Over 1,500 mortgage brokers from across the country gathered in Toronto on November 17, 2019 for Mortgage Professional Canada’s National Mortgage Conference. During the Lender Panel discussion, First National's Jason Ellis, President and Chief Operating Officer, made the following key observations.
Updates to B-20 residential underwriting rules have had the impact of increasing the addressable market for mortgage brokers and lenders to the mortgage broker channel.
Since B-20 updates, Prime mortgage underwriting by the banks has shifted. Gone are the days when exceptions were the rule. This shift in stance has allowed those who are active in the broker channel such as First National to step in and serve this so-called grey area by pricing mortgages more appropriately and in a way that better reflects our unique cost of funds. In turn, this has enlarged the addressable market and supported additional growth in the mortgage broker channel.
First National recognized the opportunity created by the shift in bank underwriting when it re-launched its Excalibur mortgage program.
The large Schedule I banks used to accept more non-traditional forms of income verification. That changed with new B-20. As a result, borrowers who used to be considered Prime are now Alt-A. When the banks shifted focus, First National moved in by re-introducing Excalibur in 2018 with its expanded underwriting criteria. We have been rewarded with strong growth since.
Borrowers who only qualify to borrow from private lenders could soon have less costly alternatives.
Currently, the Alt-A market is largely served by OSFI-regulated institutions. Those borrowers who just miss out on Alt-A mortgages today have no choice but to jump into the private lending market. Private lenders must charge high coupon rates because they do not have enough leverage and need to earn a cash-on-cash return. Non-deposit-taking institutions like investment funds appear to have a growing enthusiasm for this type of borrower and this type of product, based on investment fund partnership inquires received by First National. If Schedule I banks begin to provide leverage to these funds, brokers and borrowers will have better choices.
Expect to see more developments in the RMBS space.
Investment dealers in Canada are enthusiastically embracing Residential Mortgage-Backed Securities. RMBS are a securitization vehicle typically holding a portfolio of near-prime, uninsured residential mortgages in A, B and Z tranches. RMBS are a tool that mortgage lenders can use to increase funding diversification and cost of funds’ competitiveness. Over the next 18 months, I expect to see more offerings in this space as investors search for yield.
The liquidity crisis of 2008 increased the overall complexity of the mortgage market.
There is no question that the regulatory revolution in the industry since the liquidity crisis of 2008 has made choosing a mortgage more difficult than ever. The direct outcome is more people are seeking the advice of mortgage brokers, which is great for brokers and great for First National as a lender serving brokers.
Lender economy of scale is vital in helping the broker channel achieve the sharpest competitive offering.
One of the keys to delivering the best price and value to borrowers is economy of scale and scalability generally in underwriting and servicing capabilities. Smaller lenders without this scale advantage may struggle to keep up with ‘at the margin pricing’ offered by larger lenders like First National.
The Bank of Canada’s proposed Standing Term Liquidity Facility is a great idea for smaller institutions.
Smaller lenders that First National trades with and sells mortgages to may have access to this facility. In an economic scenario such as 2008 when there was stress around liquidity unrelated to the quality of collateral held by Canadian lenders or their level of financial solidity, this Standing Term Liquidity Facility would complement the Bank’s current tools for the provision of liquidity. This would keep the market moving.
There may be better levers to pull to help first-time home buyers than the federal government’s new First-Time Homebuyer Incentive.
This incentive was announced with little advance warning and with an unrealistic timeframe for implementation. I don't think everyone was fully prepared for the reality that this program is symmetrical, meaning if they sell their house for more money later the government will participate in some of the upside. While I hope it does provide an incentive, it’s been a difficult start. If the government wants to help borrowers in a more meaningful way, they might look at moving other levers. One example: the $1 million cap B-20 placed on mortgages that could qualify for insurance. In the Greater Toronto and Vancouver market, this change moved many borrowers into the Alt-A space.
The script has flipped and lenders serving brokers are more enthusiastic about the future.
To me, what is encouraging and refreshing is that we spent the majority of time today discussing opportunities. In contrast, the last time I participated on this panel all we talked about were headwinds and the possibilities that B-20 would shrink the addressable market. Now, the conversation has shifted to blue skies. Collectively, we’re in as good a position as we’ve been in a long time. Many investors have a lot of cash and they’re looking to put it to work, whether it’s in the Prime space, the Alt-A space or the private space. Accordingly, I think the future looks bright for lenders, brokers and borrowers.