Homebuyers with less than 20% down are going to pay more.

CMHC is hiking mortgage insurance rates for the third time in three years. Premiums are jumping up to 0.65 percentage points on the highest LTV mortgages, effective March 17, 2017. Here’s the new premium table:

But high-ratio hikes aren’t the only story. Premiums on mortgages between 65.01 and 80% LTV are soaring too.

At 80% LTV, the premium is almost doubling to 2.40%. That will push up interest rates among lenders who currently pay this premium for their customers in order to securitize the mortgage.

CMHC had a conference call this morning about the increases. Here were some takeaways:

  • It says these premium hikes are due mainly to OSFI’s capital requirement changes, which took effect January 1.
  • OSFI’s new capital requirements include a formula based on LTV, credit score, location and other things. Oddly, this formula disproportionately targets (increases the costs for) mortgages in the conservative 65.01 to 80% LTV bracket.
  • Bulk insurance premiums have increased similar to the low-ratio transactional premiums, says CMHC.
  • The insurer says it has communicated bulk pricing criteria to lenders (although the securitizing lenders I’ve spoken with cite considerable obscurity in bulk pricing, which has led many of them to transactionally insure their mortgages instead).
  • Roughly two-thirds of CMHC’s business is in the 95% LTV category, said CMHC, and about 4% of its transactional insurance is used for low-ratio customers.

Steven Mennill, Senior Vice-President, Insurance, said that CMHC is “Not doing this to affect housing markets…” and doesn’t think it will have a significant effect on competition.

Mortgage finance companies would vehemently disagree. Higher premiums have already limited competition in the low-ratio market where MFCs must charge rates that are up to ¼ point higher on 80% LTV deals (compared to last fall).

Big banks, which don’t need to rely on insured mortgages for securitization purposes, now have more pricing power than ever—at least since the dawn of NHA-MBS. And no one should blame banks. They’re not writing these rules. But from a consumer standpoint, Joe Borrower is getting the shaft, which leads us to the legislated purpose of the National Housing Act:

“The purpose of this Act, in relation to financing for housing, is to promote housing affordability and choice, to facilitate access to, and competition and efficiency in the provision of, housing finance, to protect the availability of adequate funding for housing at low cost, and generally to contribute to the well-being of the housing sector in the national economy.” (emphasis ours)

The recent decisions by the Department of Finance, OSFI and CMHC appear to twist or flout these essential provisions of the National Housing Act.

Policymakers argue that such measures are warranted for the stability of the market. That’s a whole other debate, one that’s not well supported by any publicly available mortgage risk data (default rates, overall credit quality, equity levels, etc.).

Suffice it to say, Canada’s mortgage industry never required an unlevel competitive playing field to create stability. But that’s what these new premiums have now given us.


Finance Minister Bill Morneau is suggesting that no new mortgage rules are on the drawing board.

After meeting with economists on Friday, he told reporters:

“We, as you know, were quite careful in considering the…situation around the housing markets across the country as we considered measures to ensure that, you know, the people’s bigPhoto Source: Wikipediagest investment was protected. We put in place some measures that we thought would better protect people by ensuring that the mortgages that they took on were appropriate for their situation.”

“We will remain focused on this area to ensure that those measures are having the desired impact. I can tell you that…we continue to focus on this area. The measures are, as we’ve seen, having some impact and we’ll continue to assure that Canadians are protected in the investment, which for most of them, is their biggest investment…their housing.”

When asked specifically if he had plans to restrict mortgages further, Morneau said:

“We continue to, to monitor the housing market and to make sure that the risks are appropriate for the market. We don’t have any measures under consideration at this stage, but we will continue to monitor to ensure that the housing market is stable and that people are protected in their important investment.”

Of course, one measure that’s still fully under consideration is regulators’ lender loss sharing proposal. On that, Morneau added:

“We, as you know, have been doing consultations…thinking about how we…share the risk in the housing sector. Those discussions have proceeded. We’ve had a significant number of submissions and…we’re considering those submissions now.”

“We’ve not yet come to any conclusions but we’ll be looking forward to following through on our considerations in having some news in the not-so-distant future.”

The likely translation: we’ll see Finance’s reaction to industry feedback on loss sharing this spring or summer.

Certain industry executives I’ve spoken with feel this consultation is merely the Department of Finance going through the motions. Many believe the department already knows how it wants to push through loss sharing.

But it’s only fair to give policy-makers the benefit of the doubt. We’ll wait and see how they address concerns about how loss sharing would further jeopardize Canada’s mortgage competition.

Finance is accepting comments on loss sharing until the end of February. If interested, you can send opinions here:

“…Our goal will be to work to ensure that Canadians make the investments that make most sense for their families and protect them from risk,” Morneau went on to say. “That’s what we intend to continue to focus on, managing risk on behalf of Canadians.”

Indeed, the fundamental purpose of government is to protect its citizens. Of course, how higher rates and degraded refinance options “protect” qualified borrowers is a whole different question.


Nearly half of Ontario’s first-time buyers say they’ll delay their home purchase as a result of the federal government’s new mortgage rules introduced in October.

As part of the government’s new stress-testing measures, buyers with less than a 20% down payment must now prove they can afford a payment at the BoC benchmark rate (currently 4.64%).

That change alone will force approximately 45% of first-time homebuyers to postpone their purchase while they continue building up their down payment, according to a recent Ipsos poll conducted for the Ontario Real Estate Association (OREA).

“It’s important to remember who’s being affected by measures that curb housing demand–a young family looking for more space, [or] a 20-something trying to get out of his parents’ basement…,” said OREA CEO Tim Hudak. “Rather than focusing on policies aimed at curbing demand, let’s consider boosting the housing supply or enforcing measures that make home ownership more affordable…”

Overall, the more stringent rules are expected to impact the plans of 79% of all first-time homebuyers in Ontario. Those who won’t be delaying their purchase say they’ll have to find additional funds to cover the larger down payment (27% of respondents), look for a less expensive home (34%) or look for a home in a less desirable city (22%).

Story by Steve Huebl & Rob McLister


CMT has a long record of critiquing government rule changes in the mortgage business. It’s a check and balance on a bureaucratic system that sometimes “forgets” to consult stakeholders and discounts the consumer repercussions of its policies.

But it would be a mistake to misinterpret this as advocating for the status quo.

On the contrary, Canada’s mortgage regulators have kept our housing market from going completely off the rails. Specifically, they’ve been prescient and wise in reversing lax lending policies, including:

  • Zero-down insured loans
  • 100% rental financing
  • 95% insured refinances
  • 95% stated income financing
  • Insured interest-only financing
  • High-ratio HELOCs
  • Insufficient minimum credit scores
  • Inadequate documentation requirements
  • Qualifying high-ratio variable and short-term borrowers at inadequate rates
  • Allowing insured cash-back down payment mortgages
  • Unnecessarily high maximum debt ratios.

Policy-makers at the Department of Finance, OSFI, CMHC and the Bank of Canada should be applauded for their role in these measures. We don’t say that enough.

If needed, and I stress the phrase “if needed,” the government could take additional steps to cool overvaluation (in the few regions it exists) and improve borrower quality. It could do that by:

  • Raising minimum credit scores
  • Lowering maximum debt ratios for below-average credit scores
  • Lowering maximum debt ratios for low-equity borrowers
  • Incentivizing development and reducing developer red tape to alleviate the supply constraints (a central driver of overvaluation)
  • Publicly publishing individual lenders’ arrears rates
  • Adding new insurance surcharges for lenders with arrears rates in the worst X-percentile
  • Requiring more public data disclosure from default insurers (e.g., Why on earth does CMHC not disclose TDS buckets, like what percentage of its borrowers have TDS ratios over 40% and an LTV > 90%?)
  • Increasing insurance premiums on borrowed and gifted down payments.
  • Increasing insurance premiums and MBS guarantee fees where they are not actuarially sufficient (albeit they’re already more than actuarially sound in most cases).

There’s a lot that’s been done, and still a lot that could be done, to make Canada’s housing market safer.

But one thing that should never, ever occur is policy that penalizes low-risk Canadian families with higher borrowing costs. No one wins in that scenario. And that’s exactly what the regulators have done by:

  • steadily reducing the liquidity of, and access to, NHA-MBS
  • not maintaining CMB allocations adequate for lender needs
  • eliminating insurance on low-risk refinances
  • imposing capital requirements that are overkill in many cases
  • overcharging for MBS guarantees
  • eliminating long-amortization options for those who can qualify at a standard 25-year amortization
  • forcing insurers to charge surcharges in Canada’s most liquid real estate markets
  • restricting bulk insurance access
  • eliminating important securitization outlets for insured mortgages (e.g., ABCP)
  • limiting access to low-cost insured financing for low-risk borrowers with higher-value homes
  • not fostering covered bond access for smaller and mid-size lenders
  • hamstringing banks by keeping covered bond limits below internationally accepted levels
  • not fostering private RMBS markets sooner
  • promoting loss sharing, which (depending on how it’s implemented) could hammer the final nail in small lenders’ caskets.

…and this probably overlooks many more such myopic policies.

How lenders sell and fund mortgages has never been the problem in Canada. It’s bad mortgages that are the risk.

Without question, we owe it to taxpayers to keep government-backed mortgage exposure in check with judicious underwriting, and regulators have enforced just that (over-enforced in some cases).

But the government also owes it to taxpayers to use the AAA credit rating Canada has been blessed with to lessen families’ borrowing cost burden.

This doesn’t mean lenders should give fringe borrowers more options. Definitely not. Under-qualified borrowers should see their options further restricted, and soon. That’s how to create a safer mortgage market and slow overvaluation at the same time.

But never, ever, should policy-makers force a prudent 800-credit score borrower with 20% equity and a secure employment to pay more for her mortgage.

That’s exactly what’s happening today, because of a shotgun regulatory approach that shoots to kill consumers’ options, and asks questions later.

Canada’s mortgage regulators should be simultaneously: (a) applauded and (b) held accountable. Citizens constantly hear the former in carefully planned CMHC speeches, Department of Finance press conferences and Bank of Canada Financial Reviews, but there aren’t many people doing the latter.


The government’s ongoing crusade against lenders is already proving costly.

Regulatory tightening over the last year has raised conventional mortgage funding costs by at least 25 bps, say lenders we’ve spoken with.

A ¼ point rate hike may not sound like a lot, but that’s $2,300 siphoned out of families’ pockets on a typical mortgage—over just one 5-year term.

If you’re a new buyer making an average down payment on the average Canadian home, regulators have just penalized you with $10,400 more interest over your amortization. (The average amortization is 18.8 years and the average first-timer’s down payment is 21%, according to MPC).

As usual, housing bears are jubilant over any reports of higher rates. They argue that steeper borrowing costs cut affordability, which lowers home prices, which save consumers more in the end. But that math, to put it in technical terms, is “whacked.”

For one thing, the fed’s new “stress test” makes many borrowers qualify at a higher 5-year posted, not the contract rate. And most people’s debt ratios are well below the stress test limit anyway. So raising the contract rate (which is what 2016’s insurance restrictions, capital rules, securitization fees and MBS limits do) has little effect on how much house most people buy.

Theoretically, a ¼-point bump in rates might keep only a few percent of borrowers out of the market anyway, and only temporarily (until they amassed a bigger down payment or more income).

Estimates of the price appreciation attributed to lower rates range from 15% (Bank of Canada) to over 34% (RBC Capital Markets). The latter’s research found that a 1 bps rate drop led to $266 in home price appreciation in Toronto.

Assuming the reverse were true, which isn’t necessarily the case, it would imply a $6650 price drop (over time) given a 25 bps rate hike. That might save a Toronto borrower $1,700 of interest, give or take, over a typical amortization. That’s a fraction of the extra interest they’ll now pay overall.

But then there’s the $6,650 of hypothetical savings resulting from the lower purchase price. Wouldn’t new buyers save that money?

Let’s assume they would. The problem, however, is that home values are a zero sum game. Someone else (the family who’s selling) would also lose that $6,650. Whose net worth is more important?

Even if home prices fell 5%—which wouldn’t happen because of a ¼-point rate hike alone—that would save our average buyer $4,900 throughout their entire amortization. That’s less than half the extra interest they will now pay thanks to the Finance Department’s evisceration of the default insurance and securitization markets.

And who’s to say home prices will even fall because of these rate surcharges? 3.5 million people are moving to the greater Toronto/Hamilton area in the next two decades. A ¼-point rate difference won’t stand between those families and a new home.

The facts stand on their own. When policymakers create higher funding costs for lenders, it is a “tax” on homeowners. In exchange for a notional reduction in the federal government’s risk exposure, consumers pay more. It does not make housing more affordable. 

Note: This doesn’t even touch on policy side effects like loss of lender competition, diminished MBS liquidity (a risk in times of financial stress), the consumer spending impact and so on.

So if someone tries to convince you that policymakers’ attack on mortgage lending benefits the 70% of Canadians who own (or will own) a home, tell ’em “Show me the math.” We’ve yet to see evidence that higher government-imposed borrowing costs benefit homeowners long-term.


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

Other benefits:

  • 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.

Street Capital

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…”

Home Capital

HCG-LOGONotables 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-mortgageOver 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.”

First National

Notables from its call:First National NEW

  • 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