November 18, 2019

As lending slowdown looms, some banks rush to lock in mortgages

By   Global News

TD, Scotiabank and National Bank are active buyers of broker-arranged home loans.

With the exception of a few months at the start of the year, the mortgage business has been humming in 2013 as the housing market has defied gravity – and doomsayers – and posted impressive gains.

But the borrowing bonanza isn’t expected to last, experts say, as highly leveraged households begin digging out from under record debt loads.

“The 10 per cent year-over-year growth the banks have been enjoying up until this point is probably going to wind down,” John Aiken, an analyst at Barclays Capital, said.

“We’re looking at the fourth quarter as being the final period of solid loan growth.”

Judging by comments on RBC’s conference call Thursday, there may even be a scramble among some banks to lock in as many mortgages as they can ahead of the slowdown. And that rush may mean taking on some riskier loans.

On the call, National Bank analyst Peter Routledge noted an “uptick in third-party broker originations” in recent months – industry speak for new loans arranged by non-bank companies or brokers who then pass the loan on to the bank or investors.

Most broker-arranged loans are made to “prime” or creditworthy customers, experts say. But people with dodgier credit histories or those who don’t meet the bank’s own criteria typically use these alternative sources for mortgages.

Routledge asked RBC executives if the “uptick” was a response from RBC’s competitors – banks like TD, National Bank and Scotiabank – to lock in new loan business ahead of a looming “end of cycle” slowdown.

The analyst also suggested the credit quality of the loans may be on the lower or “weak” side.

“Is your view that [the uptick is] classic end-of-cycle adverse selection? Are [other lenders] just gathering up weak credits at the end of a long credit cycle?” the analyst asked.

RBC executives declined to comment on what other banks were doing. But RBC’s chief Gord Nixon, who announced he was retiring next year, said that RBC’s rule to not take on broker loans would prove a sound strategy over time.

“What I would say, as you know, we’ve been a long time believer in core originations and not buying third-party. We think through the cycle that’s going to be positively reflected in terms of [profit] margin and performance” of RBC’s mortgage business.

Even as household debt levels have steadily escalated, the quality of home loans being made in recent years hasn’t raised much concern — far from it, actually. Arrears rates (loans with a payment 90 days overdue or more) on government-insured mortgages is a meagre 0.33 per cent, according to the Canada Mortgage and Housing Corp.

Average credit quality of loans backed by the CMHC has also improved. The average credit score of a borrower with a loan backed by the CMHC is 741 this year, up from 737 in 2012.

Scotiabank, the country’s third biggest lender behind RBC and TD and one of the banks active in buying up third-party loans, reported a 12 percent jump in profit on Friday, while results in its retail business where mortgage loans reside, were solid, analysts said.

“Good loan quality has been a hallmark among Canadian banks this reporting season and Scotia is no exception,” Michael Goldberg at Desjardins said in a note.

Comment wasn’t immediately available from Scotiabank when asked whether it has increased the amount of broker originated loans it buys and whether it considered the loans as safe as mortgages originated directly by the bank.

But as the housing market has soared, mortgages as a percentage of all Canadian bank loans have boomed to 64.8 per cent of all loans sitting on the books, according to McVay & Associates, a Markham, Ont.-based researcher that tracks mortgage statistics.

That elevated level of exposure has seen some lenders, such as CIBC, pull back from taking on broker-arranged loans, experts say.

“Banks are getting concerned about the amount on their loan books that’s in mortgages,” David McVay, president of McVay & Associates,  said.

A land grab for third-party loans is perhaps a last hurrah before the market place slows, some said.

“We’ve seen some opening of the taps for mortgages at some of the banks through third-party originations. I would say it is indicative of a slowdown,” Barclays’ Aikens said.

TD’s chief executive Ed Clark, who is also retiring next year, added to that outlook in a call with analysts on Thursday.

“We expect more subdued growth in Canada reflecting a slowing housing market and continuing consumer deleveraging.”

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