Laurentian's flawed mortgages echo Home Capital troubles

Lender's shares fall after reporting audit results

Laurentian's flawed mortgages echo Home Capital troubles
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 saw the biggest one-day drop since January 2009 (7.7%) on December 5, dragging 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 earlier this week in its annual report. Laurentian said it will repurchase about $89 million of those mortgages in the first quarter, or 4.9% of such loans sold to the firm. It will buy back an additional $91 million of mortgages “inadvertently” sold to the firm, also in the first quarter.

“This is largely a documentation and securitization-eligibility issue,” Chief Executive Officer Francois Desjardins said in a call with analysts, as quoted by Bloomberg. “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 $1.16 billion, which means there could be $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.

Read more: Home Capital slapped with $70M claim

“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.

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

No employees have been implicated in any misrepresentation and the documentation issues appear 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.

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