Despite growing unemployment in oil country, Canada’s largest non-bank lenders capped off 2015 with low arrears and solid mortgage originations. Themes from last quarter’s lender conference calls centred on default rates, fraud, compliance, mortgage spreads and renewal performance.
We’ve pulled all those tidbits and more from the transcripts of three non-bank titans, First National, Home Capital and Street Capital. Here’s a rundown of their reports to the street, with highlights in blue.
Notables from its call:
- Mortgages under administration in Q4: $24.8 billion, up 15% YoY.
- Street sold $2.1 billion worth of mortgages in Q4, $1.6 billion of which were new originations.
- Street says its market share in 2015 was 8.8%, making it the third-biggest brand in the mortgage broker channel.
- Renewals accounted for 27.5% of loan sales in Q4 vs. 12.4% last year.
- “Renewals are above trend this year … because they reflect both 5-year terms originated in 2014 and the higher than usual renewals of four- and five-year terms originated in 2011 and 2012, respectively,” said Marissa Lauder, Chief Financial Officer, Street Capital Group Inc. “This is a result of promotions we implemented in those years to meet investor demand for the three- and the four-year product.” (Source)
- “The serious arrears rate on our portfolio of mortgages was 14 bps,” noted Lazaro DaRocha, President, Street Capital Group Inc. “This is well below last year, which at 23 bps was also a very good rate on a well-seasoned portfolio.”
- At the end of the year the average Beacon score of Street’s portfolio was 742, the average loan-to-value ratio was 74.4% and the average total debt-service ratio was 36.2%. (Source)
- “…we fully expect to receive approval to operate as a Schedule I bank in fiscal 2016…There is no denying that this process has taken longer than we anticipated,” DaRocha added. “Recent publicly disclosed developments and concerns in the broker channel associated with mortgage fraud has heightened the level of awareness and expectations associated with robust fraud prevention policies and procedures.” (Source)
- “…while OSFI, when they came on site and did their file reviews, they found not one single file with any instance of fraud, they still are asking all lenders to tighten up policies as preventative measures. So that is what we are focused on doing,” DaRocha added. (Source)
Notables from its call:
- Home Capital reported net non-performing loans of 0.28% of gross loans as of year-end, vs. 0.30% at the end of 2014.
- “As of January 15, 26.9% of deposits now come from non-broker areas, not that we don’t appreciate and love the deposit brokers, but we just (see it as) a safer long-term policy for the company to have wide diversification in its deposit source,” said Gerald Soloway, Home Capital’s soon-to-be-retired Chief Executive Officer.
- “…late in the year we closed our purchase of a licensed bank, CFF Bank. This fulfilled the strategic priority we had been pursuing for some time. The integration of CFF is going very well and we see the benefits from the additional distribution that CFF brings to us and we have seen that in the fourth quarter and so far this year,” Soloway added.
- Alberta accounts for only about 4% of Home’s balance sheet portfolio and a portion of that 4% is insured mortgages.
- In terms of Home Capital’s outlook, Soloway said, “…our view is that the housing market in 2016 will be balanced with relatively stable prices and sales volumes, although of course we accept that there will be regional disparities and against that backdrop, we will be working very hard to increase our market share of the market that we participate in.”
- Asked about the recent regulation changes and what impact it may have on Home’s margins, Soloway said: “I don’t know if we’ve done any work on quantifying it, because on the insured part what has come about is the margins are still very tight on the insured part and I think that what you’ll see is you’ll see a steady increase in what we’re doing both from our core business…the key for us is to be very competitive in our space to have the better technology, to give the brokers a fast turnaround and we think we can see some nice increases in all aspects of our business with technology…”
- Asked about higher-than-normal run-off on the uninsured mortgages, Soloway responded: “when we look at the files that are closest to maturity…we make sure that before we renew any files, we get all the documentation. Now the way it’s running, there is about 90% of the renewals that are coming up, we can get all the documentation and everything is fine and we’re happy to renew the mortgage. There is a small portion where we need increased documentation. Sometimes we go back to the broker and we’ll go back and even though we’re not doing business with this broker, we’ll tell them that it’s their client that we need some documentation and we can’t renew it. Sometimes we’ve seen cases rather than give us the documentation the broker is a little unhappy about being cut off and he will just transfer mortgage to another source. But we’re not concerned because there are other sources that will take less documentation. They may be privates. They may be some of the credit unions. They may be other financial institutions.”
Notables from its call:
- First National (FN) originated $17.3 billion of mortgages, 7% more than in 2014.
- Mortgage originations in Q4 were up by 2% to $4.2 billion with origination growth in both single-family and commercial segments. Single-family mortgage renewals of $1.2 billion in Q4 were 15% above prior year.
- “This growth was achieved in spite of an 11% decline in single-family originations in Alberta where the energy industry is dominant,” said Stephen Smith, Chairman and Chief Executive Officer.
- Rob Inglis, Chief Financial Officer, noted that one of the highlights of the year was “…the launch and transition to profitability of First National’s third-party underwriting and fulfillment services business.”
- “We also experienced 69% growth in placement fees on higher volumes, and 32% growth in mortgage servicing – the majority of which pertains to the new third-party underwriting business,” Inglis added.
- First National originated for securitization $2.1 billion of mortgages. “Generally, the single-family spreads on our securitization portfolio are wider now as mortgage rates have remained steady for the past six months despite decreased bond yields, which form the base for our costs of funding,” said Inglis.
- Regarding the economic downtown being felt predominantly in Alberta, Moray Tawse, Executive Vice President, said: “First National does not have the same exposure as other financial institutions as our securitized mortgage portfolio is almost 100% insured and the uninsured MUA is on the balance sheets of our institutional customers.”
- Asked about per-unit broker fees going up 2% and expectations for future increase, Stephen Smith, Chairman and CEO, said: “We don’t see any particular pressure in the mortgage broker channel with respect to brokerage fees. There’s probably always a little bit of upward pressure on that but I’m not seeing significant jumps for the foreseeable future. ”
- First National had its first loss provision since 2009 on a multi-family developer project, four loans totaling ~$40 million. “Loan loss provisions for us on our portfolio are a regionally rare event because we’re probably more conservative than most on that,” said Smith. “… We would think it’s unique to this particular property. We don’t think anywhere else in the portfolio are there lurking defaults or defaults that are just ready to emerge.”
- Asked about the strong results for the net interest margins and outlook going forward, Rob Inglis explained one reason for the strong performance: “…we used to renew a billion dollars a year. Now, we’re doing $5 billion and maybe half of that is being securitized so there’s no broker fee to amortize against that spread.”
Note: Transcripts are provided as-is from the companies and/or third-party source, and their accuracy cannot be 100% assured.
Steve Huebl & Robert McLister