Home Capital CEO confident its mortgage business will return to historical norms

Home Capital Group inc.Home Capital is recovering week by week from a disastrous third quarter, when a dire shortage of liquidity and a new vetting process restricted its ability to originate new mortgages, chief executive Yousry Bissada said Wednesday.

He said Home Capital (TSX:HCG) didn’t have enough funds to lend until mid-July — following an infusion of capital from famed investor Warren Buffett in June — and then its brokers needed time to submit updated borrower applications.

Things have improved during the fourth quarter and, in the long run, Home Capital will be stronger because of what it learned from the financial crisis, Bissada said in an interview.

Photo via Home Capital Group Inc.
Photo via Home Capital Group Inc.

“It has forced us to look at a lot of procedures and processes and made us a much better company. That will, in the long run, prove out to be a better Home Capital,” said Bissada, who didn’t join the company until August.

Earlier this year, the Ontario Securities Commission accused former top executives — including its CEO and chief financial officer — of misleading investors about the impact of severing ties with some affiliated brokers accused of fraud.

Depositors reacted to the OSC’s accusations by withdrawing about $2 billion from high interest savings accounts from two Home Capital subsidiaries, forcing the company to look for other sources of funds for its lending activities.

“The third quarter was focused on stabilizing our liquidity, so we could get out and lend again,” said Bissada.

He added the company now has lots of liquidity but its ability to originate new mortgages was hampered in the third quarter by the new way of processing transactions and slightly more stringent guidelines.

The company reported late Tuesday that its mortgage originations plunged 85 per cent compared with last year’s third quarter _ to $385 million, down from $2.54 billion.

Its third-quarter income fell to $30 million, less than half of the $66.2 million it reported in the same quarter last year. Third-quarter revenue amounted to $95.4 million, down from $145 million.

Home Capital's Q3 2017 Finances. Image via Home Capital
Home Capital’s Q3 2017 Finances. Image via Home Capital

Bissada told analysts Wednesday that 70 per cent of the new mortgage applications it received in the third quarter were either turned down or not processed quickly enough under Home Capital’s new vetting system.

Home Capital needs to improve how it interacts with mortgage brokers, who are the intermediaries between the lenders and borrowers, he said, in part by providing them with acceptances, rejections or suggested modifications within 24 hours.

“I would say we’re inconsistent today, to be fair. There are instances where we will give immediate same-day approvals and there are other instances where we will take a few days to give approvals. And that’s not acceptable.”

Bissada said things are improving on a weekly basis and that mortgage renewals from existing borrowers are being approved at historical levels of between 75 and 85 per cent.

He said there’s still uncertainty about the impact of new federal rules for mortgage lenders, including a stricter financial stress test for borrowers to ensure they can withstand higher interest rates.

But Bissada said the new rules may end up with home buyers scaling down the size of the mortgage they get, which would be a negative, but there’s a potential positive if more borrowers turn away from banks and towards alternative lenders.

Additional opportunities include a growing immigrant population in the Greater Toronto Area, more self-employed people due to demographic shifts and a bigger push into Quebec and western provinces.

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