Home Capital expects renewals amid new rules
CEO says lender ‘is back in every aspect of our business’ after investor scandal
The head of Home Capital Group Inc. predicted Wednesday the company will enjoy a rush of mortgage renewals, a forecast that followed a lower first-quarter profit for the lender and the introduction of tighter underwriting regulations for Canada’s housing market.
Yousry Bissada, president and chief executive of the Torontobased mortgage lender, said he expects the company ’s own efforts and the new underwriting rules to contribute to strong renewal rates. “We think we will have better renewals than at any time, not just last year, but any time in the 30year history of this company,” he told analysts on a conference call.
Home Capital is not the only one predicting a higher-than-normal rate of renewals, and uninsured loans are now subject to a new “stress test” that borrowers could face if they turn to a different federally regulated institution. A report from CIBC Capital Markets last month estimated 47 per cent of existing mortgages in Canada will need to be refinanced in 2018, more than the 25- to 35-per-cent of loans that are usually up for renewal in a year.
The expectation of rising renewals came after Home Capital reported $34.6 million in net income for the quarter ended March 31, up 13 per cent compared to the quarter that preceded it, but down 40.4 per cent from last year’s $58 million.
It reported total originations of $1.16 billion for its first quarter, up nearly 33 per cent compared with the fourth quarter, but down more than 50 per cent from a year ago.
The company has been on the rebound after being hit with claims last year that it misled investors, which triggered a run on deposits that was stemmed with help from an investment by Warren Buffett’s Berkshire Hathaway Inc. Home Capital also agreed to pay $29.5 million to settle a class-action lawsuit and a proceeding before Ontario’s securities regulator tied to those allegations.
“I’m very pleased to say Home is back in every aspect of our business,” said Bissada, whose company lends to borrowers who don’t qualify for mortgages at the big banks.
But Home Capital and other lenders are now dealing with new government regulations introduced to try to tame housing markets. They include new rules for residential mortgage underwriting, known as the B-20 guideline, which came into effect at the start of this year and include the new stress test that Home Capital expects will boost the rate of loan renewals with existing lenders.
Bissada said Home Capital had “very good success” with renewals in its first quarter, although it wasn’t able to determine how much of those effects were driven by the new regulations, as renewals were offered in the preceding quarter.
“No doubt, though, we think it (B -20) will help retain some of the book because some of these mortgagors may not be able to qualify elsewhere,” he said.
The company is also seeing cooler housing markets in Canada. Home Capital noted in its management’s discussion and analysis that sales volume in the Greater Toronto Area and Greater Vancouver Area “declined significantly” during the first quarter compared to the same period last year.
“It is too early to determine whether this activity is indicative of a sustained trend due to impending further rate increases by the Bank of Canada and the uncertainties around the new B-20 rules,” said Home Capital’s MD&A.
National Bank Financial analyst Jaeme Gloyn said Home Capital’s quarter supported his firm’s “cautious stance” on mortgage lenders.
“We continue to recommend investors await better visibility on macro-related risks as well as HCG’s deposit-gathering capabilities, profitability, growth, and credit performance,” Gloyn added in a note.