Saturday, May 13, 2017

Run on a mortgage banker in Canada

They could not maintain flow, so no flow, no quantization. They carried short term mortgages because their customers are looking to refinance later. The customers roll over at the end of each short term. So the mortgage banker has a queueing problem, they need slightly more customers rolling over and slightly fewer customers dropping out. If they cannot maintain the 'compression', the trade book, organized as a tree by significance, will drop rank. The company better be making larger loans less frequently, of exit.
Home Capital had no trouble writing a growing number of new mortgages for non-prime borrowers in a hot housing market last year, but it also saw many of those customers leave at the first opportunity when their mortgages came up for renewal. Borrowers at Home Capital typically sign on for one-year or two-year mortgages in the hopes of moving to a mainline bank with a cheaper lending rate once their credit history is established. That leaves Home Capital facing constant churn, analyst Jeff Fenwick of Cormark Securities said, making its retention data one of its most closely watched metrics. Of the $13.3-billion in residential mortgages on Home Capital’s books at the start of 2016, Mr. Fenwick estimates $6-billion or 45 per cent “rolled off” during the year – a rate of attrition far higher than faced by bank lenders, whose customers tend to opt for five-year mortgages. “This is one disadvantage for a lender like Home – there is a consistent treadmill of origination activity that needs to happen in order to prevent the mortgage book from shrinking,” he said.

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