With 2023 now more than half over, and First National recently issuing its second quarter results, this is an opportune time for me to share thoughts on the state of our business and the market environment.
First, let me say how pleased, proud and grateful I am to count you as a First National client. Over the past 16 months, we’ve faced some challenging times together courtesy of 10 Bank of Canada interest rate hikes. Not since 2001 have we seen an overnight rate at 5%.
Will rates go even higher and for longer? We simply don’t know. What we do know is that First National’s bias to lending on multi-unit residential properties has been rewarded. At the end of the second quarter, our commercial Mortgages Under Administration reached a record $45.8 billion, 13% above last year. New and renewed mortgage originations for the quarter were $3.7 billion and totalled $5.9 billion for the first half of 2023. As a result, total production came close to matching the record volumes in the same period of 2022 and were ahead of our expectations.
While we absolutely do lend on other commercial property types, we credit our presence as Canada’s leading CMHC mortgage lender to the multi-unit residential sector for putting us in place to deliver these results. In particular, the MLI Select program continues to generate substantial interest given its extended amortizations, high LTVs/LTCs and premium discounts.
Rising to the occasion
Outside of interest rate increases, the most significant market news of 2023 so far was the staggering rise in CMHC application volumes ahead of the housing agency’s June 19th increase in insurance premiums. By some estimates, CMHC received three times its normal quarterly volumes and I know First National was a massive contributor. To be sure, this deadline tested our team but thanks to the incredible work of my colleagues across the country, First National rose to the occasion. In fact, I’m pleased to report that the quality of our CMHC submissions was as high as ever.
Based on record-setting activity, we estimate that it will take CMHC four to six months to work through the approval process on submissions made in June. A strong wave of fundings in late Q3 or early in the fourth quarter now looks likely. Considering this surge, we remain concerned about the supply of capital in the securitization market.
You may have read earlier this year that the Government of Canada is proposing to change or eliminate the Canada Mortgage Bond (CMB) program to reduce the government’s borrowing costs and redirect savings into affordable housing. News of the pending change was met with concern because this program has been instrumental in providing stable mortgage funding access in all economic conditions since it was launched by CMHC in 2001. Through its housing trust subsidiary, CMHC issues CMBs to the market and uses the proceeds to purchase National Housing Act Mortgage-Backed Securities from Canadian mortgage lenders, including First National.
Given the program’s importance to our clients, the housing market and First National, Jason Ellis (our CEO), Thomas Kim (Senior Vice President and Managing Director of Capital Markets) and I recently met with representatives of the Finance Department, CMHC and the Bank of Canada to express our views on your behalf. We were grateful for the opportunity to be heard by policymakers.
At this point, we do not know what if any replacement program or its economics will look like. However, based on our discussions, we feel comfortable knowing the government understands that mortgage lending in Canada very much depends on securitization. We also feel confident that this market will continue to function smoothly going forward.
This is an uncomfortable time in the economic cycle. In the context of the commercial real estate market, property values are down materially, and it is reasonable to expect defaults at the margin later this year. Moreover, it is also becoming difficult to make construction loan economics work with lending rates pushing above 7%. Interest rate hedging programs have also become more challenging to stage, although I’m pleased to say First National remains a market leader in this area.
Counterbalancing this sobering assessment is that employment is strong, inflation appears to be subsiding, immigration-fueled population growth is creating strong, durable demand for multi-unit residential units and rental rates are rising. We are fortunate these drivers remain in place and that CMHC programs – albeit with higher premiums attached – are available.
While the future is always difficult to predict, I believe an economic soft landing (without a severe recession) is possible and that the market will get back on track fairly quickly once the Bank of Canada signals an end to monetary policy tightening. In the meantime, caution is warranted.
What does caution mean to First National? That we must scrupulously execute our strategy, partner with great clients like you, and do everything in our power to respond intelligently to changing dynamics.
As you lean in to the realities of a more challenging market, please know that our team is leaning in too. If you have questions, concerns or simply want to touch base to share insights and perspectives, our door is always open.
I look forward to updating you on business and market conditions following our third quarter results this fall.