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Home Capital Wins Mortgages as Canada Banks Retreat

Bank of Canada Governor Mark Carney
Canada’s banks have been exercising more caution on higher-risk mortgages after Bank of Canada Governor Mark Carney warned that record household debt remains the biggest domestic risk to the economy. Photographer: Tomohiro Ohsumi/Bloomberg

April 20 (Bloomberg) -- Home Capital Group Inc. said it’s capturing mortgage business from Canadian lenders including Toronto-Dominion Bank and Canadian Imperial Bank of Commerce that are retreating from the C$200 billion ($201 billion) nonprime market amid signs of a housing downturn.

“The big banks are sort of juggling around their mortgage strategy and as part of that, they’re tightening up in certain areas,” Home Capital President Martin Reid said in an interview. “We’re seeing some of the fallout.”

Canada’s banks have been exercising more caution on higher-risk mortgages after Bank of Canada Governor Mark Carney warned that record household debt remains the biggest domestic risk to the economy. Carney this week signaled the potential for interest rate increases that would cool off a housing market that has seen prices almost triple in some Canadian cities over the past decade.

“While interest rates have been at historic lows recently, the inevitable climb looks to be coming as soon as next year,” said Katie Archdekin, head of mortgage products at Bank of Montreal, the country’s fourth-biggest bank.

Home Capital, the Toronto-based mortgage lender, targets the C$200 billion Alt-A market -- uninsured loans to home buyers who often don’t qualify at chartered banks because of their work history or other circumstances. Their clients include self-employed workers and new immigrants to Canada. Higher revenue from loans rejected by banks will add to earnings in Home Capital’s first-quarter results, to be released on May 2.

Credit Scale

“We see opportunities with people that are really high-caliber borrowers with good proof of income, but their circumstances are a little different,” said Chief Executive Officer Gerald Soloway, who was interviewed with Reid. “We haven’t had to go down the credit scale; we’ve been able to go up the credit scale, which is an unusual phenomenon.”

Banks are paring back loans to below prime borrowers amid signs that housing prices are starting to fall. The Canadian Real Estate Association said April 16 that prices in Canada dropped 1.7 percent in March from the previous month, led by a 3.1 percent decline in Vancouver. Finance Minister Jim Flaherty said he’s “encouraged” by signs of a housing correction in Vancouver, preferring the market to “correct itself” without government intervention.

Toronto-Dominion Bank, the country’s second-largest lender, stopped originating non-prime residential mortgages as of March 31, spokesman Mohammed Nakhooda said. The loans, offered through TD Financing Services Home Inc., represented about 0.2 percent of the bank’s mortgage portfolio.

Risk Appetite

“This decision was based on a number of factors, including a regular review of our secured lending risk management strategies,” Nakhooda said. “To remain competitive in the business in the current environment would require us to increase our risk profile, something we concluded was no longer in our risk appetite.”

Canadian Imperial Bank of Commerce, the country’s fifth-largest bank, said in March it was considering the sale of its FirstLine Mortgages broker. The bank said it wants to shift mortgage renewals into its branch network, where it can sell more products.

Increased risk management has led some banks to reject loans, Reid said.

“Two years ago, they wouldn’t have turned that deal down,” said Reid, 52.


An influx of non-prime lending will benefit Home Capital, Soloway said. The company is expected to earn C$1.50 a share before one-time items in the first quarter, up from C$1.24 a share a year earlier, according to the average estimate of six analysts surveyed by Bloomberg News.

“We have had a very good first quarter,” said Soloway, who has been CEO for 25 years. “There’s not going to be any surprises, up or down.”

Home Capital focuses on the non-prime market because it can charge a higher premium for loans than most banks after doing more legwork on potential borrowers before approving home loans. The company said it has about 2.5 percent market share of such loans, making it the largest provider in Canada.

“There’s a little bit of premium, but in some cases, it’s not very much,” said Soloway, 73.

The record consumer debt levels and potential for housing price declines prompted Fitch Ratings on April 9 to revise Home Capital’s credit outlook to negative from stable.

Emerging Concerns

The revision “is based on emerging concerns regarding home price valuations and household debt levels in Canada, which given HCG’s focus on non-conventional borrowers could potentially translate into increased credit costs,” the ratings company said in a statement.

Home Capital had record profit of C$190.1 million last year and adjusted return on equity of 27 percent. It was the 14th-straight year the company had a return on equity of 20 percent or higher.

“There is an opportunity for the company to increase its market share without lowering its standards for credit quality,” said Bryan Brown, an analyst at Macquarie Capital Markets in Toronto. He rates Home Capital shares neutral.

Home Capital’s net impaired loans to gross loans were 0.25 percent at the end of last year, indicating the higher-risk borrowers haven’t led to higher credit losses, according to Fitch’s report. Insured mortgages, which are securitized through Canada Mortgage and Housing Corp. bonds, account for 56 percent of Home Capital’s mortgage book, Fitch said.

Profit Outlook

Home Capital closed 1.7 percent down at C$49.05 in Toronto. The shares have fallen less than 1 percent this year, trailing the 9.4 percent gain in the Standard & Poor’s/TSX Financials Index.

The company forecast in its annual report that 2012 profit will climb between 13 percent and 18 percent, while total loans will rise within the same percentage range.

The other factor that will contribute to first-quarter earnings is a resilient Canadian housing market, Soloway said, dismissing the notion that Canada is in a housing bubble.

“I don’t think there is any sign anywhere from people on the ground in Canada that foresees the bubble,” said Soloway. Economists predicting a collapse in Canada “have been wrong for years; my prediction is that they’re going to be permanently wrong.”

To contact the reporter on this story: Sean B. Pasternak in Toronto at

To contact the editors responsible for this story: David Scanlan at; David Scheer at

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