Laurentian Bank’s review of problematic mortgages to finish in Q2

MONTREAL — Laurentian Bank expects to complete its review of problematic loans sold to an unnamed lender by the fiscal second quarter, and will fix or repurchase any remaining mortgages that failed to meet the proper criteria.

The Montreal-based lender — which said late last year it discovered mortgages that did not meet documentation and eligibility requirements — is implementing enhanced processes to avoid similar problems going forward, its chief executive said.

“We are increasing governance across the board,” Laurentian’s chief executive Francois Desjardins told a conference call discussing the bank’s fiscal first-quarter results on Wednesday.

“So that all new business is subject to enhanced quality control. So we will be paying more attention to the business overall, as loans renew and new business comes in.”

These stricter controls come after Laurentian said in December that an audit found mortgages sold to an unnamed third-party purchaser that did not meet documentation and eligibility requirements, and would need to repurchase as much as $304 million in mortgages. In January, Laurentian upwardly revised that amount to $392 million and said it had repurchased $180 million in loans, with another $88 million expected by the end of the fiscal second quarter.

Desjardins said in December that the issues largely involved loans that were misflagged and it found no evidence of wilful wrongdoing. He also said a smaller percentage of the problematic mortgages involved a failure to obtain or properly store documentation such as proof of income needed to adjudicate the loan, and to a “lesser extent” Laurentian found “client misrepresentation” which involved embellishing their assets or revenue.

Laurentian’s discussion of enhanced quality control processes also comes days after S&P Global Ratings said in a report it expects more evidence of Canadian residential mortgage fraud. The ratings agency said high home prices and rising household debt in Canada “increase incentives to fraudulent activity, such as overstating the borrower’s income in order to meet a lender’s qualifying criteria.” S&P said another factor is the growing proportion of mortgages originated via brokers, which do not bear credit risk in the same way as lenders.

S&P pointed to alternative mortgage lender Home Capital Group, which faced accusations of misleading disclosure to investors after severing ties with brokers accused of fraud, allegations which have since been settled. It also noted Laurentian’s disclosures that client misrepresentations had been found in connection with some home loans.

Laurentian Bank said in its financial update Wednesday that it has already identified and purchased $268 million in ineligible mortgage loans and is conducting a review of approximately 1,900 branch-underwritten mortgages sold to the third party purchaser, fixing or repurchasing any loans as needed.

Laurentian also said it agreed with the Canadian Mortgage Housing Corporation, another third-party purchaser of loans from the bank, that it did not have to perform a full review of mortgages sold to CMHC securitization programs and is working with Canada’s federal housing agency to ensure solid controls are in place going forward.

Laurentian also reported its earnings for the fiscal first quarter ended Jan. 31 of $1.49 adjusted diluted earnings per share, below the $1.54 expected by analysts surveyed by Thomson Reuters.

John Aiken, an analyst with Barclays in Toronto, said the “miss will do nothing to alleviate the negative sentiment on the stock, which in our view, continues to be weighed by the bank’s mortgage related documentation issues.”

“By and large, we believe that the market’s focus likely remains centred on Laurentian’s issues surrounding securitization documentation,” he said in a note to clients.

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