No signs of distress among borrowers yet, First National says

Steve Huebl

Quarterly Earnings

November 7, 2022

Canada’s largest non-bank lender says it is keeping a close eye on its mortgage borrowers, but hasn’t seen any “measurable issues” related to higher payments so far. During the company’s recent third-quarter earnings release, President and CEO Jason Ellis said the lender is “keeping an eye” on both adjustable-rate mortgage borrowers and those who are renewing into higher rates.

“The swift increase in the prime rate will have had a material impact on the monthly payments of our adjustable-rate borrowers,” he said on First National’s conference call.

“[But] when I look at the mortgages that are 90 days in arrears, the percentage of those that are adjustable rate is actually smaller than the percentage of mortgages in the overall portfolio,” he added. “So, it’s early days yet, but to this point, there’s no indication that the adjustable-rate portfolio was having any difficulty adjusting.”

Ellis added that, overall, the 90-plus-day arrears rate for both its prime and Alt-A portfolios is at an all-time low, down even compared to the second quarter.

Rising rates have had an impact on origination volumes, however.

“…while mortgage volumes are still ahead of pre-pandemic levels, they are perhaps 25% lower than those we underwrote in the third quarter of 2021,” Ellis noted.

“The rapid movement in the Bank of Canada’s policy interest rate has directly affected mortgage rates. These rates are not high in a broader historical context, but a three-percentage-point increase in the space of six months is difficult for the market to absorb,” he said. On the other hand, the company saw a 12% year-over-year increase in its volume of mortgage renewals during the quarter. Q3 earnings overview

  • Net income: $54.6 million (-16%)

  • Single-family originations: $4.7 billion (-23%)

  • Mortgage renewals: $1.9 billion (+12%)

  • Loans under administration: $129.3 billion (+6%)

Source: Q3 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: “…our expectation is for further moderation in volumes in the near-term as homebuyers and sellers adjust to new financial realities.”

  • On market share: “First National’s market share within the mortgage broker channel increased from Q1 to Q2. A third-quarter reading is not yet available, but we think our monthly application volume metrics remained positive in the quarter relative to the market. So, while originations will reduce our share, [we] should remain strong due to our differentiated broker service and advice-based approach to helping customers get the mortgage they can afford.”

  • On its Excalibur Alt-A program: “Prime and Excalibur volumes were both down year-over-year in the third quarter, with the rate of decline being more pronounced in the Excalibur program, where we are comparing to a period of extreme growth a year ago, as the program was still ramping up. We have also chosen to maintain our conservative approach to underwriting Excalibur mortgages.”

  • On renewals at higher rates: “…we are keeping an eye on…not just our Alt-A borrowers, but generally, the response of our borrowers as they reach renewal and are faced with higher rates…I will say on both fronts, both renewal of Prime and Excalibur have not presented any measurable issues to this point. Our renewal rates continue to be comparable to previous quarters and we have not encountered any increases in our arrears rate in either program, either on the run or at maturity.”

  • On how renewals are being handled: “…we are not changing the way we get renewals. But also we are not especially concerned yet as we haven’t seen any indications that borrowers are having difficulty.”

  • On regional strength: “…if there’s one area where we are relatively strong, particularly on the prime single-family side, it might be in Quebec…our Montreal and Calgary origination offices have actually outperformed Ontario and BC from a volume perspective, relatively speaking period-over-period.”

  • On broker fees: Chief Financial Officer Rob Inglis said broker fees have decreased by about 26% year-over-year on lower volumes, but are up roughly 10% on a per unit basis.

First National Q3 conference call


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