Home Capital Group Inc. said it will take a total of nearly two years for the company to comb through all the mortgages generated by a group of nearly four dozen brokers who were suspended because of allegations their files contained falsified income documents.
Canada's largest alternative mortgage lender said it is taking its time to thoroughly vet more than $1.7-billion in outstanding mortgages submitted by 45 brokers that the company disclosed it had suspended as part of an investigation into mortgage fraud allegations.
So far, Home Capital has reviewed about a quarter of the mortgages as part of the investigation, which was started a year ago and is expected to continue until late 2016. The process has been slowed down by the time it takes for borrowers to send the company updated documents and for company staff to call every employer for confirmation.
"It's a tedious process," company president Martin Reid said in an interview. "It's going back, getting updated documentation and then validating that documentation. That all depends on the response from the employer, so sometimes it's pretty quick and sometimes it may take quite a while."
Of the mortgages it has reviewed, Home Capital said more than 90 per cent would be eligible for renewal, either because there were no problems with the borrowers' original income documents or because the company had been able to obtain and verify new income details.
In roughly 7 per cent to 8 per cent of the cases, borrowers either haven't co-operated with the investigation or the company hasn't been able to confirm their income. In most cases, the borrowers are part of the company's traditional, uninsured mortgage program, which offers shorter-term mortgages of one to two years at higher interest rates to borrowers who typically can't qualify for a conventional insured mortgage. The company found evidence of borrowers who had salaried jobs, but had falsely inflated their incomes to qualify for lower interest rates than they would have otherwise been paying, Mr. Reid said.
All of the borrowers are still paying their mortgages and Home Capital said it would continue to hold the mortgages until they came up for renewal and then help the borrowers find a new lender, in some cases through another federally regulated "non-prime" lender or a private mortgage, such as through a mortgage investment corporation.
Despite problems with their income documents, most of the borrowers had good credit scores and have been paying their mortgages, chief executive officer Gerald Soloway told analysts. "There is a lending capacity in the marketplace that will happily lend to them, probably at a premium to what we've been charging," he said. "But we're not going to throw them out in the cold."
Company officials had initially told investors in the summer that the suspended brokers had generated $960-million worth of mortgages last year, but that it was still going through its files to come up with a complete figure. On Wednesday, the company said it had flagged $1.93-billion worth of total outstanding mortgages that had come from the suspended brokers as of the end of June. The mortgages could potentially date back up to five years, although the majority would be more recent, Mr. Reid said. That figure had since fallen by the end of September by about $200-million, mostly because borrowers have been paying down their mortgages, not because homeowners were defaulting or being cut off by the lender.
Since disclosing problems with some of its mortgages in July, Home Capital has been working to rebuild its mortgage business, which has fallen this year in the wake of its broker scandal. The volume of new uninsured mortgages, Home Capital's core business, fell more than 14 per cent in the third quarter from the same period last year. Its insured mortgage business dropped more than 20 per cent from the third quarter of 2014.
The company recently closed on the $17.8-million purchase of CFF Bank. The small, money-losing bank required Home Capital to inject $35-million in new capital, but allows the company to own a coveted Schedule 1 banking licence and accept deposits, providing a new low-cost source of funding.
Home Capital has also hired a new head of underwriting, appointed a new member of its board of directors and added 600 brokers to its network. It said it has tightened up its process for vetting new brokers, although it said it has no plans to bring back the suspended brokers any time soon.
The industry is likely taking a closer look at the issue of mortgage fraud in the wake of Home Capital's investigation, Mr. Reid said. "I'm sure the insurers and the regulator are looking at these brokers and probably looking at what other business they have done. I'm sure they are looking at this generally in the industry and what they can do to mitigate it," he said. "But for us, it's moving forward. It's a bump in the road and we need to get it back on track."
Royal Bank of Canada analyst Geoffrey Kwan rated the company's stock as underperform on concerns the company is still struggling to grow its mortgage business. However, "we think HCG is on the road to recovery," he wrote.
Industrial Alliance Insurance and Financial Services Inc. analyst Dylan Steuart called the stock a strong buy. "While the additional disclosures on the suspended brokers and the length of the ongoing investigation are unlikely to satisfy the skeptics, the fact remains that the quarter showed a rebound in originations and continued strong credit performance and profitability," Mr. Steuart wrote.