Home Capital Says Income Falsified on Loans, Cuts 45 Brokers

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Home Capital Group Inc., targeted by short sellers as a potential hazard in Canada’s hot housing market, said it found falsified income information on some of its loans, prompting it to cut ties with 45 brokers.

The brokers originated C$960.4 million ($741.4 million) of Home Capital’s single-family residential mortgages, or 5.3 percent of its outstanding loan assets, in 2014, the company said in a statement Wednesday, without disclosing the amount of loans with false data. No evidence was found that credit scores or home values were falsified, the company said.

The disclosure, requested by the Ontario Securities Commission, was the result of an investigation began in late 2014 and was guided by an independent advisory firm. An external source had pointed to possible discrepancies in income verification submitted by some brokers, said Home Capital, Canada’s largest alternative-mortgage provider.

Mortgages originated by the group of suspended brokers can be expected to contribute about C$6 million to the company’s net income over a full year, or about 2 percent of the total net income of C$313 million reported in 2014, Home Capital said.

“During the course of its review, Home Capital did a broader test to ensure that this was not a widespread issue in its portfolio and the company is comfortable that it is not,” the Toronto-based company said in the statement.

Home Capital said it is unlikely the issue will lead to credit losses, and it has taken steps to enhance its income-verification process.

Short Sellers

Home Capital has been a target for short-sellers in recent years as its share price surged with Canada’s home prices amid consumers’ near-record debt load. Groups from the International Monetary Fund to Fitch Ratings Ltd. have said the market is overvalued as prices in Toronto and Vancouver have soared.

Short interest on Home Capital stock has reached a near-record 31 percent of its free float, according to July 28 data from Markit, the most since June 2013.

“The disclosures should help investors a great deal -- it gives people a sense of the scale of the situation,” Marc Charbin, an analyst at Laurentian Bank of Canada, said by phone Wednesday. “Provided that no material credit losses come from this, this is ground that can be made up with other mortgage brokers.”

Home Capital shares tumbled after the company disclosed on July 10 that it expected a 16 percent drop in traditional mortgage originations and a 55 percent slide in insured single-family mortgage originations in the second quarter after severing ties with some brokers. The stock closed 4 percent higher Wednesday at C$28.40, and has lost 41 percent this year.

Earnings Fall

Home Capital reported Wednesday that second-quarter net income slipped 1.9 percent to C$72.3 million from a year earlier, according to financial documents released after the disclosure on brokers. Profit excluding some items declined to C$1.03 a share from C$1.05 a share last year, as the company had estimated on July 10.

“The company has maintained its solid fundamentals, despite the short-term impact of decreased originations,” Chief Executive Officer Gerald Soloway and Chairman Kevin Smith said in the earnings statement.

Home Capital said it’s taken measures to improve origination volume and the quality of its mortgages. New rules include more detailed documentation and income verification from brokers.

A conference call is scheduled for Thursday at 10:30 a.m. and participants can dial in to 1-888-231-8191.

(An earlier version of this story was corrected to remove an erroneous reference to the amount of loans with falsified information.)

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