Why this mortgage industry titan isn’t panicking

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But do your research, because the days of deep credit are over

Stephen Smith, co-founder and CEO of First National Financial LP, at his company's Toronto offices.  He says a healthy job market and the mortgage stress test should stave off housing disasters. Stephen Smith, co-founder and CEO of First National Financial LP, at his company’s Toronto offices. He says a healthy job market and the mortgage stress test should stave off housing disasters. Photo by Peter J. Thompson/National Post

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Before one of Stephen Smith’s children bought a home in Toronto’s West End not long ago, he offered some fatherly advice on buying in the city’s generally hot real estate market, which has deteriorated in recent months amid rising mortgage rates, stubbornly high inflation and general Fear that the economy is headed for a recession.

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“It’s very difficult to time markets,” said the co-founder and CEO of First National Financial LP, Canada’s largest non-bank residential mortgage lender. “There seems to be pressure on falling house prices – and I wouldn’t be surprised if they continue to fall – but they might as well follow suit. So if you’re thinking of buying a house long-term, I’d probably say, ‘Go ahead and buy.’”

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Making a big purchase like a house is all about knowing your horizons, Smith said. And what he knows to be true in the immediate here and now is that there is a plethora of murky real estate-related headlines.

For example, October residential sales volume in Vancouver fell 45.5 percent year-on-year. Experts and market observers are forecasting a 20 to 30 percent drop in Canadian home prices. And borrowers who have opted for adjustable rate mortgages are now being pressured by rising interest rates and the resulting higher loan rates.

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As if that weren’t bad enough, according to the Bank of Canada, about half of these borrowers have already reached the so-called trigger rate, at which the payments they make cover only the interest on the mortgage without detracting from the principal amount.

In the “sky is falling” scenario, the average adjustable rate mortgage holder will soon be unable to afford the increased payments. They then sell at a discount or default on the mortgage, and the entire lending industry—not to mention the economy—collapses.

But Smith, whose Smith Financial Corp. recently bought mortgage lender Home Capital Group Inc., is not much for doomsday scenarios.

Because of the stress test, we have stronger borrowers today

Stephen Smith, Chairman of the Board of First National Financial LP

Sipping sugar-free lemonade in his office overlooking Lake Ontario on a Wednesday afternoon, he comes across as a quiet, easy-going, unflappable manager. Maybe by 71 he knows a few things, including the fact that now is not the time to panic about the big adjustable-rate mortgage liquidation.

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“If you’re a lender, the only time you lose money on a mortgage is when someone defaults,” he said. “And as long as people have jobs, they pay their mortgages.”

His confidence in the housing market is underpinned by the fact that the unemployment rate remained stable at 5.2 percent in October, according to Statistics Canada. Plus, here’s an important point to remember regarding mortgage holders, variable interest rates and other things, you have to pass a stress test to be approved for such a loan.

Prospective borrowers who cannot afford to pay either the lender’s offered interest rate plus two percent or the Bank of Canada’s qualifying interest rate of 5.25 percent will not be eligible for mortgages.

“Because of the stress test, we have stronger borrowers today,” Smith said.

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A typical adjustable-rate mortgage holder may feel the need, but they had the money upfront to pay a higher, fixed-rate rate first and decided against it. And he doesn’t think it was because they couldn’t afford it.

Additionally, Smith points out that variable rate holders are generally more risk-averse and have a higher cash/disposable income balance than the nervous Nellies who lock in their five-year mortgages at a fixed rate.

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When the job market goes down and people are laid off en masse, maybe everyone is running for the hills. But people have jobs, and people with jobs will spend every ounce of fat before they throw in the towel and sell their home, their sweet home.

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In summary, Smith said don’t panic, although he advises people to familiarize themselves with current mortgage rates — whether fixed or variable — now that the days of rock-bottom credit are over.

“If you look at interest rates today by historical standards — or even by the standards of 15 to 20 years ago — they’re not high,” he said. “What we’re seeing now is mortgage rates that are a little bit more in line with the norm.”

The new normal looks a lot like the old normal and the new homeowner, including Smith’s kid who just bought in Toronto, had better get used to it.

• Email: [email protected] | Twitter: oconnorwrites

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