Changes to OSFI's Guideline B-20 left many Canadians on the sidelines of the housing market, unable to qualify for a prime mortgage – despite being a good credit risk – and unwilling to engage in the shadow market. Rather than see these would-be home owners frozen out, First National introduced Excalibur, an alternative mortgage product that is rapidly becoming the recommended solution for business-for-self borrowers and those with bruised credit (and extended ratios). Excalibur also represents a great business-building opportunity for mortgage brokers, as we hear in this first installment of Excalibur Exchange, a monthly series featuring Elena Robinson, Excalibur's Account Manager.
Elena, is demand growing for alternative single-family mortgages?
Since the additional underwriting rules in Guideline B-20 were introduced in October 2017, demand for alternatives appears to have grown rapidly, particularly in the business-for-self borrower category. Some reports suggest about 10% of the entire residential mortgage market involves alternative financings and even when you strip away the shadow lending component included in that figure, it's still very substantial.
Let's talk about your experience.
Sure, I started my career at First National 28 years ago, and after a few years, I became a licensed mortgage broker and spent two decades in the field. I also worked on the alternative lending side before returning to First National to bring Excalibur to market, or should I say back to market. Excalibur, a slightly different form, served many borrowers prior to the 2008 financial crisis.
Why did First National decide to re-enter the alternative mortgage market?
In a word, opportunity. With Canada's population and employment demographics changing so significantly, there are many people who want to access a mortgage and own a home but now fall just outside the Prime credit box. First National saw an opportunity to address the needs of these borrowers while at the same time – and this was critical – creating a business line that would benefit mortgage brokers.
How does Excalibur benefit mortgage brokers?
It enables brokers to address a large part of the market that effectively disappeared at the beginning of 2018 and to do so profitably and with a lending partner they can count on for best-in-class service and deal-making technology. Excalibur also provides the entry point to secure long-term client relationships with borrowers who use the product as a gateway to a Prime mortgage. Many borrowers will absolutely graduate from Excalibur into a First National Prime product and we're ready for them.
How has the mortgage broker community reacted?
The response in 2018 was overwhelming, probably twice the volume we initially expected, which demonstrates the intensity of marketplace demand. Even though we didn't enter the market until April last year, the volume in Ontario was well above our initial projections. Just to put that in context, Excalibur opened for business with a team of four and by year-end, our team had grown to 17.
What makes Excalibur a popular choice for brokers and borrowers?
It's a product that contains the same features as First National's Prime mortgages and we think these features make Excalibur competitively superior. So for example, Excalibur has industry-leading repayment options, an early payout feature that does not unduly penalize the borrower, which is a commonplace downside of other lender's alternative mortgages and is available for home purchases and re-financings. With a maximum loan amount of $1 million, Excalibur also enables brokers to work with buyers of high-value properties. And beyond that, borrowers looking to protect themselves can take advantage of our Echelon Home Warranty and Life Insurance Program, the same program available to Prime borrowers. We also offer bridge financing and many of our competitors do not. These advantages are wrapped inside First National's service and technology offerings that brokers know well.
Does this mean Excalibur deals are visible on Merlin?
Absolutely on both Merlin and the Merlin app. Once the mortgage funds, borrowers gain access to all the advantages resident in the MyMortgage portal, just the same as with a Prime mortgage.
Are the economics of brokering alternative mortgages favourable to brokers?
Yes is the simple answer. But to expand on that, brokers have to charge for their services in originating an alternative mortgage. This fee-for-service is the norm in the alternative industry and is well justified. Many brokers have already developed large and lucrative books with First National by using Excalibur to address their clients' needs. It's mutually beneficial.
For brokers who haven't participated in alternative deals, what's the most important thing to know?
That securing an alternative mortgage requires the borrower to provide more information to satisfy the qualification rules. For brokers, this means they have to do more Know Your Client due diligence up front. So for example, a business-for-self borrower will need to confirm he or she has been in business for at least six months and must confirm their ability to pay the mortgage. There are specific ways borrowers can meet these requirements, but they are non-negotiable. It takes a bit more time per file to get a deal done, but First National helps by setting out the requirements clearly in our Excalibur broker product sheets.
Is there a way to estimate how much time that needs to be invested?
It depends on the borrower, the type of business they own and their willingness to make information available. Our goal is to respond in 24 hours to every request and we can do that when everyone is on the same page.
What can we look forward to learning by reading future installments of Excalibur Exchange?
We'll delve into the qualification requirements with the goal of making every reader an Excalibur expert and proponent. I'll field questions from brokers and periodically, I'll report on newsworthy items.
Are you available to help me in between these posts and how do I reach you?
Absolutely. I'm available at elena.robinson@firstnational.ca or 416-320-3138.