First National Financial saw a second consecutive month of slowing mortgage originations in Q2 as rising interest rates continue to impact the housing market.

Single-family residential mortgage originations were down 10% year-over-year for the country’s largest non-bank lender. First National also reported a decline in mortgage renewal activity, which was in contrast to the previous quarter, when renewal activity surged by 25% year-over-year.

First National President and CEO Jason Ellis said the company expects originations in the second half of the year are likely to fall below 2021 volumes. However, he noted some context was necessary, given that 2021 was a record year industry-wide for mortgage volumes.

“Even with continued moderation in the originations, we do expect to still be above pre-pandemic levels,” he said on the company’s earnings call. “For context, while we’re down 10% in the quarter on single-family compared to last year, it’s still the second-biggest quarter of origination in the history of First National.”

The company also reported that its mortgages under administration, or “MUA,” rose by 5% year-over-year to a record $127.4 billion. “From a strategic perspective, we consider growth in MUA to be a key element of performance, and on this basis, we are satisfied with the results in Q2,” said Chief Financial Officer Robert Inglis.

Q2 earnings overview

• Net income: $61.3 million (+17%)
• Single-family originations: $6.8 billion (-10%)
  • “Volumes reflected reduced housing market activity brought on by rising interest rates but were still well ahead of pre-pandemic levels,” First National noted in its release. For reference, First National’s Q2 2019 single-family originations were $3.9 billion.
  • Regionally, First National said its Calgary and Montreal offices “outperformed, reporting 10% increases in volumes.”
• Mortgage renewals: $1.6 billion (-16%)
  • The decline reflects “available renewal opportunities which declined as prepayment speeds were still higher than expected.“
• Loans under administration: $127.4 billion (+5%)

Source: Q2 2022 earnings report

First National President and CEO Jason Ellis made the following comments on a variety of topics:

• On current market conditions: “With 4 Bank of Canada interest rate increases since March, the economy and housing market are entering a new cycle…Recent quantitative tightening has made it more expensive to borrow with the outcome that housing activity and mortgage lending have slowed…Our expectation is that the market will continue to adjust to this rising rate cycle with our single-family origination continuing to moderate year-over-year in the third quarter of 2022 in line with housing activity. There is always a high degree of imprecision in forecasting, but there is sufficient market evidence that housing activity will continue to soften.”

• On the impact of rising interest rates and inflation: “Rising rates also have a bearing on refinancing, prepayment and renewal activity. As the advantages of refinancing to borrowers lessen, we anticipate a correspondingly favourable impact to First National in reduced prepayment speed on our portfolio. In the second quarter, prepayment speeds remained elevated, and the accelerated amortization of capitalized origination and issuance costs continued to have a net adverse effect on the securitized portfolio. As inflation has accelerated, volatility in rates and credit spreads has increased as well.”

• On elevated prepayment activity: “As we made our way through the second quarter, there were still a great number of mortgage commitments specifically for refinancing that were being done in the industry before we saw the significant move in rates. As a result, I think this is the last gasp of borrowers taking advantage of the opportunity to refinance into what are now historically low rates. I had hoped to see the prepayment speeds already showing a significant decline by the time we got to this point. They are lower, to be sure, but still elevated relative to historic levels. I’m quite confident that as we move forward…the propensity to refinance amongst borrowers will definitely moderate as we move through the rest of this year…The annualized prepayment speed on our portfolio of securitized mortgages has been as high as the low 20% range as we’ve moved through this period of extremely low rates. And I would say a more normalized prepayment speed would be either side of 10%.”

• On its cashback incentive program: “It was very much in response to what we were seeing all of our competitors in the broker channel doing…And so, it’s important to remain at that sort of competitive leading edge.” Ellis added, “These incentives, in whatever form they take, whether they’re cash-back to the borrower, a modest increase to the commission paid to the broker, or even a special discount on the mortgage rate, they come and go regularly.”

First National Q2 conference call