Laurentian Discloses Flawed Mortgages in Home Capital Echo

(Bloomberg) -- Laurentian Bank of Canada fell the most in almost nine years after reporting it found customer misrepresentations on some mortgage loans it sold to another firm, echoing problems that almost sunk alternative-lender Home Capital Group Inc. earlier this year.

Shares of the Montreal-based regional bank plunged 7.7 percent to C$56.11 at 4 p.m. in Toronto, reversing earlier gains that saw it reach an intraday high of C$62.92 after posting fourth-quarter earnings that beat analysts’ estimates. Laurentian’s decline, the biggest one-day drop since January 2009, dragged down Canada’s other large lenders.

An audit “identified documentation issues and client misrepresentations" with some mortgages from its B2B Bank unit that were sold to a third-party firm, the lender said Tuesday in its annual report. Laurentian said it will repurchase about C$89 million ($70 million) of those mortgages in the first quarter, or 4.9 percent of such loans sold to the firm. It will buy back an additional C$91 million of mortgages “inadvertently” sold to the firm, also in the first quarter.

‘Not Material’

“This is largely a documentation and securitization-eligibility issue," Chief Executive Officer Francois Desjardins said in a call with analysts. “It is not material for the bank, its operations, its funding nor its capital. We have worked to change processes to ensure that this issue is resolved."

The total value of the mortgages sold to the third-party issuer was about C$1.16 billion, which means there could be C$124 million of “problematic loans," according to the bank. Laurentian said it was first alerted of the issue in September by the purchaser and initiated its own audit.

Laurentian Bank’s B2B unit offers non-prime mortgages through advisers and competes with alternative lenders such as Home Capital. Toronto-based Home Capital’s shares plunged in April after the Ontario Securities Commission alleged the company misled investors over the extent of fraudulent mortgage applications brought in by outside brokers. The revelations accelerated a run on deposits at the bank that was stemmed when Warren Buffett’s Berkshire Hathaway Inc. stepped in to buy a stake and extend a loan in June.

“The bank intends to perform an in-depth review of the mortgages originated in its branch network that have been sold to the third-party purchaser and to work with such purchaser to resolve any issues it identifies," Laurentian said in the annual report.

Expanding Audit

The bank is also extending the scope of its audit and reviewing its underwriting procedures after finding C$76 million of insured mortgages that weren’t eligible for insurance.

No employees have been implicated in any misrepresentation and the documentation issues appears to have been unintentional, the bank said. All mortgages being repurchased are performing in line with the lender’s overall mortgage portfolio, Laurentian said.

A spokeswoman for Canada’s Office of the Superintendent of Financial Institutions said it doesn’t comment on specific companies it regulates.

To contact the reporter on this story: Doug Alexander in Toronto at dalexander3@bloomberg.net.

To contact the editors responsible for this story: Michael J. Moore at mmoore55@bloomberg.net, David Scanlan at dscanlan@bloomberg.net, Steven Crabill, Dan Reichl

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