Dozens of brokers had falsified data: Home Capital

Home Capital Group Inc. said its recent decision to suspend its relationship with dozens of brokers was set off after an external source tipped the company off that brokers had been falsifying borrower incomes.

Home Capital, one of Canada’s largest alternative mortgage lenders, said approximately 45 individual thirdparty brokers are no longer dealing with the company following an internal review. Sixty per cent of the mortgages created using false documents were part of its “Accelerator” line of insured mortgage products.

“The investigation determined that falsification of income information had occurred but that there was no evidence of falsification of credit scores or property values,” the company said.

A total of 53 brokers were suspended during September 2014 to March 2015, of about 4,000 total brokers in Home Capital’s network. The company noted over 300 new brokers were added to the company’s approved list over the same period.

The brokers that were cut off over the false documents were responsible for the creation of nearly $1 billion of single-family residential mortgages in 2014 — roughly 12 per cent of all new mortgages created that year. The mortgages represented 5.3 per cent of outstanding loans on the company’s balance sheet. Home Capital disclosed the information after it said the Ontario Securities Commission requested it do so. Regulators halted the company’s stock pending news at the end of trading Wednesday afternoon.

“Everyone had their ideas about what transpired in the past six months, this corroborates some suspicions but dispels some others,” said analyst Shubha Khan of National Bank Financial. “It’s good we have the facts now, but there are still some questions we have.”

Khan said the questions include whether the falsely documented mortgages that were insured will continue to be insured since they were created using false information.

“The Company concluded that it is unlikely that this matter will lead to credit losses,” Home Capital said in a statement. “The Company continues to actively monitor the subject mortgages and there have been no unusual credit issues.”

Home Capital said the drop in originations led to a two-per-cent fall in profit in the second quarter. Diluted earnings came in as expected for the second quarter, at $1.03 per share. That was down, however, from $1.05 during the same period last year.

The company’s stock was up four per cent Wednesday, or $1.10, to $28.40, before the halt. However, it is still 34-per-cent below where it was a month ago.

Home Capital’s stock this week became the second-most shorted in Canada, surpassing Quebecor Inc., with 28.4 per cent of shares on loan for short-selling, according to Markit.