Mortgage lender Home Capital Group Inc. has cut ties with 45 mortgage brokers over concerns about possible income falsification, the Toronto-based company announced on Wednesday.
At the behest of the Ontario Securities Commission (OSC), the firm revealed that it has suspended its relationship with 18 independent mortgage brokers and two brokerages involving a total of approximately 45 individual brokers.
The move came after an anonymous letter alerted its board “to possible discrepancies in income verification information submitted by certain mortgage brokers,” the firm said in a statement.
Failure to properly verify borrowers’ income, or even to purposely falsify income, was one of the underlying factors that contributed to the turmoil in the U.S. housing market in the lead up to the financial crisis. Ultimately, many of these borrowers proved unable to keep up mortgage payments on houses they couldn’t afford, leading to defaults that cascaded through the financial services sector, helping to touch off the crisis.
Home Capital says it investigated the allegations and did discover issues with income verification, which led to it suspending the broker relationships. However, it doesn’t expect the issue to lead to additional losses.
Although Home Capital’s investigation determined that falsification of income information had occurred, there is no evidence of falsification of credit scores, or property values, the company indicated in a conference call on Thursday.
“It is unlikely that this matter will lead to credit losses,” Home Capital said, and that the affected mortgages are performing in line with the rest of its portfolio. It added that it has confirmed that the issue is not more pervasive within its portfolio.
That said, the full scope of the issue is not entirely clear. Home Capital has determined that the suspended brokers originated $960.4 million of single-family residential mortgages in 2014, or 5.3% of the outstanding loan assets on its balance sheet, the company said. The firm has not said specifically how much of that total is affected by the income verification issue, indicating that it is a small fraction of that total. At the same time, it has yet to fully explore pre-2014 mortgages for similar issues.
The broker suspensions have led to a subsequent decline in mortgage originations at the firm, Home Capital said. The business generated by these brokers could be expected to contribute approximately $6 million to the company’s net income over a full year, or approximately 2% of the total net income of $313 million reported in 2014, the company added.
In the wake of the discovery, Home Capital has enhanced its income verification procedures and also made changes to its staffing, the company said. The firm added that it expects origination volumes to improve as brokers adjust to its enhanced approval processes.