Home Capital corrects math error in data sent to OSFIApril 18, 2018
Recovering mortgage lender Home Capital Group Inc. has restated data on its residential home loan balances after detecting an error in a monthly filing with Canada’s banking regulator.
Data for February submitted by the company initially made it appear that the balance of insured residential mortgages at subsidiary Home Trust Co. had increased by roughly $1-billion, while its uninsured portfolio suffered a proportionate decline.
Home Capital discovered its mistake after fielding questions from analysts who follow the company about the erroneous swings in mortgage balances. The problem arose from a change to the internal process for reporting the figures, the company said on Wednesday, and some mortgages were classified incorrectly. The revised figures show only minor changes in the balance of each portfolio, while the combined balance remains unchanged at $13.26-billion, as initially reported.
The restated February totals are much closer to the company’s January filing, as reported to OSFI: Insured residential mortgage balances fell by about $89-million − a decline of about 0.7 per cent − while the balance of uninsured residential loans rose by $11-million.
Home Capital’s slip-up comes as it continues to rebuild trust and restore its lending volumes after suffering a run on deposits and a liquidity crisis a year ago, drawing added scrutiny from regulators. Since then, a revamped leadership team has been making fundamental changes to staffing and processes. After slashing 10 per cent of employees to control costs last fall, the company sold “non-core” businesses early this year and began hiring again, while increasing the pace at which it issues new mortgages. And it has worked to tighten underwriting, revamp core technology systems and rebuild key relationships with mortgage brokers.
“This was an isolated and inadvertent reclassification error,” said Laura Lepore, Home Capital’s assistant vice-president of investor relations, in an e-mail. “We worked quickly to correct the numbers and refiled our report to our regulator the next day.”
All federally regulated financial institutions must file raw aggregate data monthly to the regulator, and are responsible for its accuracy. “We have since revisited the process to reduce the the possibility of any future occurrence,” Ms. Lepore said.
A spokesperson for OSFI declined to comment.
Last April, Home Capital was thrown into crisis after Ontario’s securities regulator published allegations that the lender and three top executives had misled shareholders about fraud the company had discovered in its mortgage broker channel. Investors rapidly lost confidence and pulled deposits from Home Capital, and by the end of April, 2017, the firm was critically low on funds.
But a major equity investment by famed investor Warren Buffett last June helped steady confidence in the company. Under new chief executive officer Yousry Bissada and a revamped board of directors, Home Capital has shown signs of recovering, though it remains a diminished business when compared with its precrisis stature.
After generating a modest profit of $31-million in the last three months of 2017, Home Capital will report first-quarter financial results on May 8. And the alternative mortgage lender, which specializes in home loans to prospective homeowners who have difficulty qualifying at large banks − such as new immigrants and self-employed people − now has excess capital to spend, giving it flexibility to grow its loan books, make acquisitions or buy back shares.
Yet Mr. Bissada has stressed that the company intends to “grow responsibly.” The mortgage industry is grappling with a slowdown in activity in major housing markets since OSFI introduced tougher stress testing for uninsured mortgages at the start of January. Most lenders have said it is too early to tell what the full impact of new rules will be.
Home Capital’s share price fell as much as 1.5 per cent in early trading on the Toronto Stock Exchange on Wednesday, but recovered to close 1.2-per-cent higher, at $13.72.