The Home Capital Saga: The Latest

There’s going to be a lot of Home Capital Group (HCG) announcements as this saga unfolds in coming days. We’ll track them here…

Update #3: April 27, 3:40 P.M.

  • In an email today to brokers, Home Trust EVP, Pino Decina stated: “Home Trust has weathered difficult times during its 30-year history, and has always risen above…We are taking the necessary steps to deal with this situation…If your client has a mortgage with us, rest assured nothing has changed.”
  • Home’s apparent funder has a conflict, says law professor: “HOOPP President and Chief Executive Officer Jim Keohane sits on Home Capital’s board and is a shareholder of the mortgage lender.” (More from Bloomberg)
  • Home Capital’s stock has made a new high on the day (an important short-term positive that suggests the balance of investors aren’t giving up on the company and/or think it will be successfully sold)

Update #2: April 27, 1:05 P.M.

  • Bank analyst: “We now assume that Home Capital will not be able to access sufficient deposit funding going forward, and the company will likely move into liquidation mode.” (This same analyst simultaneously raised his rating of HCG from hold to speculative buy.)
  • “We think [a sale] is at a substantial premium to current levels. We believe HCG’s book may be attractive to several banks that could run the business with materially lower funding costs, particularly if they have regulatory support for the deal.”—GMP Securities analyst Stephen Boland (via Bloomberg)
  • HCG is expected to axe its dividend to preserve cash flow.

Update #1: April 27, 11:00 A.M.

  • A sale seems increasingly likely. HCG has retained RBC Capital Markets and BMO Capital Markets “to advise on further financing and strategic options.”
  • Its high interest savings deposits are reportedly down to roughly $814 million versus ~$2 billion last month, a roughly $600 million outflow of depositors in the last few days
  • The company now says it has a firm $3.5 billion in current liquidity and $12.98 billion in outstanding GICs.
  • Healthcare of Ontario Pension Plan is reportedly the emergency lender that gave Home a liquidity lifeline yesterday
  • The stock (symbol: HCG-TSX) has rebounded 13% to $6.99 (too early to call it a dead cat bounce)
  • Amid all the downgrades, a few analysts have raised their ratings of Home’s stock to “buy” and “outperform”
  • Big banks are reportedly limiting client investments in Home GIC’s to $100,000, CDIC’s insurance limit.

Quotes:

  • “We have a hard time viewing the challenges (Home Capital) is facing as a systemic event, particularly since there is no indication of credit deterioration in the mortgage portfolio of (the company)…With the market cap of HCG having dropped to ~$400m we are skeptical that any of the banks will step up as a buyer of the company. At this stage of the HCG fallout a purchase of the underlying loan book would be a more straight-forward process than an acquisition of the common equity.”—Scotiabank (via BNN)

 

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The Ontario Securities Commission has dropped the hammer on it.

Depositors are running for the exits ($591 million worth of its savings accounts were cashed in between March 28 to April 24, with more to come).

The company has been downgraded by DBRS to non-investment grade.

And most of its former top leadership have been shown the door.

Here’s a summary of the gory details from Bloomberg.

Home Capital stock closed today at $5.99, down 65% on the day and 84% from last May.

There’s now speculation in the media that OSFI, the banking regulator, will wind the company down or force a sale. It’s important to note that’s pure speculation until proven otherwise. No one can count it out just yet.

Apart from its banking licence, the company does have things going for it that could attract potential partners, namely:

  • It originates highly profitable non-prime mortgages as well as anyone in this country
  • It’s had a record spring (so we hear) with respect to non-prime volumes
  • The default metrics of its mortgages, even those in the fraud pile, outperform industry averages
  • Home Capital’s remaining staff, at least the ones we know, are good honest people
  • Personnel who were connected to the reported fraud will be long gone 
  • It has long-standing institutional ties (e.g., RBC and other reputable names have referred a significant amount of non-prime business to Home. Institutions have continued funding its loans, even after the fraud was uncovered).
  • Non-prime is its core business and non-prime borrowers are often just happy to get a mortgage at all, regardless of who it’s from (albeit depositors don’t have the same degree of understanding).

Here’s what’s not going for it:

  • A reputation-crushing OSC investigation (the company maintains its innocence; the first hearing is May 4)
  • A run on deposits
  • A cost of funds that just hit double-digits (at least for the short-term)
  • Unquantifiable litigation
  • Broker perception (a material percentage of brokers may no longer refer it business)

Turning this company around will require:

  • Immediate action (hours count at this point)
  • Regulators’ cooperation (recall that OSFI gave Home a bank licence just 19 months ago, so unless they feel the situation is hopeless they’ll probably do what they can to help keep it a going concern)
  • A new brand name, most likely
  • More top executive and board departures
  • New and highly-regarded leadership
  • Committed incentived funding partners with deeeeeep pockets (did I say deep?).

It won’t take long to get more clarity on Home’s viability. Expect a series of major announcements from the company, and perhaps regulators, in the next few days and weeks.

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About a year and a half ago, FICOM made a subtle but impactful rule clarification in B.C.

The regulator stated that lenders must “play an active and substantial role” in creditor life insurance in order for mortgage brokers to be able to sell it to B.C. consumers.

Basically, this means that the lender has to first understand and approve of the creditor life product and its suitability for borrowers. Otherwise, its B.C.brokers would not be considered exempt from insurance licensing requirements.

To the average onlooker this doesn’t sound like a big deal, but it creates real problems:

  1. If a lender hasn’t “effected” (approved) a third-party creditor life product, brokers can’t even talk about it. Clients who need coverage could then overlook it altogether, which could create financial risk for them later on.
  2. If a lender doesn’t effect third-party coverage, its customers typically get pitched inferior in-house creditor life products. That’s the big issue right there. Lender-provided products aren’t portable. That means the customer has to reapply for coverage if they switch lenders. They face higher premiums (sometimes much higher) when they do. If they’ve had health issues since their last mortgage, they may not get covered at all, which is a serious risk.

Most broker lenders have signed on with the largest third-party provider of creditor life in Canada (MPP). But many haven’t. The notable exceptions are certain banks and credit unions who—not coincidentally—have their own creditor life products. Since those products are not portable, they effectively act as retention tools to keep that lender’s customers bound to it.

We hear that some lenders (like First National and MCAP) have their own C-life products but make third-party products available anyway. They do this to be broker and customer friendly (good on them).

Now, you may be wondering why FICOM has taken the position it has. Here’s what Chris Carter, Deputy Superintendent of Supervision told CMT:

FICOM has undertaken a number of investigations of creditor group insurance (CGI) that stemmed from consumer complaints. Common concerns include aggressive sales practices, inadequate oversight by insurers over CGI distribution, inadequate training of CGI sellers, and lack of creditor involvement in the initiation of a CGI product. The Information Bulletin was issued to address these consumer protection concerns.

When CGI is sold through an exempt channel, including through mortgage brokers, consumers do not have the benefit of advice from a licensed insurance professional to help determine whether the insurance is suitable to their needs. In this environment, FICOM believes that strong oversight and controls by insurers, and creditor involvement in the development of the CGI product, are essential to protect the interests of consumers.  

FICOM’s Bulletin also states that exempt sellers (mortgage brokers) must:

  • ensure that customers understand the voluntary nature of CGI;
  • not engage in tied or coercive selling;
  • not enrolling ineligible customers;
  • provide clear information to customers on terms and conditions; and
  • know when to refer customers to the insurer.

Creditor life is inferior to term life in most cases (not all) and FICOM is clearly trying to protect consumers, which is great. Unfortunately, like many regulations, there are side effects.

FICOM maintains that in British Columbia, creditor life must be “effected” (as FICOM has stipulated) by the creditor under sections 37 and 92 of the Insurance Act. It says its stance does not change existing legislation. Industry groups disagree with that interpretation, however, so expect more wrangling to come on this issue.

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Following weeks of consultations with mortgage experts, the government’s Standing Committee on Finance has issued five recommendations for Parliament.

They stem from the government’s mortgage changes last fall and this January. Those policies generated widespread criticism from non-bank mortgage providers who argued the new rules:

  1. created an uneven playing field between banks and non-bank lenders
  2. make it more difficult and expensive for low-risk borrowers to obtain a mortgage.

Largely as a result of that criticism, the Standing Committee on Finance recommended that the federal government:

  1. Work with provincial governments to ensure stable, affordable regional housing markets.
  2. Consider increased support for first-time homebuyers.
  3. Use Statistics Canada to beef up housing data and allow for more informed policy decisions.
  4. Put a moratorium on new mortgage regulations until the last set of policies can be assessed.
  5. Ensure that mortgage regulations treat all mortgage lenders fairly.

During its own testimony the Department of Finance questioned the extent to which taxpayers should financially support government-guaranteed mortgages. However, it provided the committee with virtually no context on the important benefits of mortgage competition, which are made possible by federal sponsorship of housing finance.

The DoF also charged lenders with relying on portfolio insurance. That isn’t surprising in the case of mortgage finance companies, since portfolio insurance does what it was intended to do: facilitate lower funding costs.

“According to (the DoF), the presence of risk in Canada’s housing markets can be explained by low interest rates, growth in home prices and support for the country’s housing market through Canada Mortgage and Housing Corporation,” the report reads.

“While (the DoF) does not think that mortgage interest rates will rise as a result of the changes, it indicated that it is possible that rates could increase slightly.” (It appears the DoF is either misinformed or purposely omitting facts on this issue. Mortgage Professionals Canada estimates that the changes have already increased the average conventional mortgage interest rate by roughly 0.25 percentage points.)

CMHC was a bit more forthright on this point. It noted that the changes have led to a 15%–20% reduction in the volume of its underwriting activity, mostly for first-time homebuyers. It anticipated that the new regs will negatively affect first-time homebuyers’ ability to borrow, lead to higher mortgage interest rates and lessen competition in the mortgage financing sector.

Non-Consultation

The industry had virtually no chance to comment on the changes before their implementation. In testimony from the Parliamentary Secretary to the Minister of Finance (Liberal MP Ginette Petitpas Taylor), she attributed that to the “importance of confidentiality.”

“…When it comes to changing mortgage rules, it’s truly important to make sure that we are very sensitive and very prudent with the information we have,” she said. “As a result, that is why there was no public consultation held regarding these matters.”

In other words, it was better to have less informed policy that failed to thoroughly explore superior alternatives.

The Opposition’s Response

At the end of the report, the Official Opposition criticized the regulations as a “one-size-fits-all solution” that was designed with only specific regions of Canada in mind—specifically Toronto and Vancouver. That has “unfortunately hurt other housing markets across the country,” it argues.

The Opposition called on the Minister to:

  • reverse the mortgage changes “based on the impact they are having on Canada’s economy, including the real estate and mortgage industry…”
  • study options to modify the stress test so that it doesn’t negatively impact first-time homebuyers
  • conduct broad stakeholder consultations prior to “unilaterally introducing changes to…mortgage rules.”

“We believe the government needs to ensure that…small mortgage lenders and credit unions remain competitive, rather than advantaging the large banks,” the Opposition noted. “Since the changes on October 3 were made without prior consultation, they were not evidence-based policies and they hurt rural communities and reduce the competitiveness of Canada’s small mortgage lenders and credit unions.”

The Minister of Finance must now publicly respond to the committee through Parliament. Sources familiar with the matter tell us that could happen by August.


By Steve Huebl and Robert McLister

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Last November the Department of Finance banned default insurance on single-family rentals. That was a near-knockout blow to the rental financing businesses of lenders who rely on securitization.

Since then, lenders who compete with the big banks have been forced to find new balance sheet funding. The extra cost of that funding has led a majority of lenders to jack up their rental rates by 15-25 bps. That’s up to $2,300 more interest that folks must now pay on a $200,000 rental mortgage.

Or do they?

While the rental businesses struggle at monoline lenders, some of the largest banks are apparently giving regular residential rates to many of their renewing rental borrowers. That’s a big problem for brokers, who often have no way of matching those rates.

It’s also a problem for consumers, who face a loss of competition in the rental financing market. They now have fewer cost-effective alternatives to the major banks, whose products often entail higher early breakage penalties. (Banks can’t be blamed for the Department of Finance’s actions so this is merely an observation, not a jab against them.)

What Now?

“I think transactional based brokers without a measurable value add—who are not differentiating themselves—are in big trouble, full stop,” says Calum Ross, broker and author of The Real Estate Retirement Plan.

But Ross says the challenges are far less of an issue for brokers “who offer full service financial planning and integrate the [rental] property into the [client’s] larger financial plan.”

“If you don’t have a clear value proposition, you are a commodity and commodities get used for price,” he says, adding that the new environment is destined to “cull the herd” of brokers. “The fact is, a more competitive [rental financing] market will cut margins and force us all to improve our game.”

Rental financing professionals must be able to demonstrate their ability to save clients more than that 15-25 basis points, he says. That amounts to just 10-15 bps on an after-tax basis since most investors tend to be at higher marginal tax rates.

But the challenges don’t end there. With anecdotal reports of broker-channel banks tightening up their internal rental financing criteria, rental lending options could continue to shrink in the “A” market. Brokers who specialize in income property financing may have to get increasingly comfortable with non-prime alternatives.

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MCAP 79 MortgageAs those in the mortgage business are painfully aware, Department of Finance rule changes have made low-ratio mortgage insurance far more expensive—well over 200% more expensive in some cases. For mortgage finance companies who rely on insurance for securitization, that’s a serious problem.

One of the more inventive solutions to this problem comes from MCAP, with its new “MCAP 79” mortgage. The product, which launched last week, comes with an eye-catchingly low 5-year fixed rate (as low as 2.29% at 65% LTV). There’s also a 1% fee, which can be capitalized into the mortgage. MCAP uses the 1% upfront fee to offset its insurance and capital costs.

The product has all of MCAP’s bells and whistles—i.e., 20% prepayment privileges, portability, a fair prepayment charge and a 120-day rate hold. It’s available on insurable owner-occupied purchases with LTVs up to 79%. The primary applicant needs a 720+ credit score and the maximum property value is $1 million.

Will Consumers Bite?

Triple-A quality borrowers aren’t used to paying a fee, regardless of how low a rate is. In this case, they’ll obviously want to know the total borrowing cost of MCAP’s 79 mortgage versus competing products.

We ran the numbers, and given:

  • a 65% LTV
  • equal payments, and
  • a mortgage held to maturity

…the effective rate of the MCAP 79 beats virtually all competing rates above 2.52%.

Assuming the mortgage is not broken early, the MCAP 79 is currently the best low-ratio 5-year deal from any broker lender. Albeit, breaking the mortgage early can change that because the 1% fee is non-refundable and there’s a $300 to $500 reinvestment charge in the first three years.

Time will tell how MCAP 79 performs in the marketplace. But whether it’s a hit or not, MCAP’s product team deserves a gold star for creativity. 

If it retains its cost advantage, and if brokers can get clients past the fee and sell the overall borrowing cost advantage, the product could see some success.

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For mortgage brokers who don’t do a lot of commercial financing, knowing where to take a deal can be a challenge.

The Financing Hub wants to solve that. For the past year, the company has been quietly honing an online tool that:

  1. Lets a mortgage broker enter a commercial deal
  2. Gauges lender appetite for that deal, and then
  3. Facilitates that deal through to closing.

“The Financing Hub is a digital solution that provides both the broker and the lender significant time and cost savings,” says founder Paul McGill. “It allows you as the broker-user to compile the important submission data and related application documents through the easy-to-use online application form. The system then reviews your inputs to select a working list of likely funders for that transaction.”

The site is useful for everything from retail space financing, office space financing and Eco-Retrofit financing, to construction loans and multi-unit residential financing. The system is powered by Northbrook Financial Technologies and currently has 23 commercial lenders.

None of the Big 6 banks are presently participating, but the group does feature well-known commercial players such as Equitable Bank, Home Trust, Alterna Credit Union and Harbour Mortgage. The largest loan closed on the site to date is $23 million.

The Financing Hub isn’t the only player in the space, of course. Vancouver-based Fundever is another system that connects commercial lenders with brokers.

What distinguishes The Financing Hub, McGill says, is its ability to directly connect brokers with the lender of their choice, and then allow the broker to use its system to interact with the lender(s) through to closing.

“Both the broker and the lender have just one consistent electronic worksheet. They work through that rather than pulling changes, additions and deal comments together from various emails,” says McGill. “We also have Transaction Support services that allows the submitting broker to access commercial mortgage expertise if they need it.”

Brokers pay no fees for transacting with lenders through the system. The company makes money by charging lenders a fee (in basis points) per closed mortgage. 

If a broker needs help structuring a commercial deal, registered support agents can help for a fee. Depending on how much work the agent wants to do they can simply refer the deal to a support agent and get a 20% referral fee, or they can co-broker it for a 50/50 split.

“The benefit to the originating agent,” says McGill, “is that they have an ability to gain more experience on the commercial side…and the borrower remains their client.”

“For the agent wanting to diversify and add $500,000 to $5-million commercial deals as part of their business…[support agents] help them get started. After a few deals they should be able to go direct to lenders on their own.”

Going forward, McGill says the goal of The Financing Hub is to expand the pool of lenders and offer new alternative financing programs, options that its members typically wouldn’t have access to on their own.

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  • You can’t get a mortgage without talking to someone.
  • Online mortgages are an invitation for fraud.
  • You can’t assess mortgage suitability online.
  • Digital signatures aren’t safe.
  • You can’t cross-sell an online mortgage customer.

These are the modern-day urban myths of Canada’s mortgage market. And each quarter that goes by, more smart people develop technology to disprove them.

Alterna Bank is the latest lender to show the industry how it’s done. A few weeks ago the bank launched Canada’s first fully digital “end-to-end” mortgage application.  

It lets borrowers apply for approval, upload their documents and close the mortgage, all online, with zero face-to-face or telephone contact with the lender.

While a few other mortgage providers allow homebuyers to submit mortgage applications online and upload documents, a mortgage specialist must speak to the borrower and walk him or her through the remaining steps. Alterna Bank says its mortgage specialists are still available to help, but live support is purely optional.

That seems diametrically opposed to what some banking executives preach, regarding the importance of cultivating borrower “relationships.” Common wisdom is that one-on-one rapport leads to more referrals and cross-selling (and in most cases it does).

But Alterna believes that relationships are built mainly on a pleasing customer experience, not “selling” the customer. “We’re trying to put people before profit,” says Alterna CEO Rob Paterson. “There is no campaign to try and sell you something [non-mortgage-related at Alterna]. We’re focused on the specific need you have and time you have.”

Alterna Bank Mortgage ApplicationAnd one of those needs is the need for speed, speed of approval. Here’s how Alterna’s app works:

  • Application submission takes 8-15 minutes, says the bank.
  • “We’ve decreased the amount of screens to get you a pre-approval,” says Paterson. “A lot of apps are in the 14-screen area.. We’re around 8-9.”
  • Borrowers receive an instant pre-approval with a 90-day rate hold, conditional on the normal documentation.
  • Alterna keeps the customer informed of every step of the process, via email updates and its online portal.

Alterna’s app was developed by Lendful, a fintech company in which it’s invested millions. In truth, the application seems plain and uninspired compared to the benchmark of e-mortgage interfaces, Quicken’s Rocket Mortgage. But it’s simple and easy to understand, and the process is well automated.

Alterna’s model has some notable facets:

  • Less initial commitment
    • “Most of the big banks force you to give personal details upfront before they’re willing to talk to you about rates and what-if scenarios,” says Paterson. “We reversed it….Come kick the tires with us and use the tools….educate yourself, and then when you’re comfortable with that, then give us personal information and get a pre-approval.”
  • The bank uses OCR (optical character recognition) to speed up data extraction from client-uploaded documents.
    • Human fulfillment officers are still employed to review documentation as necessary.
  • Credit bureaus are pulled automatically when the borrower applies.
  • A “significant percentage” of Alterna’s underwriting is automated based on its approval formulas.
  • Alterna uses all digital signatures.
    • Big props for that. Digital signatures dramatically improve borrower convenience and satisfaction. This is one area where paper-dependent lenders need to wake up and realize what millennium they’re in.
  • The bank uses an “everyday low pricing” policy with its online application to take the haggling out of the rate process.
    • Alterna’s rates are currently quite beatable at 2.68% for a 5-year fixed. This might be a weak link in its model. Its target market—DIY borrowers—are online rate shoppers. Alterna doesn’t yet have the brand or marketing clout of a major bank to convince people that speed and ease is worth a rate premium. That said, Paterson notes that automation “allows us to provide better rates…,” which suggests Alterna could compete more aggressively over time.

The bank’s niche is the DIY mortgage shopper, which Paterson estimates comprises “about 15-20%” of borrowers, a number he says is “definitely going to grow.”

The bank developed this app because “do-it-yourselfers are educating themselves” about mortgages, he says. “They’ve been looking for a digital solution to support their choice of buying online. As people start to use digital applications like Apple pay and Uber, financial services is a natural extension of that.”

DIY borrowers are “time starved” and “very trusting of the digital space,” adds Paterson. Many of them are Millennials, who have a “strong comfort level” making big-ticket purchases online.

He maintains that DIY apps are “not going to eliminate physical branches completely or eliminate the broker channel. Everyone has interaction preferences,” he says. But, “Over the next 5 years, a digital component could be upward of 50% of the mortgage market.”

That will kill jobs in our business, Paterson admits. But it will essentially be a “repurposing [of] the types of jobs in the industry.” Mortgage providers will “still be leveraging people to come up with more technology…”

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Never before has your credit score had such an impact on your mortgage rate.

Ever since the banking regulator (OSFI) jacked up capital requirements on default insurers, and linked its capital formula to credit scores, more and more securitizing lenders have:

a) set different rates for different credit score ranges; and/or

b) raised their minimum credit scores for given mortgage products.

At some lenders, borrowers with, say, a 640 credit score are offered rates that are 1/4 point worse than someone with a 750 score. Many retail channel lenders set their internal discounts based on credit scores as well.

On conventional mortgages, the magic number seems to be 720. On scores below that, lenders’ extra insurance costs start climbing more meaningfully, and some of them pass that through to borrowers.

It all means that we as an industry are going to have to better educate our clients about this trend—because, according to a recent TransUnion poll, many folks don’t get it.

Over half (56%) of credit card holders say they don’t even understand how their credit score is compiled.

And 4 in 10 borrowers don’t grasp the importance of making more than their minimum monthly payments.

Cardholders who pay more than the required minimum each month are less risky borrowers in general. And that shows up in their credit scores. And, while the credit bureaus don’t disclose their exact scoring algorithms, those formulas seem more sensitive than ever to debt utilization and payment timeliness.


Sidebar: 88% of Canadians regularly pay more towards their revolving debts than the minimum requirement.

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Canada’s largest broker channel players have now reported fourth-quarter earnings. The quarter was unusually rich in earnings commentary, particularly about Ottawa’s latest mortgage regulations.

Most companies have downplayed the impact of those rules. But as all of us in the industry know, they could prove devastating over time to smaller mortgage players, players who nonetheless originate top-quality loans.

Below you’ll find the meat from the conference call transcripts of First National, Home Capital, Street Capital Bank and Genworth Canada. The comments in blue deserve particular attention.


Street Capital Bank

Notables from its call (Source):

  • Street finally received approval for its Schedule I bank application. Street Capital Bank Canada officially began operating on February 1.
  • Street’s mortgages under administration shot up 12% to $27.7 billion year-over-year.
  • CEO Ed Gettings said one of Street’s objectives for 2017 is the launch of its uninsured mortgage product, with the first loan expected to be made this spring.
    • Chief Financial Officer Marissa Lauder gave this forecast for the new product: “We expect to originate $150 million to $200 million of uninsured mortgages in 2017, rising to $600 million to $700 million in 2018 and to $850 million to $950 million in 2019. This product is expected to earn a net interest margin in the range of 2% to 2.5%, and that includes the conservative provision for credit losses.”
  • Gross gains before acquisition cost, as a percentage of mortgages sold, was 166 bps in the quarter, compared to 167 bps in Q4 2015 and down from 184 bps in Q3 2016. Lauder said most of the decline in the ratio from Q3 2016 reflects the narrowing of spreads between mortgage rates and MBS and CMB rates in Q4.
  • “There is some uncertainty about the level of prime insured mortgage origination volumes that we expect in 2017, given the mortgage insurance rule changes,” Lauder said. “Right now, we continue to believe that a decline of up to 10% compared to 2016 is possible. We expect the softness, any softness, in new prime insured activities will be offset by a growing level of renewals, and the introduction of our uninsured lending product, which could potentially capture some of the previously insurable product.”
  • Gettings added: “…we’ve absolutely seen a significant drop in refis currently. However, it’s been made up in other areas such that our total originations are slightly ahead from last quarter.”
  • Addressing the mortgage insurance rule changes, President Lazaro DaRocha said that while January and February are seasonally weaker, Street’s volumes have so far been consistent with 2016. “It is difficult to predict with any certainty the ultimate effect of these recent changes. As we have some liquidity options that will mute the impact of reduced insurance availability…we continue to expect the insurance rule changes to have a relatively modest impact on 2017 originations of up to 10% decline compared to 2016.”
  • “As we have been saying for some time, Street Capital’s strategic imperative is not to materially increase its market share of insured mortgages in the broker channel,” DaRocha said. “We will seek to maintain our number three or four position in that channel, while focusing our energy and capital on building our banking platform and in the coming year, expanding into a full-suite retail lending financial institution.” Gettings clarified later that given the reclassification of MCAP and RMG as now being combined in the D+H lender market share reports, that Street “will alter our target to maintain the number four position in the market share, in the broker channel.”
  • Asked whether Street implemented any promotions that would have contributed to the strong originations in the quarter, DaRocha replied, “We didn’t have anything out in the market that wasn’t just matching what was in the market, whether it was rate to the consumer or a commission to the broker. So, no we didn’t have anything — we weren’t buying market share if that’s where you’re getting at.”
  • “…what we’re seeing in the (mortgage) spreads right now is we saw a little bit of softness in January, but it has started to return to higher rates through February and the beginning of March,” said Lauder.
  • Asked about expectations for mortgage originations for Q1, DaRocha said, “I know absolutely Q1 for the market must be down over the prior year, given what I’ve spoken to with several other people. But it’s really hard to say. All I can say is our volumes are flat to slightly up through February and our anticipation is Q1 will be flat to slightly up.”

 

Home Capital Group

HCG-LOGONotables from its call (Source):

  • Home Capital (HC) reported net earnings of $247.4 million for the full year 2016, down 13.8% from 2015.
  • Total loans under administration grew to $26.4 billion at the end of 2016, a 5.5% increase over the end of 2015.
  • HC reported “lower average balances in our traditional single-family residential mortgages (and) lower average rates.”
  • Net non-performing loans as a percentage of gross loans ended the year at 0.30% compared to 0.28% at the end of 2015.
  • Total origination in the quarter rose 14.5% year-over-year to $2.43 billion. Total originations for the year were $9.2 billion. “This performance represents the good progress our residential teams have made on improving service levels for the mortgage brokers driving increased volumes,” said former CEO Martin Reid. (Home Capital Group announced March 28 that Reid was being dismissed effective immediately.) “We saw our response times for commitments improve, improved turnaround times on documentation process, and better service levels on approval and funding while keeping standards within our risk management framework. Our core traditional single-family residential line saw its volumes increase 3.5% to roughly $5 billion in 2016 versus 2015.”
  • Originations of insured single-family “Accelerator” mortgages for HCG’s securitization programs decreased 33% year-over-year to $347 million, impacted by the new insured mortgages rules introduced by the government. “…we expect Accelerator to be negatively impacted in 2017 as a result of these changes, however we anticipate a relatively limited impact on net income,” Reid noted.
  • “While there were many positive things happening across various business lines, our overall performance was negatively impacted by lower-than-anticipated retention and renewal levels,” Reid said. “This, combined with elevated expenses, resulted in lower net earnings. Efforts towards improving retention during 2016 were slower to take effect than anticipated… Over the last quarter, we completed a review of our strategies and we have refined our strategic plan to better manage costs, streamline our products, and drive revenue growth.”
  • Speaking to why he feels confident about Home Capital’s ability to deliver on its plans to grow profitability in 2017, Reid said: “Our first priority is to prudently strengthen our core traditional residential mortgage business… We’re looking at actively managing the full life-cycle of our customers while they have a mortgage with us and identifying all touch-points that offer an opportunity to promote retention. This includes looking at onboarding mortgage servicing in our contact centres to drive an enhanced overall customer experience. We work to improve our call centre’s handling of calls that signal the customer was likely to shift their business to another institution. Now we are working on productivity improvements through more streamlined process controls and digitization to be able to respond appropriately to customer requests in a timely fashion. Our second priority is to continue to provide innovative products and solutions to service all of our customers. As the regulatory landscape continues to evolve, we will remain innovative with new products to attract and retain customers.”
  • “We have launched a project called EXPO, an initiative that will target $15 million of cost reductions based on an annualized run rate of our Q4 2016 expenses excluding items of note savings over the course of 2017,” Reid added. “We expect this work to be complete by the end of 2017…. this will result in a restructuring provision to be taken in 2017 and more detail on that will follow in our Q1 results…There will be difficult decisions in the coming months, however, we are taking the necessary steps company-wide to strategically effect meaningful change.”
  • In addressing Home Capital’s challenge with customer retention, Reid said, “if you look at our customer base over the last five years, the credit quality of that customer is a lot better than what it used to be so they do have a lot more choices.” Pino Decina, Executive Vice President of Residential Mortgages, added, “it’s all about this new look customer that we’ve seen post B20. They have come on board with a higher credit quality, which also means that they have more choice and earlier on than clients that we’ve had in the past. So, it’s about developing new opportunities for our retention folks to better put their grips into these customers and make sure that they stay on longer term.”
  • Asked how they are going about competing for customer retention, Decina said, “you’re going to attack them earlier and the client is in a position where they’ve graduated from a credit quality standpoint, then certainly you’re going to have to be more aggressive on your pricing in order to extend out their terms.” Reid then said, “to add to that, these are clients that were already priced aggressively coming in the door so you had that margin compression as they were coming in the door. You may have to be aggressive in price in the renewal, but you also don’t have the same kind of origination cost that you would on new customers. So, you are saving a little bit on the brokerage commission.”
  • Asked whether there are plans for new products to support revenue growth, Reid spoke about the full rollout of Home Capital’s broker portal, Loft. “(It) will help to improve that service level of the brokers, which should in turn result in better originations,” Reid said. “We are looking at products in light of recent regulatory changes (and) how we can take advantage of opportunities that may exist in the market given the number of people that are impacted by that. There’s a number of other initiatives that we are looking at at early stages, but the ones that are going to have a material impact short term are going to be the service levels to the broker, those initiatives around that and around retention.”
  • Decina provided more details about the rollout of Loft ahead of the busy spring mortgage market: “…we’ve applied sort of that 80-20 rule to it. So by the time the spring market hits, 20% of our most impactful mortgage brokers will be on Loft. And the reason we’re in a position to do that is really as a result of the work that happened in the back half of last year…We continued the rollout to all the teams in our traditional group throughout the balance of 2016 and I’m happy to report that all the teams in Toronto are currently on that. And we’re in a position now to deliver confidently what we call our 688 service-level agreement. And effectively what that stands for is six-business-hour turn time on commitments on all approved applications, eight-business-hour decisioning on supporting documentation, and eight-business hours to instruct our solicitor partners. (CMT: This is a solid SLA compared to the average broker lender.) So those are the three key areas when speaking on mortgage originations and I’m happy to say that in the month of December although we did see a steady improvement leading up to the month of December, we saw all three meeting those service-level agreements.” Decina noted that those 20% of brokers who will be targeted first are the top producers who generate about 80% of Home Trust’s volume.
  • Responding to a question about Home Capital’s risk appetite in the Greater Toronto Area and falling LTV ratios on new uninsured originations, Decina said, “We’re just watching very closely in particular in the GTA on some of the big-ticket items, not being aggressive on loan to value where we don’t need to be. And when I say big ticket, we sort of look beyond that $1.5 million [price point] as sort of that step where you want to start to scale back that loan to value. And I think that’s prudent and probably an approach that we’re going to continue certainly throughout the year.”

First National

Notables from its call:First National NEW

  • Mortgages under Administration in Q4 increased 6% year-over-year to $99.3 billion.
  • Speaking about the year ahead, CEO Stephen Smith said, “This is likely to be a period of some upheaval in the housing markets, as government intervention aimed at reducing risk are likely to exert some downward pressure on activity and home prices.”
  • On the challenges that lay ahead for First National in 2017, Smith said this:
    • On the new stress test rule: “Our view is that this could slow insured market activity by 5 to 10%, which, while not overly significant, it will have a bearing on single-family origination opportunities and volumes this year.”
    • On the limit imposed on the insurability of conventional single-family mortgages, and refis: “We believe this rule change could significantly reduce the amount of conventional mortgages that are insurable and available for securitization in our NHA MBS and CMB programs. Although such mortgages can be underwritten on a conventional basis for our institutional funding partners, placement is generally not as profitable as securitization. As well, the introduction of these rules will almost certainly result in a reduction in the overall availability of insured mortgages, which would increase competition and result in tighter spreads, higher origination costs and compressed net securitization margins.” (CMT: In the “A” mortgage space, heightened competition will occur for high-ratio and previously insured mortgages only. By handicapping securitizing lenders, regulators have set back competition by almost 20 years on conventional mortgages.)
    • On the capital changes for mortgage default insurers: “OSFI has determined there are greater risks related to conventional loans between 65 and 80% loan to value and the result is that premiums for such insurance have recently increased by over 200%. The higher cost of insurance will have a direct impact on net interest margins on securitized mortgages for any conventional mortgage that the company elects to insure and securitize.” (CMT: To be clear, risk has not risen materially for mortgages with substantial equity—i.e., 20-35%. Instead, a group of policy-makers have unilaterally decided, without any conclusive evidence and contrary to their own internal stress tests, that they prefer bigger buffers in the almost inconceivable chance that masses of equity-rich homeowners default.)
  • “We will need to address these challenges through our strategies, but the key point is that our business model, the diversity of our mortgage markets and broad funding sources beyond NHA MBS and CMB securitization make us confident that we can respond effectively to change,” Smith said. “Just to be clear on the financial impact: most of the issues I’ve just touched on affect origination volumes. First National earns most of its profit from its $74-billion servicing portfolio and $26-billion portfolio of securitized mortgages. These portfolios will continue to provide earnings over the life of the mortgages.”
  • Commenting on Q4, Moray Tawse, Executive Vice President, said, “It wasn’t entirely clear sailing as our team in Calgary will tell you, but we managed to offset most of the impact of the 22% decline in new origination volumes in the Prairies with positive performance elsewhere. 2016 was also challenging due to increased competition from smaller lenders that were intent on buying market share.”  (CMT: 4 out of 5 mortgagors, those being conventional borrowers, will no longer benefit from such competition.)
  • “Although First National is always competitive for our customers, we chose to win on service not on undisciplined pricing, and for the most part we were very successful,” said Tawse.
  • On regional challenges facing FN, Tawse noted that “in the last couple of months, real estate companies have reported slowing sales in British Columbia, perhaps associated with the foreign ownership tax. First National originates about 20% of its single-family mortgages from its Vancouver office so slowing housing sales there or other regional issues could have a negative impact in 2017.” Later in the call he added, “I think our Vancouver originations could easily be down 30% in terms of commitments.”
  • “In the face of potential challenges in the residential market for new mortgage originations, our plan is to seek some offset through our commercial segment business,” Tawse noted. “Commercial had an excellent year in 2016 with new originations up 9% to $4.8 billion, so we will look to keep growing there. There is also significant value in our single-family renewal opportunities and retaining those borrowers is a key focus for 2017.”
  • Responding to a question about what FN will do about refinanced mortgages that can no longer be insured or securitized, Smith said, “We securitized through NHA MBS and CMB approximately half of the mortgages, and approximately half our mortgages that are originated are insured. So what we would do going forward, we’ll reallocate our mortgages that are refinances that we can no longer securitize. We’ll put them either into our asset-backed commercial paper program or we’ll sell them to institutional investors.”

 

Genworth Canada

Notables from its call (Source):

  • Genworth reported net operating income of $388 million in the fourth quarter, up 3% over the prior year. Net premiums written of $760 million were down 6% over the prior year.
  • We expect the government’s mortgage rule changes to reduce the size of our transactional insurance market this year by approximately 15-25%, after accounting for changes in borrower behaviour,” said Stuart Levings, President and CEO. “This will, however, be partially offset by the recently announced premium rate increase. The increase will add approximately 40 basis points to our average premium rate for 2017 compared to the prior year.”
  • “Further changes are being considered by the federal government in the form of a potential risk-sharing arrangement, whereby lenders would share in a portion of mortgage default losses,” Levings added. “We are in the process of preparing a comprehensive written response to the government’s request for comment. As we have previously stated, we do not believe a risk-sharing structure would represent an improvement in the Canadian mortgage finance system, one of the most admired in the world today.”
  • “We continue to focus on regional risk dispersion and high-quality loans, driving down exposure to borrowers with low credit scores,” Levings said. “This increased our average credit score to a new high of 751 in 2016. In addition, home price appreciation in our statement remains more muted compared to the overall market, reflecting the reality of a constrained first-time buyer.”
  • “Based on our current market assumptions, we expect a full-year loss ratio range of 25-35% for 2017,” Levings added. “This range reflects our expectation of continued pressure from oil-exposed regions together with some normalization of losses in Ontario and B.C. in response to slowing housing markets.”
  • Speaking about the transactional premium rate increases that took effect on March 17, Levings said the increases averaged approximately 18-20%. “As a result, we expect that the average premium rate for the calendar year 2017 should be between 330 and 335 basis points, an approximate 14% increase over the 293-basis-point average in 2016. The price increases range from 11% at the 95% loan-to-value level to 127% at the 75% loan-to-value.”
  • Levings noted that Genworth’s current market share is around 30%. “We are cautious in this environment, as we should be, and we’re not going to be aggressively pursuing growth,” he said. “But…we definitely see an opportunity to invest in some of our processes around risk selection, and certainly look to grow that market share prudently a couple of points this year and a couple of points next year.”

 


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

By Steve Huebl & Robert McLister