Manulife Bank is fast becoming an essential broker lender thanks to its competitive rates and balance sheet products.
Those products should be in high demand this coming year, especially given National Bank’s exit from the channel. That includes its most recent rollout announced last week, the Manulife One for Small Business Owners.
This product’s hallmark is flexibility. Well-qualified BFS (business for self) clients can qualify with TDS ratios up to 69%.
Moreover, for clients meeting the following criteria, TDS can exceed 70% if:
- Their net worth is at least 2 times the loan amount
- Their liquid assets are at least 1.2 times the loan amount (excluding the subject property)
In exchange for these looser qualifications:
- The maximum loan-to-value is 65% instead of 80%, with 50% maximum for the revolving LOC
- The LOC rate is a bit higher (prime + 0.70% instead of prime + 0.50%)
- The rate on the optional 5-year fixed sub-account is about 40 bps higher
- There is no rate surcharge for refinances
- The LOC’s minimum interest payment can be capitalized (i.e., made by the LOC itself)
- Maximum amortization on the fixed-rate sub account is 30 years
- The 5-year fixed portion is qualified at the contract rate, not the much higher BoC benchmark.
Keep in mind:
- The client’s net business income is verified using an NOA and T1 General
- Applicants must be in business 2+ years to qualify under this program
- The revolving account is qualified using the BoC’s benchmark rate
- Maximum loan amount is $1 million
- The property must be owner-occupied
- The product is not available in Quebec at this time
- A $14 monthly fee applies for the M1 ($7 for those aged 60+). It includes comprehensive e-banking.
All in all, the M1, SBO edition, is a strong option for business owners who write down much of their income and need some qualification leeway. It gives them the liquidity they need to grow their businesses, and an interest-offset LOC account to minimize their day-to-day interest cost.
In 2017, Manulife’s mortgage lineup will see even more additions, namely a rental and conventional mortgage. (Its only conventional product currently in the broker channel is the M1.)
With the government’s botched insurance rule changes last month, brokers (and consumers) need all the competitive refinance and rental products they can get.
Mortgage volumes in the broker channel surged in the third quarter, up 9.6% year-over-year. That’s according to data from D+H.
This data precedes the government’s transformative mortgage rule changes which kicked in on October 17 and November 30.
The top 10 broker channel lenders accounted for 84.8% of broker volume, the most in seven quarters. That’s a trend that could strengthen in 2017 as the Department of Finance’s new rules injure small lenders.
Canada’s biggest non-bank lenders have all reported third-quarter earnings. In their earnings calls they outlined how they’re coping with Ottawa’s recent changes to the mortgage qualification and insurance rules.
Per usual, we’ve combed through their transcripts in order to see what they’re telling investors. Here’s a rundown of it all, with highlights in blue.
Notables from its call (source):
- Street sold a record $2.85 billion in mortgages in Q3 2016 compared to $2.28 billion in the same period last year.
- Gains as a percentage of mortgages sold were 184 bps in the quarter, above its traditional range of 178 to 182 bps.
- “We expect the upward trend in renewal volumes to resume with renewal volume expected to exceed 2016 volumes by 30% to 35%, while 2018 renewal volumes are expected to increase by 35% to 40% over a very strong 2017,” said Marissa Lauder, Chief Financial Officer.
- “…in Q3, our underwriting service returned to normalized levels following the underwriting adjustments we made in Q1 of this year,” said CEO Ed Gettings. “As a result, we generated strong performance during the quarter driven by higher new funded sales lines. We are looking forward to continued strength during Q4 as we target to remain number three or number four in the broker channel. During Q3, we retained our number three position in the channel, with a market share of 9.6%, up 1.2% from Q2.”
- One of Street Capital’s objectives for 2016 “was to continue to generate renewable volume of 75% to 80% of loans eligible for renewal. Year-to-date, we have renewed $1.07 billion in mortgages, which is close to the 75% of those available for renewal,” said Gettings.
- “The shifting regulatory environment further validates our long-term strategy to leverage our leading brand into a multi-product multi-channel opportunity,” Gettings added.
- Street reported a tax loss carry forward balance of $325.9 million in the quarter. “This represents a real and sustainable advantage for the Company,” said Lauder. “We are currently not paying any cash taxes and will not pay cash taxes for many years to come. As a result, the net income after tax measure underestimates the true earnings available to the company.”
- The serious arrears rate on Street’s mortgage portfolio was 11 bps in the quarter, “well below the CBA performance,” noted Lazaro DaRocha, President. That compares against 14 bps for the same period last year.
- “In Q3, Street Capital came to an agreement in principle to sell mortgages to two more Canadian Schedule I banks,” said DaRocha. “We completed our first sales with one investor in October and we anticipate completing the first sale with the second investor before the end of the year.”
On Department of Finance Mortgage Changes…
- “…the recent announcement of new mortgage insurance rules by the Department of Finance will have a modest impact on the business in 2017,” said CEO Ed Gettings. “We expect that this will be more than offset by higher renewal volumes and our transition to Schedule I banking platform.”
- DaRocha: “…we anticipate 2017 adjusted net income to be between 4% and 7% higher than 2016 for the following reasons: The results of these [DoF] changes are expected to reduce new originations in 2017 by less than 10 percent. We have liquidity options that will mute the impact of reduced insurance availability. The modest reduction in new originations will be more than offset by strong growth in renewals.”
- DaRocha added: “Utilizing our bank platform, we anticipate launching our uninsured mortgage product before the end of Q1 2017. That said, the risks of government-backed insurance availability continue to increase. Most recently, the Department of Finance issued a consultation paper on the concept of risk sharing. While the final structure that this will take is yet to be determined, we believe that some form of loan loss risk sharing will be implemented.”
- “In our opinion, this will likely result in increasing costs of capital and, ultimately, rates for consumers. Obviously, this will add even greater pressure to mono-line unregulated mortgage lenders. However at the same time, there are some tailwinds on the horizon. Recently the Government of Canada announced a material increase in immigration targets from 2017…Immigration is a key driver of housing activity in Canada.”
- DaRocha also noted that one of the reasons Street embarked on applying to become a Schedule I Bank was due to a strategic review conducted four years ago that found the mono-line unregulated lending business model faced limited growth prospects and increasing risks. “We saw not only risks to the availability of insurance, but also risks associated with the declining availability of government-sponsored securitization programs.”
- “We are confident that the Bank platform will not only allow Street Capital to diversify its funding sources but, more importantly, allow it to raise its own funding for the expansion of products beyond an insured mortgage, thereby diversifying its revenue streams and allowing it to more dynamically address any future disruptions to market conditions be they regulatory or otherwise,” DaRocha said.
- Asked about low-ratio mortgages that may not be eligible for insurance going forward, DaRocha replied: “…we do anticipate a drop in new insured originations next year. We believe there will be less than 10% from what we originated this year. We are comfortable that we have not only expanded our funders in terms of the numbers, but also in terms of the magnitude of volume they will take. We are in negotiations with a couple of them to get them to take more of the conventional low ratio, that’s always a continuing process for us…”
Notables from its call (source):
- Home Capital had total originations of $2.54 billion in the quarter, compared with $2.5 billion, which takes total year-to-date originations to $6.8 billion from $5.9 billion in the first nine months of 2016, up 15% on a year-to-date basis.
- Net non-performing loans as a percentage of gross loans remained low at 0.31% compared to 0.33% in the second quarter.
- “…management is disappointed in the growth of revenue, net income and loan balances, which have come in lower than expected,” said Martin Reid, President and CEO. “Operationally, we have made changes in our business that have resulted in expenses increasing at a much faster rate than the growth in revenues. This combined with a more challenging and uncertain business environment, given the regulatory changes, adds greater uncertainty to the growth in revenues going forward. As a result, we will be revising our mid-term targets.”
- Reid added: “…our future plans to reduce expenses will be over and above our other initiatives focused on revenues that are already in motion, such as improving service levels to mortgage brokers by reducing turnaround times on commitments and approvals, while maintaining strong risk management standards; getting more benefits from our broker loyalty program, Spire, and our broker portal, Loft, and driving initiatives to improve customer retention through improvements in renewal efforts as well as slowing down early redemptions.”
- “The bottom line impact of [the Department of Finance] changes was not significant, particularly in light of the fact that insured mortgage lending is a smaller part of our business, as well as being a low-margin business,” said Reid. “We see the potential impact of these changes to be as much as a 60% drop in originations of our accelerator product. This would reduce after-tax net income by about $4.8 million, or $0.07 per share.”
- On the changes to the low-ratio insurance program, Reid said this: “The two areas most affected are refinances and rental properties. This business will likely still qualify for a mortgage, but just not for an insured mortgage. They will likely shift from [a] lender’s insured portfolio to their uninsured portfolio. The potential opportunity for Home will be a function of pricing for that product. Although, in theory, pricing should increase, it is still unclear whether competitive pressures will keep pricing low or whether it will rise providing Home with an opportunity under one of our uninsured products, time will tell.”
- Chief Financial Officer Robert Morten noted that Home Capital has now reviewed all of the customer files and income documentation related to mortgages referred by the 45 suspended brokers. “…there have not been any unusual credit issues on these mortgages. The value of outstanding mortgages originated by these brokers in the loans portfolio at quarter end was $1.14 billion, as compared to $1.3 billion at the end of the second quarter and $1.55 billion at the end of 2015.”
- Asked about the progress of retention efforts of Home Capital’s traditional portfolio, Pino Decina, Executive Vice President, Residential Mortgage Lending, said: “…as we develop strategies to improve our retention of all of our customers, including our classic book or traditional mortgages, we are looking at the reasons why they are leaving across all fronts. So not just at maturity, where the largest focus obviously is always placed, but mid-term. So we’ve pretty much segmented the strategies into two groups for clients that are within 90 days of maturity and obviously those are renewal strategies, and then outside 90 days more of retention strategies, try to keep them on our books, graduating them on to a program if they are in that position, looking for other products to meet their needs and retain them with Home.”
- Commenting on some of Home’s analysis in terms of consumer behaviour, Decina explained, “…traditional or classic mortgage customers usually take about 20 to 22 months to graduate. And when we say graduate, that’s going from an alternative A mortgage to an A-mortgage… Over the past couple of years, the traditional customer has come to us with a lot higher credit quality and the Beacon scores…These are real near-prime customers and so that life-cycle has really shortened. They are graduating at a much, much faster pace…(but) We know they’re going typically back to their bank of choice, which typically is what happens with our traditional customers.”
- Asked about progress on efforts to reduce broker turnaround times, Decina provided this update: “We’re getting very close and have actually seen our successes in the past quarter, where our commitments are issued within six hours on approved applications. So we’re very pleased with that documentation review. We want to commit to within eight business hours, so one day, and then likewise with our solicitor partners.”
- On the broker portal roll-out, Decina said, “we’ve actually just completed a full enhanced training for our staff here in Toronto. We are going to do the same for our branches and then start a more robust roll-out in Q1 of next year to our broker partners. We have made some enhancements to the portal, based on our pilot partners that were put on it. So we want to make sure our staff were up to date on those changes and again, full roll-out starting in Q1 next year.”
Notables from its call:
- Mortgages under Administration increased another 6% year-over-year to a record $98.6 billion.
- That makes First National Canada’s largest non-bank originator and underwriter of mortgages, and the country’s single largest commercial mortgage lender.
- “The oil industry downturned and Western Canada continued to manifest itself with a 34% drop in single-family origination volumes out of our Calgary office,” said Stephen Smith, CEO of First National. “We’ve seen a contractionist market each quarter for over a year now. But this is the largest reduction in mortgage demand so far.”
- “…we saw a decline in single-family originations of between 2% and 5% in other regions of the country in this past quarter,” Smith added. “We believe this is the result of some smaller originators choosing to buy market share with little regard to profitability.”
- On the Department of Finance’s new mortgage rules announced on October 3, Smith said the most significant change for First National is the new mortgage insurance rules that increase the stress test for borrowers of five-year fixed high-ratio mortgages. “The stress test will have an industry-wide effect for all mortgage lenders, reducing volume of high-ratio mortgages by an estimated 5.8%,” Smith said.
- Regarding the changes as a whole, Smith outlined the impacts on First National: “We believe these changes will have a disproportionate impact on non-bank lenders that use NHA MBS and CMB securitization as funding sources. First National has used portfolio insurance in the past several years to insure conventional mortgages, which were then securitized or sold to institutional investors.”
- “What does this mean for First National? First, let’s talk about the impact on originations. First National originates approximately $22 billion of mortgages annually consisting of $13 billion of new single-family, $5 billion of single-family renewals and $4 billion of commercial multi-residential mortgages. Generally, about 50% of the new single-family volume is high-ratio insured, and about 50% of that amount would be affected by the new qualifying rate rules. For high-ratio originations for the nine months ended 30 September, 2016, our analysis would indicate that if we re-underwrote using the new qualifying rate, our origination volume would be reduced by 4.6%, or approximately $300 million on an annualized basis.”
- “Accordingly, we anticipate a decline in high-ratio single-family mortgage originations going forward of approximately 5% to 8%, which works out to between $300 million and $500 million, or about 1% to 3% of total originations,” Smith said. “In context, this is a negative, but not a significant one. Of note, we do not anticipate any material impact on our other originations and renewals, as a result of these new rules and no impact on commercial lending at all.”
- “Now let’s look at the impact upon profitability,” Smith continued. “First National earns most of its profit from $73 billion servicing portfolio and $25 billion portfolio securitized mortgages. These portfolios will continue to provide earnings over the life of the mortgages. Due to the economics of new single-family originations for First National, they provide little, if any, earnings in the year they are underwritten. Instead, profits are delivered to shareholders as the company receives service income, and the net interest margin from securitized mortgages. The fact that rule changes will have a negative impact on single-family originations in 2017 and likely in 2018 will have little to no impact on First National’s 2016 or 2017 earnings. Finally, let’s look at the impact on funding. While some conventional mortgages originated in the past would not now be eligible for any NHA MBS securitization, the company has institutional investors and asset-backed commercial paper conduits that can purchase such mortgages without portfolio insurance. In other words, First National has diversified funding sources and continues to participate fully in the market.
- “Overall, we expect our scale range of single-family and commercial mortgage products, diversified funding sources and proven customer focus approach will allow us to continue to provide solid results going forward, in spite of these rule changes,” Smith said. “First National’s faced challenges in the past, economic, market oriented and legislative, and every time our business model has proven its worth. We expect this set of challenges to be no different.”
- Looking forward, Moray Tawse, Executive Vice President, said, “We also expect the low interest rate environment to remain with us for the final quarter of 2016, such that mortgage affordability will remain at favourable levels. This provides a catalyst for continued market activity as does a relatively stable employment picture in most regions of the country and ongoing immigration levels, which are another driver of housing demand.”
Note: Transcripts are provided as-is from the companies and/or third-party source, and their accuracy cannot be 100% assured.
By Steve Huebl & Robert McLister
It’s been a long time coming but D+H finally has real competition for Expert, the system that over 90% of brokers use to send applications to lenders.
DLC Group, a subsidiary of Founders Advantage Capital Corp., has purchased D+H’s competitor, Marlborough Stirling Canada Limited (MSC), for $5.5 million. MSC produces MorWeb software, a web-based order-entry platform for mortgage brokers.
DLC is purchasing 70% of MSC and another group, led by Geoff Willis, is buying the other 30%. Willis currently runs OTTO Mortgage Systems, which also makes software that automates the mortgage origination process.
Chris Pornaras is expected to remain president with Willis also joining the management team in some capacity. As such, we suspect that Otto—or at least much of its best functionality—will be merged with MorWeb sometime next year.
DLC “anticipates it can increase MSC’s market share by having more DLC mortgage brokers use the MSC platform,” says the company’s press release. That shouldn’t be too hard, given DLC’s 5,000 agents comprise 40% of the mortgage broker market and fund $37 billion a year. By this author’s back-of-the-napkin math, if DLC gets even half of those brokers using MorWeb it could pay for the purchase in 24 months or less.
Albeit, while DLC Group has ample volume to make MorWeb viable, it will take time to shift a critical mass of agents from Expert to MorWeb. “Changing peoples’ habits is dependent on user experience,” says DLC President Gary Mauris. “Users want better access to their data, integration to the CRM of their choice and a slick mobile platform, so these things will all be on the drawing board in coming months.”
Regardless of this deal, however, Mauris says “MSC and D+H will both remain key partners for DLC.
Speaking to CMT about his MSC growth plans, Mauris said, “We’re reviewing options and potential opportunities for additional partnerships. We’re also looking for ways to more economically serve our lender partners.”
Regarding third-party brokerage partnerships, some will question whether brokerages would ever use software run by a competitor. Clearly, however, DLC would be crazy to misappropriate its customers’ data—so those criticisms probably aren’t valid.
“We’ve never held broker data hostage and marketed to past agents’ clients,” says Mauris. “A broker’s client data is their data.”
The other consideration will be getting all lenders connected to MorWeb. TD and a few smaller lenders are conspicuously absent. Without TD, many brokers simply won’t use the platform. That should be a top 2017 priority for Mauris, Willis & co. as they invest in their new platform.
The mortgage industry is quickly realizing just how vital the online channel is to future growth. You could sense that from the near-standing-room-only crowd at the first-ever Digital Mortgage Conference, held last week in San Francisco.
Most, if not all, of the Canadian banks had representation at the event. Yours truly was also there, scribbling down insights from the top e-lenders in the game.
These were 10 of the top takeaways from the event:
- Quicken Loans’ Rocket Mortgage is Blasting Off
- In the first three quarters of this year, Rocket Mortgage (Quicken’s online-optimized lender) handled $5 billion in volume, making it a top-30 U.S. lender after just 11 months in business
- Every 34 seconds someone creates a Rocket Mortgage account
- Every 9 minutes someone completes a Rocket Mortgage application
- Millennials are twice as likely to use Rocket Mortgage to buy a home as Quicken Loans clients 36 or older
- The majority of clients who are using Rocket Mortgage are doing so on a mobile device
- Forget everything you think you know when designing an online platform
- Quicken felt someone should be able to get approved while standing in the home they want to buy
- To make the process this fast and simple, Quicken mapped out every step of the mortgage customer experience and re-engineered it
- “We failed many times” while trying different ideas, said Regis Hadiaris, Rocket Mortgage’s Product Lead
- “Use user experience testing to break through your own ignorance,” he suggested
- Build user confidence to improve conversions
- Online mortgage lenders are new to most people. Many customers fear they’ll have to go it alone. An e-mortgage company’s job is to convince them they won’t have to.
- When it comes to service, “The whole discussion of how digital is only non-human is misguided,” said Hadiaris
- Rocket Mortgage provides the “same type of approval you can get from talking to a person on the telephone,” Hadiaris added. “Once people understand that, their concerns melt away.”
- “Borrowers don’t expect any less personal support when transacting online,” Carter Kirks, Sr. Manager Consumer Finance Group, PwC, told the crowd
- Cost efficiency is the future
- “Acquiring customers as cheaply as possible is the fulcrum of competition,” said Biniam Gebre, Partner at Oliver Wyman
- e-lenders “are winning that game,” he said
- Top digital mortgage providers all have these things in common:
- Simplified online applications
- Intuitive selection of mortgage products
- Instant rules-based conditional approvals
- Continuous automated updates for clients
- Easy-to-access human support, when needed
- Electronic signing
- Direct data ingestion is the killer app
- The top online lenders are building ways to pull a client’s income, debts and assets directly from third-party sources for instant unconditional approvals
- Most big U.S. lenders should have this functionality within a year and a half, says Gebre
- Quicken already links up to 95% of U.S. financial services providers, making it the leader in automated document importing (Quicken uses e-verification firms like this)
- For clients who decide to import their income and asset information, Rocket Mortgage cuts an average of eight days off the closing time for the loan
- Competitive advantage in digital lending will centre on your architecture and “how well you can integrate” documentation sources, said John Harrell, VP Product Management at USAA
- Online rate research is pervasive
- Everyone except the “silent generation” (those age 73+) researches mortgage rates online nowadays, says Carter Kirks, Sr. Manager Consumer Finance Group, PwC
- Some lenders are going full-auto
- Rocket Mortgage clients can go start to end without talking to a person
- ….”our goal is no customer interaction whatsoever…” with a goal “of closing online entirely,” said Vishal Garg, Founder and CEO of Better Mortgage, a Goldman Sachs backed e-lender
- In time, 90% of the functions performed in manufacturing a mortgage will be machine driven, Garg predicts
- He adds, “Most of our customer pain points are in the fulfillment of the transaction,” after approval
- Competition will intensify for AAA borrowers
- Insured mortgages “will become extraordinarily competitive…as players [enter] who don’t have legacy costs.” They’ll pass along their savings through lower rates
- “Simple” is in high demand
- Quicken doesn’t purport to have the lowest rates in the country, but its self-serve Rocket Mortgage option is so fast and simple that customers “put value in that,” says Hadiaris
- J.D. Power rated the Rocket Mortgage’s intuitive user experience as significantly better than Quickens’ regular traditional service mortgage
Interestingly, no one but Better Mortgage’s CEO wanted to admit their technology is replacing loan officers, but that is exactly what is happening—albeit in small numbers thus far
For anyone interested in creating a more automated lending experience, the Digital Mortgage Conference is worth the trip. If nothing else, it’s a good reminder of how hard competitors are working to lure your customers online.
Another bank earnings season is in the bag. It was a quarter where Canada’s Big 6 banks addressed analysts about the changing regulatory landscape.
There was also a sharper focus on uninsured mortgage portfolios. National Bank analyst Peter Routledge addressed the issue in a recent note to clients: “With uninsured mortgages driving an increasing portion of overall mortgage and loan growth…the consequences of a decline in housing prices—most notably in the Toronto and Vancouver markets—weighs more heavily with each passing quarter.”
As usual, we’ve picked through the Big Banks’ quarterly earnings reports, presentations and conference calls, and compiled all the mortgage-related goodies here. Notable tidbits are highlighted in blue.