HOMEQ Corp. reported on Tuesday that its net loss surged by 80% to almost $5.1 million in the second quarter as mortgage originations fell and the company continued to focus on conserving cash resources.

Formerly an income trust known as Home Equity Income Trust until it converted to a corporation at the end of June, HOMEQ intends to apply to the Minister of Finance to have its subsidiary, Canadian Home Income Plan, become a federally regulated Schedule I bank to be known as HomEquity Bank. The new charter would allow the company to access retail deposits as a stable source of funds.

Until it receives approval, the company is taking steps to conserve cash, particularly in the context of tight capital markets and economic uncertainty. These steps include reducing the average mortgage amount for new customers, scaling back marketing activity, closely monitoring overhead expenses and rationalizing sales territories.

“It’s been essential for us to continue to operate under our existing cash reserves for the time being, and to provide ourselves with a margin of safety until capital becomes more available and less expensive,” said president and CEO Steven Ranson in a conference call on Wednesday.

These cash-conserving steps have caused mortgage originations to be temporarily reduced, the company said. In the second quarter, HOMEQ saw mortgage originations plummet 42% to $23 million in the second quarter. But this drop was smaller than the 50% to 60% decline that the company had projected.

“There continues to be a growing demand for our product, and an increasing need for funding,” said Ranson.

During the quarter, the trust’s mortgage portfolio grew by 9% on an annual basis to $833 million. The spread percentage was 3.17%, eight basis points higher than the same quarter last year, and the highest level achieved since the first quarter of 2008.

“We are pleased with the improvement in our spreads and income this quarter,” said Ranson, adding that he is encouraged by signs of increased liquidity in capital markets.

The objective of obtaining a bank charter is to enable HomEquity Bank to access retail deposits sourced through deposit brokers to grow HOMEQ’s consolidated reverse mortgage portfolio and increase its spread income. It will also help to diversify the company’s supply of funding.

“Retail deposits are a very stable and cost-effective source of funds,” explained Ranson. “Markets have changed, and we need to diversify away from the wholesale funding/securitization structure we followed since our initial public offering in 2002.”

Ranson said he expects its application to be approved by the government in the third quarter of 2009, and noted that the company has made progress on its application in recent months.

“Our attention in the last quarter has been very strongly focused on the bank application,” he said.