Mortgage lender Home Capital cuts ties with 45 brokers for bogus documentation

Trading in shares of alternative mortgage lender Home Capital Group was halted on the TSX after the company revealed it had cut ties with several dozen mortgage brokers for falsifying income details about borrowers.

Measure 'essential to the long-term health of our business,' Toronto-based company says

Trading in shares of alternative mortgage lender Home Capital Group was halted on the TSX Wednesday after the company revealed it had cut ties with several dozen mortgage brokers for falsifying income details about borrowers.

The lender launched an investigation after an anonymous tipster warned them that some of their brokers were fudging the numbers as to how much prospective borrowers took in as income. In a conference call with analysts, the company said it became aware of some instances where borrowers were submitting employment letters claiming higher salaries than they actually had.

"There was no evidence of falsification of credit scores or property values," the Toronto-based company said in a statement ahead of that call.

The company said in a statement that it is releasing the information after a request from the Ontario Securities Commission. The company offers home loans predominantly to recent immigrants, self-employed people and others who have non-traditional incomes that make it harder for them to obtain loans from conventional lenders like the big banks.

In an investigation spanning from September 2014 to this past March, Home Capital said it suspended 53 brokers in the probe. That's out of a total of more than 4,000 brokers the company works with at any given time.

All in all, the company said the brokers it has cut ties with brought in $960 million worth of mortgage loans last year — about five per cent of all loans the lenders has on its books. 

"During the course of its review, Home Capital did a broader test to ensure that this was not a widespread issue in its portfolio and the company is comfortable that it is not."

In a release, the company revealed that about 60 per cent of the loans — $576 million, according to research firm Industrial Alliance Securities originated with a group of brokers, now cast out, in its so-called Accelerator program, which offers insured mortgages to prime borrowers. That figure, however, implies that the remaining 40 per cent, or $384 million were from different mortgage programs, some of which are subprime.

"The lower contribution to the [uninsured] mortgage book is positive from a future credit loss perspective," IAG analyst Dylan Steuart said in a note to clients. Steuart rates the stock a "strong buy" and has a target price of $49 on the shares. On Thursday, they were changing hands at $31.

Other analysts agree, including Marc Charbin of Laurentian Bank who has a target price of $42 on the shares and says "credit losses from the terminated brokers are unlikely."

​The company's quarterly earnings, also released Wednesday, reveal that the percentage of non-performing loans out of the total on the books is very low — 0.33 per cent at the end of the last quarter.

"We are confident that these measures, in spite of their short-term impact on volumes, were essential to the long-term health of our business," the company said.

Home Capital's stock has fallen more than 43 per cent in the last 12 months, but was up 11 per cent once trading resumed on Thursday. The stock has become a favourite of short-sellers, who are investors who make money by betting that the company's shares are going to go down in value. 

Last week, James C. Baillie abruptly left the company's board of directors, citing "a variety of personal reasons" in a statement. Baillie, a former chairman of the OSC, had been a director with the company since 2012.


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