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In conversation with Jason Ellis

  • First National Financial LP

Jason Ellis is our Managing Director, Capital Markets. As such, his daily activities have a direct bearing on First National’s performance and competitiveness. In this interview, we ask Jason to elaborate on his responsibilities.

Let’s start with your role. What are your responsibilities? 
The Capital Markets group manages interest rate risk, funding and securitization for all commercial and residential mortgage origination. 

You have an MBA and are a CFA charter holder, but how did you get into this line of work?
It was a bit of a random walk.  While completing my MBA I applied for a summer internship at RBC DS and wound up on the fixed income trading floor.  I was lucky.  These days, finding a summer job like that would be like winning the lottery. I had a working knowledge of this fancy new thing called a ‘Lotus 123 spreadsheet’ and that was enough to turn a summer job into a full-time position. I spent seven years in fixed income trading with RBC DS in Toronto and New York.  In 2001 I moved to Manulife Financial to work in the Asset/Liability Management group. I learned a lot in both positions but my experience made me realize how much I preferred working in the fast moving, transaction-oriented environment of the dealer.

How did you end up at First National?
In 2004, I received a call from a recruiter who described First National as this small but growing entrepreneurial business engaged in prime mortgage lending. I didn’t know the first thing about securitization or the mortgage broker industry but I had the basic finance tools and I was looking for a change.  Among other things, it was an opportunity to get back to trading and reconnect with my friends in the capital markets.  Fortunately, my interviews with Stephen Smith went well and here I am…13 years later. 

How much has the Company changed?
When I joined, we had fewer than 150 employees and origination volumes were a tiny fraction of what they are now. Mortgages under administration had just reached $5 billion. So it was smaller, but the basic culture hasn’t changed.  It still has that entrepreneurial spirit to it.  Many of the people who were here when I started are still here giving us that continuity of culture.

Has the Company evolved in your time?

The scale and complexity of the business has changed materially.   First National completed an IPO as an income trust, converted to a corporation, issued debt and preferred shares, and became an NHA MBS Issuer.  Like others in the industry, we’ve also adapted to sweeping regulatory and accounting changes in recent years.  Out of necessity, policy and procedure have become much more formal. But we still don’t write policies for the sake of writing them; they serve a specific purpose and contribute to the growth and maturity of the business. There’s not a lot of wasted movement at First National.

How have your responsibilities evolved?
When I started in 2004, we originated around $3 billion a year.  Now we’re originating in excess of $15 billion plus several billion more in renewals.  That growth has required us to stretch our funding strategies and grow our securitization vehicles. Back then, we worked largely with balance-sheet investors who took on mortgage commitments at the time of origination.  We managed relatively little interest rate or credit risk.  Now, because we use securitization so extensively, there is a lot more to manage.  The nature of the job has evolved every year, which definitely keeps things interesting. 

Isn’t it challenging to manage that risk when rates are rising or falling?
Yes.  Managing residential mortgage commitments may be among the most complex hedging exercises in all of fixed income.  Mortgage commitments are asymmetrical.  If rates go higher during the commitment period, the promised mortgage rate does not change but if rates fall, the mortgage rate can ‘float down’ with them.  Most hedging strategies, like short selling a bond, are symmetrical.  Rates go up, prices go down.  Rates go down, prices go up.  There are asymmetrical hedging strategies like ‘Swaptions’ but these are expensive and not very liquid.  Adding to the complexity, the lender is obligated to advance funds in all circumstances, but the borrower has no obligation to take them.  The hedge position must factor in an assumption for the closing ratio.  Even if a lender gets the basic interest rate hedge right, there is still an exposure to credit spreads.  This was particularly pronounced during the liquidity crisis.  So yes, it can be challenging, but that’s good for job security.  If anyone asks I tell them my job is very, very difficult.

Are you taking risk in managing interest rates or mitigating it?
Our mandate is to reduce risk, not add to it.  The hedges aren’t perfect though.  We are left with residual exposure between the mortgages and the hedging instruments, sometimes referred to as ‘basis risk’, but we are definitely reducing the company’s risk profile.  

Shareholders often wonder what happens to First National’s performance if interest rates go up or down.
If we’re doing our job well, performance should not be materially different either way.  One of the biggest impacts from rising or falling rates is on the timing of our cash flows. You can see that in our quarterly results when we talk about hedge gains and hedge losses. When interest rates are falling, we’re creating hedge losses today in exchange for wider net interest rate margins during the life of the mortgage.  Alternatively, when rates are rising, we create current period hedge gains in exchange for lower net interest margins.  Without context, these hedge gains and losses can cause confusing volatility in our net income.  To address this, First National provides an additional measure of financial performance called Pre-Fair Market Value EBITDA.  This  measure has no prescribed meaning under International Financial Reporting Standards but it is helpful in gauging our underlying performance because it adjusts income by eliminating the impact of gains and losses associated with hedging activity.  The Management Discussion and Analysis (MD&A) in our annual report is a great resource.  I’d encourage anyone to read it to get a better understanding of First National’s business.

Does Capital Markets play a role in making First National more competitive for borrowers?
Very much so.  Our job is to try and bridge the gap between our customers’ needs, the competitive environment and our various funding strategies.  Our group works collaboratively with our origination team and investors to deliver the best terms, products and rates to our borrowers. 

Capital markets and presumably your funding partners’ appetite for investing change all the time. Isn’t that a challenge?
Whether we encounter change on our end or change on theirs as a result of new capital requirements, regulations, or structural changes in securitization vehicles, one of the things First National has been good at is finding solutions. By innovating, we’ve been able to attract new funding partners over many market cycles, and even more importantly, keep existing ones. Finding solutions and maintaining diverse sources of funding is an important part of what we do every day and it keeps us competitive for borrowers as well as investors.

Working in capital markets, and with other large institutions, you must gain unique insights into the economy as well as real estate and mortgage markets. Do you share your insights?
Actually, one of the things I really enjoy is going out to talk to commercial borrowers and residential mortgage brokers. I try to make our business less opaque and share our thoughts on marketplace trends. I think that kind of dialogue is important and I’m happy to share what I know.  Unfortunately, what I don’t know is the one thing people like to ask most.  What direction are mortgage rates going?   Alas, your Magic 8-ball probably knows better. 

You also write the Treasury Guy blogs on our website.
It’s true…but I’m no economist or writer. I try to stick to the facts and make those columns light reading for people on the go who just want a quick hit of information.  Or a laugh.  

So final question: of all the things going on in the capital, real estate and mortgage markets today, what’s the one thing that you think borrowers and mortgage brokers should know?
The rate of change has been furious, but managing through change is First National’s specialty.   The tremendous growth we’ve enjoyed hasn’t altered our entrepreneurial spirit but it has given us the depth of experience and financial tools to continue to serve our borrowers and broker partners.