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The Real Estate Market Home Capital cut ties with dozens of mortgage brokers over falsified documents

The move to lower interest rates comes as Canada’s housing market appears to be cooling off outside of Toronto and Vancouver

Matthew Sherwoo/for The Globe and Mai

Trading was halted on Home Capital Group Inc.'s stock after the company revealed late Wednesday that it cut ties with dozens of mortgage brokers in the wake of an investigation that revealed they had falsified documents about borrowers' incomes.

The details of the internal investigation, which began last fall, were made public at the request of the Ontario Securities Commission, the company said.

Home Capital, which through its subsidiary, Home Trust, is one of Canada's largest alternative mortgage lenders, said it had hired external investigators last fall after an "external source" alerted the company to problems with some mortgage applications submitted by several brokers. Investigators found evidence that brokers were falsifying the income statements for borrowers, although the company said there was no evidence that brokers had faked credit scores or property values.

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Between September and March, the company said it suspended 45 mortgage brokers, including 18 independent brokers and two brokerages, out of a total network of 4,000 brokers.

The brokers had originated $960.4-million worth of single-family loans last year, or 5.3 per cent of all outstanding loans. Most of the loans, 60 per cent, were part of the company's Accelerator program, which gives insured mortgages to prime borrowers.

Home Capital also revealed it had made "changes to staffing" in the wake of the review and has worked to improve its income verification processes. It said it expected the volume of mortgage originations to grow as "brokers adjust to the company's enhanced approval processes."

Despite uncovering problems with some of its mortgage applications, Home Capital said it didn't believe the issues were widespread across its mortgage portfolio and didn't expect to see large losses on its loans. "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 in a statement.

Home Capital's shares have been in free fall since it warned on July 10 that second-quarter mortgage originations fell by $600-million compared with the same period last year. The company was the second-most shorted stock in Canada this week, according to London-based financial information firm Markit.

The company reported $72.3-million in net income in the second quarter, down 1.9 per cent from the same period last year. Diluted earnings per share were $1.03, compared with $1.05 a year earlier.

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