Laurentian Bank of Canada is trying to calm jittery investors, suggesting shareholders overreacted when they sent its share price tumbling after the bank disclosed problems with some mortgages it issued.
The Montreal-based bank played down documentation gaps and misrepresentation affecting up to $300-million in mortgages as largely a paperwork issue, even as it admitted staff had failed to get necessary documents to verify some loans, while a lesser number of clients had embellished their means to qualify.
Executives at the lender have stressed that it has ample excess cash to repurchase $180-million in problematic loans in the near term, and more if necessary. Audits turned up no evidence that staff did anything intentionally wrong, and found no notable concentration of improper loans coming from any particular mortgage brokers, the bank said. And so far, the loans at issue have performed well.
But that has only done so much to reassure investors whose hackles are up after watching alternative lender Home Capital Group Inc. narrowly dodge insolvency when it failed to properly disclose evidence of mortgage fraud involving some brokers in its network.
Laurentian's mortgage woes overshadowed otherwise encouraging fourth-quarter financial results, and left analysts concerned that more problems could yet be uncovered as the bank continues to review home loans issued through its branches.
"In our view, there are too many unknowns and the potential for the size and scope of [Laurentian Bank's] mortgage investigations to increase is, in our view, high," said Darko Mihelic, an analyst at RBC Dominion Securities Inc.
Laurentian's share price slipped 1.3 per cent on the Toronto Stock Exchange on Wednesday, steadying somewhat after plunging 7.9 per cent lower a day earlier.
Fraudulent mortgage applications are a growing problem as would-be home buyers feel squeezed by rapidly rising home prices. Early this year, credit reporting agency Equifax released data showing the number of mortgage applications flagged as potentially fraudulent has risen 52 per cent since 2013. Buyers sometimes submit fake or altered employment letters, bank statements or tax returns in an effort to qualify for larger mortgages.
Laurentian chief executive officer François Desjardins was not available for an interview. But speaking to television news network BNN on Wednesday, Mr. Desjardins sought to distance Laurentian's trials from Home Capital's troubles, saying the two lenders are "very different organizations." Most notably, where Home Capital faced a liquidity crisis after suffering a run on its deposits, Laurentian has an array of funding sources and excess cash on hand. "I can buy those loans back today," he said.
In late September, an unidentified third party doing a routine audit of securitized loans purchased from Laurentian uncovered issues with some mortgages. In most cases the loans were sound, Mr. Desjardins said, but some were labelled incorrectly and didn't meet the criteria for sale to the third party. In a small number of cases, the bank either hadn't obtained proof of assets or income, or hadn't filed those documents properly, whereas a lesser number of clients inflated their income or assets.
"It's our job to weed that out," Mr. Desjardins told BNN, but added: "This, to us, is really a process and paperwork issue that we have to resolve."
As Laurentian expanded its own audit, it found more issues in the same vein, and also discovered $76-million of loans with portfolio insurance they weren't eligible for, some of which were sold to another third party. Laurentian has promised to buy back $180-million in problematic mortgages, and estimates that total could rise to about $304-million. That would represent roughly 1.6 per cent of the bank's residential mortgage portfolio, and 0.8 per cent of its total loans. But the final tally won't be clear until it completes its review in about two months.
"While these numbers are not large relative to the bank's overall mortgage book ... their mere presence raises questions about the bank's underwriting processes and risk management," said National Bank Financial Inc. analyst Gabriel Dechaine.
The bank began overhauling internal controls and underwriting processes at the start of November, and said it didn't disclose the issues sooner because they aren't large enough to be material to Laurentian's funding or its capital levels.
"Our credit history is excellent as demonstrated by an industry-low loan loss ratio," spokesman Benjamin Cerantola said in an e-mail. "Furthermore, we have improved our processes, policies and procedures, which will have a positive impact, not only on securitized loans, but on the whole book."
A spokesperson for Canada's banking regulator, the Office of the Superintendent of Financial Institutions, declined to comment on a specific financial institution, while Laurentian said it never comments on its relationship with regulators.