio (Excalibur):
- “Excalibur mortgage volumes were also lower than last year, but only marginally. We believe that the Alt-A market has been comparatively unaffected by the recent competitive dynamics observed in the prime space. From a credit perspective, the Excalibur program continues to outperform relative to expectations.”
On the outlook for Q4:
- “Looking forward in stark contrast to the year-over-year decline in funded mortgages, new residential commitments issued in the quarter were 50% higher compared to the same period in 2023. This augurs well for year-over-year new origination growth in Q4 as these new commitments transform into fundings.”
- “…the arrival of tailwinds in the form of interest rate reductions and a growing residential commitment pipeline should deliver higher year-over-year originations in Q4 and a strong start to 2025.”
- “First National did not alter our sales or service strategies to bolster commitment levels during the quarter. Between Bank of Canada actions and new homeownership incentives announced by the federal government, it seems that the housing market is setting up well for the quarters ahead.”
On commercial lending activity:
- “Through the first nine months of 2024, commercial origination is 17% higher than last year despite the impact of interest rates on transactions and new development activity. CMHC incentives to build multi-unit rental stock and create affordable housing have kept our clients active.”
- “Fourth quarter commercial originations will likely moderate slightly compared to especially strong quarter last year, but we expect to close 2024 with record annual commercial mortgage volumes.”
On potential securitization constraints after reaching $11.2 billion in securitized volume this year:
- “We are mature users of CMHC programs, specifically the NHA-MBS. And we will, as we move through the fourth quarter, use all of the available MBS guarantee fees that we receive access to…We see mortgages running off of those as quickly as we add them in some cases, so no immediate constraints there.”
On the impact of the expanded Canada Mortgage Bond (CMB) program:
- “The availability of funding through a larger CMB has provided an efficient source of liquidity for lenders in the space, including First National. The larger CMB with funding dedicated to multifamily housing has attracted new lenders to the market and has had a tightening effect on margins.”
First National Q3 conference call
Note: Transcripts are provided as-is from the companies and/or third-party sources, and their accuracy cannot be 100% assured.
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Last modified: November 3, 2024
