First National Financial saw its single-family mortgage originations fall in the second quarter, with increased market competition partly to blame.
But the Q2 results were in-line with past forecasts given “surprisingly strong” activity in Q2 2023, according to First National President Jason Ellis.
“The borrower psychology was different, there was a temporary reduction in rates due to what was going on in the U.S. and with Credit Suisse,” he said on First National’s earnings call. “But also, admittedly, in Q2 of last year, a significant competitor was absent from the market and so that, I think, made our Q2-over-Q2 a difficult comparison.”
Overall, however, First National saw its mortgages under administration rise 8% compared to last year, driven in large part by its commercial lending portfolio, which was up 35%.
While the Bank of Canada’s initial quarter-point rate cut in June did little to stimulate Canada’s housing market late in the second quarter, Ellis says activity should pick up in the second half of the year with subsequent interest rate cuts.
“When combined with the second cut on July 24, we may see some increased activity in the second half of the year,” he said.
Drop in single-family originations was expected
First National had indicated in its Q1 earnings call that single-family mortgage originations would be lower on an annual basis due to the factors mentioned above that resulted in “extraordinary” volumes during the same period last year.
While part of that was driven by falling fixed mortgage rates, another factor was Scotiabank’s deliberate choice to “intentionally slow” the growth of its mortgage book at the time.
However, early in the third quarter of last year, Scotia reintroduced more competitive pricing, which shifted market dynamics, intensified competition among lenders and put downward pressure on origination volumes industry-wide, including at First National.
“The bank’s return meant market share positions reverted to more traditional levels for other participating lenders, including First National,” Ellis explained on the call. “All else being equal, however, First National has retained its relative position in the channel.”
And while originations were down from last year, they were still up 74% from the first quarter of this year.
Despite the challenges with single-family originations, First National experienced strong growth in its commercial lending business, with originations, including renewals, rising 35% to $5 billion for the quarter. This growth was fuelled by increasing demand for insured multi-family financing, according to Ellis.
Looking forward, Ellis said new single-family commitments in July were higher than the same month a year ago.
“It’s too early to call this a trend, but we are cautiously optimistic that this is the case,” he said. “Nonetheless, our official position is to expect single-family funding to be lower in the third quarter than last year’s $8.3 billion based on the existing pipeline.”
Q2 earnings overview
| Q2 2023 | Q1 2024 | Q2 2024 | |
|---|---|---|---|
| Net income | $89.2M | $49.9M | $54.1M (+2%) |
| Single-family originations (incl. renewals) | $7.4B | $3.5B | $6.1B (-17%) |
| Commercial originations (incl. renewals) | $3.7B | $3B | $5B (+35%) |
| Mortgages under administration | $137.8B | $145.1B | $148.2B (+8%) |
Notables from its call:
First National President and CEO Jason Ellis commented on the following topics during the company’s earnings call:
On market competition:
- “While the spreads we’re observing at origination on residential mortgages right now are under some pressure, probably the most significant source of that pressure has been in some of the additional incentives being paid to mortgage brokers as lenders. I also know that one of the bank lenders in the channel may have been at the margin more aggressive than typical as it fought its way back to its traditional position within the channel after having stepped back last year (Editor’s note: a clear reference to Scotiabank). I think that some of that will be moderating…”
On its alternative lending portfolio:
- “Our Excalibur volumes were lower by a similar magnitude as our prime products, a not surprising outcome as the relatively higher rates have made it even more difficult for borrowers to qualify in the non prime space.”
On mortgage arrears:
- “First National borrowers continue to hold up well against the stress of today’s interest rates. 90-day arrears represent just 8 basis points of our prime book compared to 7 basis points at the end of March and 5 basis points a year ago. The historical tendency toward five-year mortgage terms has certainly served our prime borrowers well.”
- Ellis noted that due to the shorter terms for Alt-A products, First National’s Excalibur arrears rate is higher compared to its prime book. “However, with a stable housing market and our concentration in liquid urban centers, there were virtually no realized loan losses in the quarter. Even so, as a prudent lender, First National continued to accumulate provisions for credit losses which we have not released into income at this stage.”
On First National’s third-party underwriting services:
- Referencing First National’s new underwriting partnership with BMO, which re-entered the broker channel in January, Ellis said “we’re pleased with the progress in establishing a growing underwriting and fulfillment platform for them in the broker channel.”
On commercial lending outlook:
- “We expect origination volumes to surpass last year’s Q3 production of $3.3 billion…In June, CMHC made refinements to some of those programs, which caused an increase in application volumes along with the recent increase in funding available from the Canada Mortgage Bond Program, removal of GST for new construction, there is support for ongoing activity even in the face of today’s interest rates. While these headwinds have fostered competition for the multi-unit space and [have had] a related impact on available spreads, First National remains a profitable market leader in this market.”
First National Q2 conference call
Note: Transcripts are provided as-is from the companies and/or third-party sources, and their accuracy cannot be 100% assured.
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Last modified: August 13, 2024