EQB Inc. T.EQB.PR.C

TD Notes

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Canadian Housing & Mortgage Market Panel

TD Securities Financial Services Conference - Key Takeaways

As part of TD Securities' 2023 Canadian Financial Services Conference, we hosted a panel discussion focused on the Canadian Housing and Mortgage Market. Our panelists included Andy Charles, President & CEO – Canada Guaranty; Darren Lorimer, SVP and Head of Commercial Banking – Equitable Bank; and Faheem Tejani, President – Mortgage Company of Canada Inc (MCOCI). This panel discussion focused on both residential and commercial lending, with key themes being market activity/outlook, credit trends, and capital/regulation.

Market Activity/Outlook

• Private mortgage lending activity has softened in line with the broader mortgage market, but arrears remain stable (albeit up modestly). Mr. Tejani noted that private mortgage originations are down ~40%-50%. However, this is largely being offset by higher mortgage renewal rates (currently ~50% vs. 15%-20% pre-pandemic), given that higher interest rates are making qualifying at regulated lenders more difficult.

• Equitable Bank is exercising some caution with its commercial lending. For example, it stopped new originations for uninsured construction loans in May 2022 due to cost and interest-rate inflation. It also tightened some parameters around equipment leasing lending. Mr. Lorimer sees strong fundamentals for some sectors, including multi-family rentals, retirement homes, student housing, self- storage, industrial, and certain pockets of office (suburban) and retail. Commercial lenders are broadly continuing to lend to their core clients, but lenders are becoming more discerning towards forging new lending relationships in this environment.

• The CMHC has regained some of the residential mortgage insurance market share lost in 2021 (see Exhibit 1). For context, the CMHC had 46% market share in 2019, before tightening underwriting standards in mid-2020. The private insurers Canada Guaranty and Sagen MI chose not to follow CMHC's lead and subsequently captured share. Mr. Charles believes that fairly equal market share going forward will persist. Notably, high-ratio insured mortgages used to make up ~40% of origination volumes (before the global financial crisis) vs. 15%-16% today (partly due to regulatory tightening, but also due to years of price inflation pressuring affordability for first-time home buyers).

  Credit Trends

 There is clearly some expectation for arrears to move higher, but the panelists expressed a cautiously optimistic outlook. Mr. Tejani noted that the company has not seen any material change in credit scores (typically 700-800) and it continues to lean on appraised values as an important risk management tool. It has seen a modest uptick in arrears rate (~2% today, but still below pre- pandemic levels). The relatively short duration portfolio (~6 months) for its private mortgages also helps alleviate potential renewal pressure. Unlike other lenders, MCOCI completes property appraisals on renewing mortgages. Many mortgages are currently renewing at higher LTVs vs. their typical limit of 80% at origination, but if the borrowers are making payments, they will typically renew.