Canada’s TD Bank Helping U.S. Taxpayers’ Market Retreat

Canada’s Toronto-Dominion Bank is expanding its U.S. mortgage lending by holding loans on its books -- a business model U.S. banks are just starting to revive as policy makers seek to reduce the government’s dominant role.

Toronto-Dominion, Canada’s second-largest bank, made about $8 billion of home loans in the past 12 months through its U.S. unit, known as TD Bank, according to Malcolm Hollensteiner, the division’s director of retail lending sales and production. It retained almost all of that debt, more in keeping with Canadian practices, and in contrast to most U.S. banks, which usually package their originations into government-backed securities.

U.S. regulators and lawmakers want to draw more private capital into the $9.3 trillion market after the fallout from the housing crash left taxpayer-backed programs financing about 85 percent of new loans. TD Bank, which operates on the East Coast, where it’s open seven days a week and late into the evening, is among lenders flush with deposits that are chipping away at the government’s share. The bank plans to hire 140 loan officers to more than double staff and bolster originations as higher interest rates choke off refinancing, Hollensteiner said.

“We’re an institution that’s interested in growing,” he said in a telephone interview. “We’re still a very young player on the scene.”

Toronto-Dominion’s success in the market is poised to become even more important to the company with Canadian consumers’ record debt burdens set to stifle borrowing in its home country, according to Barclays Plc analyst John Aiken.

U.S. Expansion

The Toronto-based company began its U.S. expansion in 2004, with the announcement it would acquire 51 percent of Portland, Maine-based Banknorth Group Inc. for about $3.8 billion, and about two years later said it would buy the rest. It agreed in 2007 to purchase Cherry Hill, New Jersey-based Commerce Bancorp Inc. for $8.5 billion and added South Financial Group Inc. in May 2010 for about $61 million.

Along the way, TD Bank embraced Commerce’s branding as “America’s Most Convenient Bank” and its unusual branch hours -- including being open as late as 8 p.m. on weekdays and on Sundays when other banks are closed.

The result has been “what normally would be a great problem: an amazing deposit-gathering capability,” said Peter Routledge, a Toronto-based analyst at National Bank Financial. The catch is that the cheap funding needs to be used to lend to maintain the margins of the business, and the banks it acquired weren’t as good at adding loans, he said.

Auto Lending

In response, TD Bank also agreed in December 2010 to buy auto lender Chrysler Financial Corp. for about $6.3 billion from private-equity firm Cerberus Capital Management LP, and this year acquired $5.7 billion of credit-card balances from Target Corp. and entered into an agreement to help provide new debt to the retailer’s customers.

U.S. mortgage lenders are fighting over fewer originations after 30-year rates increased to 4.35 percent from a record low

3.31 percent a year ago, stalling refinancings, according to Freddie Mac data. After reaching $2 trillion last year, volumes will fall to $1.7 trillion this year and $1.2 trillion in 2014, the Mortgage Bankers Association forecasts.

TD Bank’s hiring of mortgage loan officers will focus on its banking footprint, which extends from Maine to Florida, including the Boston, New York and Philadelphia areas where “the housing markets are in a sound position and TD Bank has a strong brand presence,” Hollensteiner said. It expects to boost the amount of the employees, who work at its bank branches and other offices, to 230 by the end of next year.

Recruiting Talent

While the company faces a “competitive” market for loan officers with the experience and relationships needed to find home buyers seeking loans, it’s able to attract talent as rivals are roiled by falling refinancing and new regulations taking effect Jan. 1, he said.

“Originators are going to be more focused on making sure they’re with a well-capitalized institution moving forward,” Hollensteiner said. “Capital is king.”

Stephen Boyle, chief financial officer of Toronto-Dominion’s U.S. arm, cited mortgages as the biggest reason the unit has increased its loans faster than American peers during a September investor conference. Michael Pedersen, the division’s head, said the previous month he hopes to add to the holdings by luring more of its deposit customers, as he seeks to expand the gap between rates on its assets and funding costs.

The company’s C$835 billion ($800 billion) of total assets as of its fiscal third quarter ended July 31 meant it was North America’s eighth-largest bank, trailing only Royal Bank of Canada among lenders in its own country.

Mortgage Types

Its C$414 billion of loans included C$106 billion from the U.S., according to a company presentation. In the U.S., it held $30.8 billion of one-to-four family residential loans on June 30, up from $24.4 billion at the start of 2012, Federal Deposit Insurance Corp. data show.

TD Bank’s use of its balance sheet allows it to offer types of mortgages not found at many competitors, Hollensteiner said. That includes providing first and second mortgages of as much as 90 percent of a property’s value, with the “piggyback” home-equity loans accounting for 10 percent, he said.

It also retains loans with private mortgage insurance to lower-income, first-time home buyers with down payments as low as 5 percent, including as little as 3 percent of their own cash if they can secure gifts or grants, he said. In addition, the bank offers loans for individuals having custom homes built that then convert into permanent financing.

Jumbo Loans

In the company’s most recent fiscal year ended Oct. 31, jumbo loans too big to qualify for government programs accounted for 45 percent of its originations, while 89 percent carried fixed rates, according to Hollensteiner.

The bank has been among lenders in the U.S. putting 30-year fixed mortgages with rates near record lows on their books this year. The type of debt is uncommonly central to the America market and is said to be reliant on government guarantees, such as through taxpayer-backed Fannie Mae and Freddie Mac.

Wells Fargo & Co.’s balances of first-lien residential mortgages averaged $254.1 billion in the July through September period, up from $234 billion a year earlier. JPMorgan Chase & Co.’s book of prime mortgages, excluding certain loans from banks it bought during the financial crisis, rose to $48 billion on Sept. 30, up from $41.4 billion a year earlier. Demand for 30-year fixed-rate loans can be seen in the lenders offering 30-year jumbos at lower rates than conventional debt.

That appetite has crimped sales by issuers led by Redwood Trust Inc. of private mortgage bonds, a market that had been growing after a 2011 cut to the upper loan-size limits of Fannie Mae and Freddie Mac and increases in their debt-guarantee fees.


“It is a bit of a head-scratcher as to why banks would so aggressively put potentially very long duration assets on their balance sheets at this point in the interest-rate cycle,” Redwood Chief Executive Officer Martin Hughes and President Brett Nicholas wrote this month in a shareholder letter.

During an Oct. 31 Senate banking panel hearing in which lawmakers examined ways to reform the U.S. market, Federal Reserve Bank of New York researcher Joseph Tracy and AllianceBernstein LP’s Michael Canter said that 30-year U.S. mortgages will require taxpayer backing of some sort.

“Under the presumption that it’s important for the housing market to have 30-year mortgages and that mortgage availability is vital to the housing market, we don’t think it’s workable without a government guarantee,” said Canter, head of securitized assets at AllianceBernstein, which oversees more than $250 billion in fixed-income investments.

Capital Requirements

Certain banks’ current demand for 30-year mortgages doesn’t mean that deposit-takers can replace the $5 trillion market for government-backed mortgage securities, Canter said later in an e-mail. It “would be great if that capacity were there, but given the new capital requirements for banks and legal issues surrounding mortgages I am not sure that it is,” he said.

Thomas Wind, head of Everbank Financial Corp.’s mortgage unit, said that “the thought of putting on a lot of 30-year fixed-rate loans at 4 percent doesn’t have a lot of appeal” to many smaller banks, who may remember how long-term mortgages helped fuel the savings-and-loan crisis of the 1980s after deposit rates rose. While his Jacksonville, Florida-based bank takes on loans with rates fixed for as long as 10 years, “we just don’t like that longer-term tail risk,” he said.

Hollensteiner said Toronto-Dominion is comfortable with managing the risks of 30-year loans, and employs “pretty rigorous” underwriting to guard against the default dangers of its products, with protections tied to items such as borrowers’ debt-to-income ratios and credit profiles.

‘More Catholic’

The company’s culture means that it’s likely being careful when adding the long-term assets, according to National Bank Financial’s Routledge. Its corporate treasury department can use derivatives such as interest-rate swaps that can convert fixed payments to floating ones, he said.

“They’re more Catholic than the Pope in terms of interest-rate risk,” he said.

Aiken of Barclays agrees that’s one of the company’s strengths. At the same time, he said, because the lives of U.S. mortgages can vary more with changes in borrowing costs, it’s “absolutely something that could damp profitability down the road” as actions by the U.S. Federal Reserve raise deposit costs from the levels near zero in place since an American housing collapse caused a global crisis.

In Canada, a housing boom that helped lead the world’s 11th largest economy out of the 2008 financial crisis was fueled by some of the lowest mortgage rates in decades as the Bank of Canada cut its key rate to a record low 0.25 percent.

Overheating Market

Canadian policy makers and the central bank, concerned about an overheating housing market, have been urging consumers to curb borrowing, while Finance Minister Jim Flaherty tightened rules on insured mortgages for the fourth time in four years in July 2012 on concern some regional housing markets were overheating. Canada’s banking regulator released tougher mortgage-lending standards last year and Flaherty said last week he would intervene again if needed.

Canada’s economy is predicted by economists to grow next year and in 2015 at a slower pace than in the U.S., after mortgage borrowing rose 1.7 percent to C$1.11 trillion in the second quarter, according to Statistics Canada, and debt such as mortgages and credit cards increased to 163.4 percent of disposable income, among the highest in the world.

The recent “fairly strong contribution” of Toronto-Dominion’s U.S. unit to its profits will likely grow as a result, which makes adding American loans such as mortgages “a very important factor in TD’s valuation,” Aiken said.

The company’s shares rose 17 percent this year through yesterday, about the same as the eight-company Standard & Poor’s/TSX Commercial Banks Index. The stock slipped 0.3 percent to C$97.62 in Toronto trading.

Hollensteiner said there’s plenty of room for it to continue growing in the U.S. mortgage market -- and a jump in rates and new regulations may create even more.

“We expect there will be disruption in the industry in terms of who’s doing business today and who’s doing business tomorrow,” he said.

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