Home Capital says business heading its way

As new regulations kick in, alternative mortgage lender is seeing stronger numbers

Home Capital Group Inc. believes early results from this year suggest that mortgage business may be migrating from banks to the alternative lender after the federal banking regulator introduced tougher rules for uninsured mortgages at the beginning of the year — even though it too is required to abide by the new requirements.

Preliminary indicators also suggest the credit quality of Home Capital mortgage originations is improving after the new rules were introduced Jan. 1, though it’s difficult to precisely quantify the impact, chief executive Yousry Bissada said on a conference call Thursday to discuss its fourthquarter earnings.

“We have observed that some of our customers have been impacted by the stress test, and have therefore qualified for smaller loans than they would have last year.”

The rules for federally regulated lenders introduce a stress test for borrowers with a more than 20-percent down payment to prove that they can service mortgage at a qualifying rate of the greater of the contractual mortgage rate plus two percentage points or the five-year benchmark rate published by the Bank of Canada.

Results from the quarter ended Dec. 31 were about 40 per cent less than it earned in the same quarter last year before it was hit with allegations it misled investors, but Bissada said he believes the company is turning a corner.

He said the credit-quality improvement seen so far this year could be an indication that business previously booked at the Big Six banks is migrating to Home Capital for mortgage solutions — but did not elaborate on why, given that Home Capital is subject to the new rules.

The company has previously said it is concerned about the impact of the recent revisions to mortgage underwriting guidelines for federally regulated institutions.

“The company has identified a number of strategies to mitigate the impact of stress testing and co-lending changes while maintaining overall credit quality,” the company said in its 2017 and fourth-quarter report.

“However, management will require more time to fully assess how the market responds to the changes and what the net impact will be on the company’s addressable market and product suite offering.”

Home Capital Group Inc. reported a net income of $30.6 million in its most recent quarter, compared to a net income of $50.7 million in the same quarter last year.

Revenue dropped in the quarter to $109.5 million, from $144.6 million in the similar quarter a year ago, but ahead of Thomson Reuters estimates of $86.5 million.

It’s been a tumultuous year for the Toronto-based mortgage lender after allegations it was misleading shareholders prompted a run on deposits by customers last April.

By June, the company agreed to pay $29.5 million to settle a class-action lawsuit and a matter before the Ontario Securities Commission concerning the allegations.

But last fall the company was still facing elevated expenses because of the scrutiny, as it cut 65 jobs and sold off segments of its business amid the departure of several executives.

More recently, separate lawsuits by a short seller and West Face Capital Inc. were launched against Home Capital and three former executives, both alleging the lender’s public disclosure was inaccurate and misleading.