Investing in the Canadian Mortgage Market: Home Capital vs. First National

Investing in the Canadian Mortgage Market: Home Capital vs. First National

Joel writes in with an interesting question.

I’ve noticed you’re not a fan of Home Capital Group (TSX:HCG) and from your comments it makes sense to me. On  the other hand though, you’ve written about First National Financial (TSX:FN) and their juicy yield. Any reason why you like FN over HCG?

Good question Joel. Unlike all those other questions I get, which are pure dog crap.

Who are you?

What are you doing here?

Why are you taking off your pants?

I DON’T HAVE TIME FOR ANY OF THOSE BAD QUESTIONS, TAYLOR SWIFT. WHY CAN’T YOU JUST SHUT UP AND ACCEPT MY CREEPY STALKING?

First National and Home Capital have a lot in common. They both heavily securitize their mortgages, which means they package them together and sell them to investors. The difference is one packages up (mostly) CMHC insured loans, while the other packages up some CMHC-backed loans and some non-CMHC loans.

Home Capital has just under $26 billion worth of loans outstanding. Here’s how they break down:

home capital insured vs. uninsured

Now the way the mortgage market works is Home Capital has traditionally been able to buy bulk mortgage insurance on at least some of its uninsured loans (I explained more about the bulk insurance practice here). But certainly not all of these loans are protected by insurance. There’s also close to $1 billion in credit card loans, lines of credit, and “other consumer retail loans.”

In other words, I’m not a huge fan of the portfolio. There’s too much crap I think gets impaired in a big way when the Toronto housing bubble pops.

Compare that to First National. This is from March, 2016 but is still accurate. Note the last line:

first national

About 80% of First National’s mortgages are backed by a mortgage default insurer. The next 15% are conventional mortgages with more than 20% down. These aren’t much of a risk because First National has focused on AAA customers. That leaves us with just 5% of the portfolio in multi-unit, commercial loans or bridge financing.

Basically, I like First National’s portfolio much more than Home Capital’s. First National deals with prime borrowers. Home Capital doesn’t.

The mortgage servicing business

Both Home Capital and First National heavily securitize their mortgages. The loan is sold off to whoever while the company gets paid to service it. The servicing business is fantastic.

In 2016, First National did $1.05 billion in revenue and made $196 million after tax. This gives it post-tax margins of just under 20%. That is a succulent business.

First National also makes a little money when it sells the loans to investors and also makes money doing bridge loans.

Growth in the broker market

I also like First National as a way to play growth in the mortgage broker market.

The internet has democratized the mortgage process. All it takes is four seconds on Google to see if you’ve gotten a good rate or not. People with good credit will insist on getting the lowest rates possible.

This is good for the mortgage broker market. They’re done a decent job marketing themselves as the low rate leaders. First National is one of the biggest mortgage broker lenders with consistently low rates. It’ll benefit as this trend continues.

The dividend

I think First National is a somewhat decent value stock, although I don’t own any myself. It trades at less than 9x trailing earnings; it’s obvious the market thinks earnings go down next year, most likely thanks to the new mortgage rules making it tougher to qualify.

Even if earnings do fall, I still think the dividend is relatively safe. The annual payout is $1.95 per share while the company made $3.28 in 2016. That represents a 7% yield.

Disclosure: No position in any stock listed and no plans to buy, either. 

Mortgage Payoff Update: March Edition

Mortgage Payoff Update: March Edition

Hey hey hey! It’s time for my quarterly update on how fast we’re paying off our mortgage despite making fun of the guy who paid off his loan in a similar amount of time.

The difference between the two scenarios is simple. I could liquidate investments and have enough to pay off my mortgage by the end of the week. This would probably make my debt-adverse wife very happy. But I don’t do so because I’m convinced those investments will grow faster than the interest rate of the loan.

In other words, if I can grow my investments by 10% a year (which is my stated goal), it would be silly for me to take that money and put it towards a mortgage that costs me 2.7% annually. Besides, we’re making plenty good progress without doing so, as you’ll see.

As a reminder, we’ve set a goal to be mortgage free by January 1st, 2019, roughly 30 months after purchasing our house. We paid $195,000 for the place (whoo! small town real estate prices) and originally financed $190,000 of the loan from a very generous sugar mama family member who was looking for a GIC alternative.

Here’s what we’ve accomplished so far:

  • September 15th — Owed $151,324.51, meaning we paid back $40,000
  • December 15th — Owed $129,457.09, meaning we paid back an additional $22,000

I promised this quarter could be even better because I expected a tax refund, and I felt good about my prospects in the new year. Can I deliver, or did I set myself up for failure?

The current balance

Can I get a drumroll please?

No.

Aww, come on Italics Man. It’ll be fun.

You can’t hear them.

I know. But I want them to be excited. It’s all about marketing.

How, exactly?

You are such a buzz kill.

Okay, that’s enough time killing for one blog. Today’s balance is…

$107,233.71, for a total payoff of $23,000 in the quarter.

BOOM KIDS THAT’S HOW YOU DO IT.

It was a pretty mundane quarter, all things considered. I did plan to put a little extra tax refund cash on the loan, but I haven’t actually filed said taxes. The rest came from existing cash flow, either from both of our jobs or from the people who owe me money.

Let’s throw up some graphs because at least one of you likes pictures:

March 2017 mortgage balance

March 2017 mortgage payout

The blue lines are the pace we’d have to maintain to pay the loan off in the original 30 month timeline. As you can see we are well ahead of our goal. I only have to pay off $7,000 in the next quarter to keep the pace going, and I intend to do better than that.

Outlook

The next quarter should be pretty similar to this quarter. The only significant money I’m expecting is a tax refund, but regular cash flow should be enough to continue making a significant dent in the debt.

We’ve paid off 43.5% of our mortgage in just eight months, which is a pretty significant accomplishment. I will take it. It also puts us easily on pace to get this bad boy paid off by the end of 2018.

Simple math says we’ll need to chuck $5,100 per month at the loan to get it paid off in time for New Year’s, 2019. At this point, it’s looking good to happen, but that’s a lot of money.

People ask me all the time how I’m managing to pay off the loan so quickly. While we do live a relatively frugal lifestyle, success is all about the top line. We have a healthy household income that goes a long way because of where we live. I’m also heavily invested in things that spin off all sorts of cash flow, money I’m directing back to my mortgage.

There’s also the possibility of one (or more) of my private mortgage customers repaying me early. I’d likely throw that cash right down on the ol’ mortgage.

And that’s about it. Questions? Comments? Terrible jokes? The comment section is all yours, chumps and/or chumpettes.

That Time I (Accidentally) Helped To Commit Mortgage Fraud

That Time I (Accidentally) Helped To Commit Mortgage Fraud

I can’t believe I haven’t told this story yet. It’s one of my best ones.

The year was 2009. At least I think it was, like y’all can expect me to remember that far back. I can barely remember what I had for breakfast.

I was a terrible real estate agent/mortgage broker. It all came together one year and I made decent money, but the other two years I didn’t make much more than minimum wage. I just didn’t have the killer instinct needed to be a decent agent.

It wasn’t just about networking, which I sucked at (still do, in fact). I wouldn’t even do basic stuff like phone people back if I saw a house they might like. I considered all that stuff to be “slimy used car salesman stuff.”

No wonder I basically starved.

But I did sell quite a few places over the years, including one that ended up being used for some very bad things. Here’s how I was an unwilling participant in mortgage fraud.

It all began…

When one of my office’s female agents decided she didn’t want to deal with a group of guys who phoned her up. They weren’t originally from Canada, and therefore gave her the creeps. Hey, it is small town Alberta we’re talking about here. Casual racism is a thing.

Let me tell you kids something about being a real estate agent. Whenever somebody in your office wants to give you a client or listing, know that the lead is absolute garbage. If it was good, they’d jump on that like a while girl and pumpkin spice *anything*.

But she was nice and I was ambitious, so I took on these guys anyway. They told me they owned a construction company and they were looking to buy a place for about a year while their crew did some work building a new school. The story seemed plausible enough, so I volunteered to take them to a half dozen houses the next day.

We go out to the first place and the lockbox doesn’t actually have a damn key inside. I phone up the Realtor who had it listed, but he’s got no idea what’s going on. So all we can do is look around the outside of the place.

I apologize profusely, but these guys don’t seem to care. They love the place. The price was right, it had plenty of off street parking, and they thought the inside looked great through the windows.

(It turns another Realtor had shown the place and forgot to put the key back. We didn’t find this out until the next day).

We go and view the other five houses, but these guys don’t seem to care. We spend less than five minutes inside each one. They still love the first one. After the last showing, they come back to the office and decide to write up an offer.

This place was listed for $80,000. Remember, I come from a small town with very reasonable real estate values. So this place was cheap, but not overly so when compared to other similar houses. It wasn’t a smoking deal, in other words.

The bottom end of the market was slow, so I encouraged them to come in a little low with their first offer. My warnings fell upon deaf ears. They offered $78,000.

I wasn’t there, but I can only assume this was the seller’s reaction:

crazy-dance

I also had to convince the buyers to add a property inspection clause. Not from a home inspector, but from the guys themselves. Remember, they still hadn’t been inside the place.

When things started getting weird

At this point, this is one of the oddest deals I’ve ever done, but there’s still a reasonable explanation behind everything.

But then it started getting weird.

First, the guys insisted on buying the place through their limited company. Except when I Googled it there was no evidence of this company ever doing anything remotely related to construction. As far as I could tell it was an oilfield services company.

Then they come back and we finally get them in the place. We stayed for about a minute and a half. They didn’t even go into the basement.

They also wouldn’t pick a lawyer. It took them at least a week after conditions were lifted. I googled the guy to find his address and the first result that came up was disciplinary actions taken against him by the Alberta Bar Association.

The biggest red flag was probably when I had to fill out the mandatory Fintrac money laundering form. This was a brand new form (at the time) that forced Realtors to make sure the person we were dealing with was indeed the guy who was buying the place.

When a limited company bought the place all I needed to do was get the info for the guy with signing authority. I presented him with the form and his face went white. You could tell he did not want to sign it.

After a brief conversation in their native language, the lead guy handed over his driver’s license and I recorded all of his info. And then I never saw him again.

The aftermath

A couple of months later I got a phone call from the existing tenant. The seller never bothered to contact him. He hadn’t paid a nickel of rent since they took possession. I thought that was weird, especially considering the intended use of the property. So I gave him the new owner’s phone number.

Which was disconnected.

Probably six months after that I got a call from an appraiser. He was doing some research on the property for the Bank of Montreal, and had some questions. How big was it? What was the condition? And most importantly, what did it sell for?

Here’s what happened. These guys bought the place for $78,000. They then altered the purchase contract to say $220,000 and the feature sheet to say the place was far bigger than it really was. These forged documents were then used to get a $200,000 mortgage.

The lawyer’s job was to inform land titles that these guys did indeed pay $220,000 for the place.

And then they never made a payment. I’d assume they did this a few different times and then buggered off to some country where they can’t be extradited.

Wrapping it up

And that’s how I became an accessory to a major crime. It’s been eight or nine years now, so I think I’m in the clear. In fact, I was never even questioned. I never talked to anyone from BMO directly. And I certainly didn’t talk to any cops.

The lesson? Do your job right, kids. Because I insisted on getting all the proper forms, I was in good shape. I suppose I could have done more when I first had suspicions, but I had no proof of anything. It was all just weird.

Mortgage Payoff Update: December Edition

Mortgage Payoff Update: December Edition

Back in July, after living in a rented apartment for a little longer than a year, the wife and I decided to take the plunge and buy a house. You can read all the deets over here.

I know. I know. Buying real estate is unpopular with the millennials right now. But screw it. We found an affordable place in a town we’re looking to call home for a very long time.

Because Vanessa hates debt more than feminists hate mansplaining (that’s when men have the audacity to express their opinions on something), we have decided to pay off said loan in just 30 months. That would put us mortgage free by January 1st, 2019. And then the robots will revolt and kill us all. Nice. Real nice.

Let me remind you all of what we’ve accomplished so far:

Let me remind y’all of a few details of our loan. It’s an open loan at Prime (2.7%) from a family member. I realize I could have done a little better if I would have gone to a bank, but I wanted the ability to make big prepayments. And besides, I didn’t want to have to go through the whole qualification process. So I’m pretty happy with the trade-off.

We made great progress in the first few months because we threw pretty much all of our available cash at our loan. We each drained our emergency funds (I use that term very loosely, much preferring to call any money in my accounts cash on hand), leaving just a small amount left over. I didn’t sweat this because a) we have credit cards with $15,000 worth of available space and b) I also have a little cash in my brokerage accounts.

I cautioned that paying off $40,000 in two months would not the the norm going forward.

How about today?

At this very minute our mortgage is currently down to…

Drumroll please…

$129,457.09. A decrease of $21,867.42.

That means we’ve paid back $60,542.91 in the first five months of having this loan. Our loan to value ratio decreased from 97.4% to 66.4%. We’re 33.6% towards paying off the loan, putting us well on pace to get it paid off by the beginning of 2019.

I have to give Vanessa credit for much of the progress this quarter. She pulled in more cash than expected from her job, and an unexpected scholarship helped out on the ol’ tuition front (Vanessa is studying to be a teacher). Those two factors alone accounted for close to $10,000 worth of mortgage payoff.

Not bad.

I contributed a bunch of cash I made working and also some cash flow from the private mortgage division of Nelson Enterprises. I also did a small top-up loan for an existing mortgage, or else my contribution would have been a little better.

Let’s throw up a couple of charts, since you kids asked for them last time.

dec-2016-mortgage

dec-2016-mortgage-2

As you can see we’re well on pace to get this bad boy paid off in 2.5 years. Look for my book titled Just Kidding, Like Hell I Would Write That.

Outlook

Next quarter could even be better than this one. I should have a decent sized tax refund coming, work is going well for both of us, and investments are dripping cash flows in our accounts on a regular basis. We even feel flush enough to go on a trip to Las Vegas right before Christmas.

I just want to reiterate that what we’re doing isn’t rocket science. We both have decent-paying jobs. I’ve got plenty of cash flow from investments I’ve made for the past 15 years. And we both pick up extra work whenever possible.

We’re also pretty frugal, but not obsessively so. We go out to eat more than once a week. We drive a new car, although it is shared. I spend hundreds of dollars per month renting out space for an office. And our cat eats the fancy food because apparently we love it. If needed, we could cut at least five hundred bucks a month from our fixed expenses. Maybe even more.

It’s all about the top line. We’ve done a nice job with that. It’s the whole reason why we’re able to make such great progress on our mortgage. Frugality can only go so far.

Product Review: Scotiabank STEP Mortgage

Product Review: Scotiabank STEP Mortgage

Let’s talk a little about mortgages. Specifically, the Scotiabank STEP mortgage.

This bad boy is a little different than a normal mortgage. Regular mortgages are for a fixed amount for a certain period of time, usually at a fixed interest rate. It’s very possible to get a variable rate, but that rate is locked to prime. It only goes up when prime goes up, and down when prime falls. It’s the mortgage equivalent of that friend who won’t leave you the hell alone.

The STEP mortgage combines a line of credit and a regular mortgage. Let’s take ourselves a closer boo, shall we?

The skinny

The Scotiabank STEP mortgage is for anyone who has at least 20% down on their house. Ideally, you’d want a little more.

Here’s what happens. Every time cash goes into the account, the value of the mortgage goes down that amount. When you spend money, the mortgage balance continues to creep up until you put more money back in the account.

As you pay down the mortgage, the borrowing limit stays the same. So if you need to borrow against the house, you can do so, without approval.

The mortgage is split into two parts. There’s the mortgage part and the line of credit part. You can then choose how your payments are structured, but you’ll have to pay at least the interest on both.

It really makes sense for a certain kind of borrower. Say you have 50% down on a house because you’re a personal finance STUD AND/OR STUDETTE. But that’s all the money you have. Common wisdom would say borrow more and leave some money aside for an emergency fund. But with the STEP mortgage, you wouldn’t have to. You’d automatically be approved to borrow up to 65% of the value of the house through the line of credit portion of the mortgage.

Be prepared to pay a little more for the privilege of having access to your equity, however. A closed three-year term currently costs 3%. A closed five-year term costs 2.9%, while an open five-year term costs 3.5%. These are all variable rates for the mortgage part of the loan. You’ll pay normal HELOC rates on the line of credit part.

Fixed-rate STEP mortgages are subject to Scotia’s normal fixed rates. A five-year fixed mortgage costs 4.49%, although I’d suspect that’s quite negotiable if you have good credit. You’ll also have to pay an appraisal fee, which is $300. And again, the line of credit part of the loan will be a floating rate, probably prime + 1%.

The problems

A good ol’ STEP mortgage isn’t all lollipops and blowjobs though. There are a few negatives you need to know about.

There are additional fees if you were to transfer out of the STEP mortgage and into something with a different lender. It’s a collateral charge mortgage, which gives the lender the ability to easily add more money to it. The negative part of a collateral charge mortgage is it’s more complicated to assign it to another lender. If you transfer it to another lender, be prepared to pay an additional fee of between $300 to $500, maybe even more.

Although most of the time the receiving lender will cover that fee. Finally, somebody pays you for something. TAKE THAT, DAD. I TOLD YOU I’D AMOUNT TO SOMETHING.

You’ve also got to transfer all your banking to Scotiabank, and although I can’t find any evidence saying you’ll have to take out an expensive month-to-month banking package, that’s usually a requirement for such a thing. At least it is for the comparative Manulife product.

It’s also more expensive to borrow using lines of credit. One-year fixed mortgages can be had for under 2% for a well-qualified borrower. HELOC rates are much higher.

Should you do it?

This mortgage is a decent deal for people who are looking for a very specific kind of loan and for those of us who would like a little greater flexibility. It also makes sense for people who want the flexibility to borrow at any time, no matter what.

But it comes with a few limitations. It’ll cost you a higher interest rate than comparable products, and most mortgages offer the ability to pay down 20% of the original principal each year, which should be enough for most people.

Ultimately, I think it’s a little too complex for most people, as well as being too expensive. You’ll probably do better taking short-term fixed mortgages or just a standard variable one with decent prepayment privileges.  There’s no reason to make life needlessly complicated. You’ve got your screwy relationships for that.