LOOKING FORWARD

First National Financial’s Stephen Smith on the housing market and the largest-ever donation to a business school

Canadians love their banks, even if part of that means loving to hate them. But the country also has a strong non-bank financial services industry, including a thriving mortgage industry that has proven lucrative for more than a few entrepreneurs, including Stephen Smith, the founder of First National Financial LP who recently made a big splash in the business world by donating $50 million to the Queen’s University School of Business, now called the Stephen J.R. Smith School of Business. It’s the largest-ever gift to a Canadian business school and continues Smith’s charitable efforts at the school, as well as other endeavours such as setting up a museum of Toronto alongside his wife, an archivist and librarian. Two-thirds of the $50 million will go toward attracting and retaining top faculty and research, and the rest will be used to fund scholarships for MBA students. How strong is First National? TD Canada Trust last year outsourced the underwriting and fulfilment of its mortgages to Smith’s firm, the second-largest broker lender in the country.

FP $50 million is a lot of money. Why now? Why Queen’s?

SS I’ve been involved in philanthropy with Queen’s over the past 18 years. I started in ’97 when I established a bursary to help students in financial need in electrical engineering and economics. Over the past 18 years, there have been about 250 students that have

been the beneficiary of that. In 2008, I established a fellowship and I upgraded that to a chair in the department of economics and public policy. I have had a long connection with Queen’s and, of course, I’m a graduate of Queen’s electrical engineering 1972. I’ve been very fortunate personally and professionally and, as a result, I wanted to give back in a pretty significant way. I believe that a strong post-secondary education system is essential to maintain a healthy society and I benefited from it as many do. The real wealth in society is human capital and so I think it’s great to invest back into people and by giving to the Queen’s business school, I’m able to do that.

FP You could have given $10 million and everyone would have been happy.

SS I could have given 10, but I wanted to make a gift that was transformational to the business school. I think this is important to create a better society. Business success results in a healthy economy, and a healthy economy ensures we have a strong social infrastructure. It’s important for business graduates to have a sense of social responsibility and by making a gift like this, I think I can encourage other people to make gifts or maybe step up their giving.

FP Business schools, particularly MBA ones, get a lot of flack for not turning out critical thinkers.

SS I think to some extent, anyone who comes out of university initially often needs a degree of maturity to become a critical thinker. I look at graduates out of engineering schools, social sciences or other arts and humanities, people are 22, 23, 24, maybe some from the professional schools are older, but they still need maturing before they develop the real critical thinking. The important thing for schools, universities in general and professional schools is to develop a degree of social responsibility and understanding one’s wider obligation to the community as a whole. I don’t think I’d be thinking in these types of terms when I was 24 or 25. You’re more thinking about where to get a job, what do I have to do? When one matures, gets older and has children, you realize it’s not about you anymore, it’s about the children and the next generation. Although there is criticism about business schools, I think the criticism is more about why aren’t people in their 20s more mature? Why don’t they understand the bigger picture? Well, that comes with maturity.

FP How did an electrical engineer get into the mortgage business?

SS I was always interested in business, particularly economics, so I took a lot of my options in electrical engineering in economics.

In my first year I persuaded the dean to let me drop geology and take economics on the promise I wouldn’t go into any of the earth sciences. I lived in Ottawa during the summer and I took an economics course during the summer at Carleton and I took economics for all my other options, so by the end of the fourth year I had enough course work for a degree. I was going to quit in third year and my dad, and I can just imagine what my dad was thinking now as a parent, said economist or electrical engineer? Hmm. He said, Why don’t you stay in electrical engineering for another year and a half and then you can go to graduate school in economics. I went to the London School of Economics after graduating from Queen’s and graduated in economics. I did a little bit of engineering work, but mostly analytical work, and I’ve really spent my last 30 years in mortgage finance and insurance.

FP The last government tightened a lot of mortgage rules, both for home buyers and for lenders. How did that affect your business?

SS Nothing really changed for us as far as we could see. We’re Canada’s largest non-bank mortgage lender. We have about $93 billion of assets under administration. We’ve always competed for high-quality borrowers and we distribute our mortgages through mortgage brokers. We have the best mortgage underwriting software in Canada and nobody else has anything like it. It lets brokers and, correspondingly, their customers go online and track where their mortgage application is. Once they are customers of ours, they can go online through My Mortgage to see where the mortgage is, what’s outstanding, if they want to change something. We’ve invested a lot in technology to make this a current 21stcentury or millennial-like experience. Second, we’ve always provided great rates so we compete very much on rates to give the best deal we can to the Canadian consumer.

FP What’s your take on Canada’s housing market?

SS Low interest rates have resulted in higher housing prices and that’s natural. People tend to buy houses based on cash flow. If you can spend $1,000 a month, and interest rates are 5%, you can afford one amount, and if they’re 2.8%, you can afford another amount. I find I generally agree with CMHC reports with respect to the housing market and that there is some overheating here in Toronto, but, in general, the housing demand that we’ve seen tends to reflect the underlying demographics of Canada. People aren’t buying houses because they think they’re going to make a lot of money. They’re buying a house because they’re married now, or expecting their first child, or they’ve had a couple of more children and it’s time to move up. We’re not seeing people buying housing specifically for speculative reasons as we have in previous booms like in the late ’80s. Affordability isn’t that bad. The number that is often mentioned is that the ratio of household debt to income is high, but when you look at the ratio of cash flow spent on debt, it’s in line with historical averages. The other issue is that there is a left side of your balance sheet, which is your assets, and assets here are stronger and growing.

FP Is there anything you’d like the government to change?

SS If they were concerned particularly about the higher end, they could increase the down payment from 20% to 25%. In Canada, 30% of all home buyers are insured and the other 70% are second-time buyers and they put 20% down. I wouldn’t look at any move that would increase the down payment for firsttime buyers. Those are people trying to get into housing.

FP There seem to be a lot of misperceptions about non-bank lenders. What do people not understand about your business?

SS I think the misperception is that we’ve grown up thinking the Canadian banks are the gold standard with respect to credit. That is, if you can’t get a loan from a bank then you must be into the netherworld of sub-prime lenders. That’s not the case. We compete with the banks straight up. Our rates are competitive or more competitive and our service levels are definitely higher, so we compete on service levels and price. It’s a commodity product so you’re never leading too far in terms of price, but we do compete on service levels through technology. It’s about understanding that there is a different world out there that has non-bank lenders that have a similar or better credit profile. I would be willing to stack the credit profile of our book against any bank in the country and I would think it would be as good or better.