HSBC Canada cut its five-year variable mortgage rate to 2.39 per cent as banks compete for customers amid a slump in home sales.
The Canadian division of London-based HSBC Holdings Plc also cut its five-year fixed rate for some mortgages to 3.09 per cent, the lender said in an emailed statement. Both rates, effective May 17, undercut mortgage offered by Canada’s six-biggest banks, which have been adjusting rates during a spring buying season that’s started out soggy.
Bank of Montreal last week cut its five-year variable rate to 2.45 per cent — a 1 percentage point discount from the lender’s prime rate — in a mortgage special that runs until the end of May. Toronto-Dominion Bank followed on May 15, matching the 2.45 per cent rate in a special available until May 31. HSBC has been undercutting the largest domestic banks on mortgages for about a year.
Home sales nationwide fell to the lowest in more than five years in April , as bond yields and tougher mortgage qualification rules imposed in January helped cool the market.
Canada’s banks are witnessing “a more pronounced” slowdown in mortgage growth in the second quarter, with a 0.19 percent growth since the start of the year, Scotia Capital analyst Sumit Malhotra said Wednesday in a note to clients. That’s the slowest in four years.
The February-to-April period has “traditionally marked the slowest period of the year for domestic residential real estate loan growth, and our review of recent data clearly indicates that the seasonal deceleration will be more pronounced” in the banks’ second quarter results which begin next week, he said.
The head of Home Capital Group Inc. predicted Wednesday the company will enjoy a rush of mortgage renewals, a forecast that followed a lower first-quarter profit for the lender and the introduction of tighter underwriting regulations for Canada’s housing market.
Yousry Bissada, president and chief executive of the Toronto-based mortgage lender, said he expects the company’s own efforts and the new underwriting rules to contribute to strong renewal rates.
“We think we will have better renewals than at any time, not just last year, but any time in the 30-year history of this company,” Bissada said on a conference call with analysts.
Home Capital is not the only one predicting a higher-than-normal rate of renewals, and uninsured loans are now subject to a new “stress test” that borrowers could face if they turn to a different federally regulated financial institution. A report from CIBC Capital Markets last month estimated 47 per cent of existing mortgages in Canada will need to be refinanced in 2018, more than the 25-35 per cent of loans that are usually up for renewal in a year.
The expectation of rising renewals came after Home Capital reported $34.6 million in net income for the quarter ended March 31, which was up 13 per cent compared to the quarter that preceded it, but down 40.4 per cent from last year’s $58 million.
Home Capital also reported total originations of $1.16 billion for its first quarter, again, up nearly 33 per cent compared with the fourth quarter, but down more than 50 per cent from a year ago.
Home Capital Group’s Toronto offices.
The company has been on the rebound after being hit with accusations last year that it misled investors, which triggered a run on deposits that was stemmed with help from a high-profile investment from Warren Buffet’s Berkshire Hathaway Inc. Home Capital also agreed to pay $29.5 million to settle a class action lawsuit and a proceeding before Ontario’s securities regulator tied to those allegations.
“I’m very pleased to say Home is back in every aspect of our business,” said Bissada, whose company lends to borrowers who cannot qualify for mortgages at the big banks.
But Home Capital and other lenders are now dealing with new government regulations introduced to try to tame housing markets. They include new rules for residential mortgage underwriting, known as the B-20 guideline, which came into effect at the start of this year and include the new stress test that Home Capital expects will boost the rate of loan renewals with existing lenders.
Bissada said Home Capital had “very good success” with renewals in its first quarter, although it wasn’t able to determine how much of those effects were driven by the new regulations, as renewals were offered in the preceding quarter.
“We haven’t been able to isolate how much of the renewal book is because of B-20,” he said. “No doubt, though, we think it will help retain some of the book because some of these mortgagors may not be able to qualify elsewhere.”
The company is also seeing cooler housing markets in Canada. Home Capital noted in its management’s discussion and analysis that sales volume in the Greater Toronto Area and Greater Vancouver Area “declined significantly” during the first quarter compared to the same period last year.
“It is too early to determine whether this activity is indicative of a sustained trend due to impending further rate increases by the Bank of Canada and the uncertainties around the new B-20 rules,” said Home Capital’s MD&A.
The company’s stock price rose Wednesday, with shares up about 5 per cent at midday.
National Bank Financial analyst Jaeme Gloyn said Home Capital’s quarter supported his firm’s “cautious stance” on mortgage lenders.
“We continue to recommend investors await better visibility on macro-related risks as well as HCG’s deposit-gathering capabilities, profitability, growth, and credit performance,” Gloyn added in a note.
TORONTO — Home Capital Group Inc. is anticipating the highest mortgage renewal rate ever in the alternative lender’s history, in the wake of new regulations and company initiatives to stay competitive.
Home Capital CEO Yousry Bissada says the Toronto-based mortgage lender is “back in all aspects of our business” despite reporting a 40 per cent year-over-year drop in net income in the latest quarter, compared to a year ago.
It reported fiscal first quarter net income of $34.6 million, beating analyst expectations but falling short of the $58 million earned a year ago before the lender was hit with allegations of misleading investors and faced a run on its deposits.
Bissada says Home Capital expects higher levels of mortgage renewals going forward to give the company a boost, as borrowers who stick with their current lenders can avoid a new stress test for uninsured mortgages that make it harder for homebuyers to qualify.
He told analysts on a conference call that the new mortgage guidelines, introduced this year, combined with new company initiatives will produce the highest mortgage renewal rates in Home Capital’s 30-year history.
He adds that Home Capital is also offering more competitive mortgage rates as it faces competition from private lenders and other institutions which are not federally-regulated, and not required to apply the new stress test.
For many Canadians, higher interest rates are reason to grumble. But for the country’s 3.4 million subprime borrowers, they could spell disaster.
Borrowers with impaired credit histories may have limited access to emergency funds compared with their prime counterparts, giving them less wiggle room when debt servicing costs rise. That puts them on the frontline of the Bank of Canada’s recent interest rate increases.
Jason Wang, vice president of risk analytics at Progressa, an alternative lender that services mostly subprime clients, hasn’t yet seen evidence that higher borrowing costs are leading to more missed payments, but that could change, he says. Of 28.4 million “credit-active” Canadian consumers, 11.9 per cent fall into the subprime category, according to estimates from TransUnion, one of the country’s two credit-reporting agencies.
Progressa’s loss rate, which measures the number of clients 90 days past due on their payments, is a lagging indicator. “I am curious to see if, in a few months, the Bank of Canada raises the rate again, if that would be trickling into our data,” Wang said in a telephone interview.
The next opportunity to gauge the impact of higher rates will come with the firm’s next quarterly risk report in July, Wang said. Depending on the results, the lender would decide what action to take and that may include adjusting its risk profile for acquiring new clients, he said.
Subprime borrowers will feel the squeeze from higher interest rates.
After the Bank of Canada’s three 25-basis-point hikes since July, Wang calculates, someone with a $60,000 (US$46,000) variable-rate loan would need to pay an extra $37.50 in interest every month. And with rates bound to go higher, those costs will mount.
Implied odds from swaps trading show about a 33 per cent chance of another hike at the bank’s May 30 meeting, and a 95 per cent chance of two increases by the end of the year. The Bank of Canada last lifted its benchmark rate to 1.25 per cent in January.
“A non-subprime person might say, ‘Well, what does that mean? That’s one dinner I could do less in a month,’” he said. “For subprime, and we see this every day, when they are budgeting down to every $10, this is a lot.”
So far, they’ve been able to absorb the higher interest costs because the economy is doing well, and “increased income and employment prospects” are probably balancing things out, he said. “It might take another couple of rate hikes for us to see anything.”
“I would urge the Bank of Canada to be really careful with future rate movements,” Wang said.
TORONTO — Scotiabank has joined its Big Five banking peers in raising its benchmark fixed-rate mortgage rate.
Canada’s third-biggest lender raised the posted rate for a five-year fixed-rate mortgage from 5.14 per cent to 5.34 per cent, effective Tuesday, while also increasing the posted rates for other terms.
Late last month, TD Bank was the first of the Big Five lenders to raise the benchmark rate, increasing it to 5.59 per cent, due to factors including the competitive landscape, the cost of lending and management of risk.
Royal Bank later raised its benchmark rate to 5.34 per cent, followed by CIBC which raised its posted rate for five-year fixed term mortgages from 4.99 per cent to 5.14.
The Bank of Montreal earlier this month upped the benchmark rate slightly to 5.19 per cent.
The mortgage rate increases from Canada’s biggest lenders come as government bond yields rise, signalling higher borrowing costs for corporations.
Canada’s big banks don’t seem keen to follow Toronto-Dominion Bank’s lead on mortgage hikes — at least not all the way.
Posted mortgage rates have diverged in the past week following rate hikes by Toronto-Dominion, Royal Bank of Canada, Canadian Imperial Bank of Commerce and National Bank of Canada. Bank of Nova Scotia and Bank of Montreal have stood pat — so far — creating a 45 basis-point difference on five-year fixed-term loans.
“This is very different from what we’ve seen in the past,” Barclays Plc analyst John Aiken said. “It may be a bit of gamesmanship: TD and Royal were seeing how far they could lift mortgage rates for the group, but it doesn’t look like the others are playing ball.”
CIBC, which expanded its mortgage book at a faster pace than the rivals in the past two years, lifted its posted rate for five-year mortgages by 15 basis points to 5.14 per cent. That undercuts Toronto-Dominion’s 45 basis point hike to 5.59 per cent on April 25 in what RateSpy.com founder Rob McLister called “the biggest move in years” for Canadian banks.
“This is a bit of differentiation in terms of strategy,” Aiken said. “In the past CIBC has been growing their mortgage book at a faster pace than the rest of the peer group and it looks like they’re trying to continue that.”
Posted mortgage rates have diverged in the past week following rate hikes by Toronto-Dominion, Royal Bank of Canada, Canadian Imperial Bank of Commerce and National Bank of Canada.
Royal Bank, Canada’s largest mortgage lender, and Montreal-based National Bank also undercut Toronto-Dominion’s move, opting for a 20 basis-point hike on the five-year term to 5.34 per cent this week. Bank of Montreal and Scotiabank have maintained posted rates at 5.14 per cent, according to their websites.
“Scotiabank has not increased its posted mortgage rates since January,” Lukas Gerber, a bank spokesman, said in an e-mailed statement. “Our number one focus is providing value for our customers — we manage our pricing very actively to do just that, using a variety of market benchmarks.”
Banks generally give homebuyers better terms than their posted rates. Canada’s big banks are offering unadvertised discretionary rates of 3.39 per cent for five-year fixed mortgages and 2.75 per cent for variable-rate mortgages, according to RateSpy.com. That’s little changed from late January.
When prospective borrowers sit down in the boardroom to negotiate a loan at one of Canada’s largest alternative lenders, they’re greeted by a sculpture of a gun with its barrel twisted back toward the shooter.
“We tell the borrowers if you are dishonest to us, it’s like pulling a loaded gun on yourself,” says Eli Dadouch, 52, founder and chief executive officer of Toronto-based Firm Capital. The company lends to home buyers, builders, developers, and landlords that bigger banks can’t or won’t touch, charging more than twice as much for the risk.
It’s been a lucrative business. In addition to the gun sculpture, Dadouch’s extensive contemporary art collection at the company’s office in the city’s north end includes pieces by U.S. pop artist Steve Kaufman and photographer Rodney Smith. With new mortgage rules pushing more homebuyers to alternative lenders like Firm Capital, business may be about to get even more lucrative.
“We think there will be some opportunities because the credit unions will pick up the vast majority of the bank rejects. It goes down the food chain.” said Dadouch, sitting in Firm Capital’s boardroom, where espresso and cookies are served. “We’ll get their business.”
Alternative lenders are playing a growing role in Canada’s real estate market as the industry searches for new sources of financing, risk-averse banks become more picky, and investors look for yield.
The march to the private market has been driven in part by a desire to reduce taxpayer exposure to housing, which has until recently, been on steroids. Federal and provincial governments have gradually been tightening the screws, reducing amortizations, instituting foreign-buyer taxes and making it tougher to get a mortgage.
New mortgage rules are pushing more homebuyers to alternative lenders like Firm Capital.
The moves have begun to bite. About 49 per cent of all outstanding mortgages were uninsured at the end of last year, up from 36 per cent five years ago. And the housing market in Toronto, Canada’s biggest city, has abruptly slowed, with average prices plunging 14 per cent in March from a year earlier, the biggest drop since 1991.
That doesn’t worry Dadouch, who thinks any slump is temporary in Toronto due to the simple fact that more people want to own a home than there is land or homes available. He met Firm Capital’s Chief Financial Officer, Jonathan Mair, buying distressed debt from him in the early 1990s, when interest rates rates reached double-digits and several trust companies collapsed in the recession. Even at that time, portfolios of residential mortgages sold to investors at only a slight discount to face value, Dadouch said.
“I think single-family always does really well in this country,” he said. Single-family mortgage lending currently makes up about 15 per cent of the company’s business. The company has about $1.3 billion (US$1 billion) in mortgage assets, including $562 million in its publicly traded mortgage investment corporation at Dec. 31.
MICs will likely grow to about 14 per cent of transaction volume in Canada under new the new mortgage rules from about 10 per cent now, according to research from Canadian Imperial Bank of Commerce last year.
Firm Capital’s specialty is lending for terms up to 24 months, after which the borrower will ideally refinance the loan at one of the country’s big banks, or if things aren’t going well, head to another private mortgage investment corporation. Its public mortgage portfolio has an average interest rate of 8.3 per cent, compared with about 3 per cent for home loans at the big banks.
“In this liquid market, whenever there’s a problem, somebody refinances us,” he said. “You never want to be the last guy on the stick. Leave enough room to get taken out.”
Dadouch got into real estate as a teenager managing properties for his parents before starting a mortgage business with his father in 1988. He kept growing Firm Capital after his father’s death in 1990, and it currently employs 80 to 90 people, he said.
Unlike the traditional bank lenders, Firm Capital doesn’t focus on a prospective borrower’s credit score when considering a residential mortgage deal, lending primarily on asset value, Dadouch said. They also rely on borrower integrity when dealing with builders and developers, making a decision within an hour about whether or not they’ll be willing to extend credit, he said. They’ll do one deal in 10 that they’re shown, Dadouch said.
“We have no pressure to lend money for the sake of lending money,” he said. “When your commodity is cash, they’ll come to you wherever you are.”
Firm Capital has sold a handful of real estate projects in the last 10 years after borrowers couldn’t pay. He can’t remember the last time they had to sell a single-family home to recoup their investment, he said.
“We honour every commitment we give,” he said. “We will work with a good guy who runs into trouble.”
The company provides first mortgages, secondary debt, mezzanine and equity financing in transactions anywhere from $1 million to $50 million for builders and developers, Dadouch said. But they’re willing to go higher — the company provided a first mortgage for $147 million to finance the construction of Canada’s tallest condo tower, The One, located in Toronto’s upscale Yorkville neighborhood. They also have a small art finance business, a nod to Dadouch’s passion.
“They’re very entrepreneurial, flexible, and creative in the types of deals they do,” Michael McTaggart, a partner in PwC’s corporate advisory and restructuring group, said by phone from Toronto. “When I go up there, I do my homework.”
The company counts former Finance Minister Joe Oliver and Frank Newbould, a retired judge who oversaw high-profile bankruptcies like Nortel Networks Corp., among its board of directors.
There’s no question Firm Capital would be considered a lender of last resort for a home buyer given the punitive fees that mortgage investment corporations can levy, sometimes around 20 per cent all-in, including other professional fees, said Shawn Stillman, a broker at Mortgage Outlet. Nevertheless, he’s seeing greater demand for mortgage investment corporations from his clients that have been shut out of the housing market due to the new regulation, he said.
“Would they be the first lender I would go with? Absolutely not,” Stillman said by phone from Toronto. “But if there wasn’t this demand for the money, they wouldn’t be in business.”
Dadouch doesn’t disagree: “Nobody deals with us, or any other MIC out there, because they like any of us,” he said. “They come to us because there’s a story.”
TORONTO — Canada’s federal police searched the office of real estate firm Fortress Real Developments on Friday as part of an investigation into mortgage fraud, two sources with direct knowledge of the investigation told Reuters.
The Royal Canadian Mounted Police confirmed it had searched offices but declined to name the company involved.
“We can confirm that the RCMP Integrated Market Enforcement Team carried out six search warrants in the GTA (Greater Toronto Area) relating to an investigation into syndicated mortgage fraud,” Royal Canadian Mounted Police Sergeant Penny Herman said.
Fortress could not immediately be reached for comment.
Ontario’s financial regulator in February revoked the license of mortgage brokerage Building Development and Mortgages Canada Inc (BDMC) following an investigation into the sale of syndicated mortgage investments to fund Fortress projects. Fortress’ co-founder Vince Petrozza also had his license revoked.
In a special report published in November, Reuters revealed that the Canadian province’s regulator had been investigating brokers raising funds for projects associated with Fortress since 2011 but had failed to take action despite repeated warnings that the marketing of the risky investments broke provincial laws.