Filling a mortgage-market hole

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This article was published 22/4/2012 (2762 days ago), so information in it may no longer be current.

TORONTO — Home Capital Group said it's capturing mortgage business from Canadian lenders, including Toronto-Dominion Bank and Canadian Imperial Bank of Commerce, that are retreating from the $200-billion non-prime market amid signs of a housing downturn.

"The big banks are sort of juggling around their mortgage strategy and as part of that, they're tightening up in certain areas," Home Capital president Martin Reid said in an interview. "We're seeing some of the fallout."

Canada's banks have been exercising more caution on higher- risk mortgages after Bank of Canada governor Mark Carney warned that record household debt remains the biggest domestic risk to the economy. Carney last week signalled the potential for interest-rate increases that would cool off a housing market that has seen prices almost triple in some Canadian cities over the past decade.

"While interest rates have been at historic lows recently, the inevitable climb looks to be coming as soon as next year," said Katie Archdekin, head of mortgage products at Bank of Montreal, the country's fourth-biggest bank.

Home Capital, the Toronto-based mortgage lender, targets the $200-billion Alt-A market — uninsured loans to homebuyers who often don't qualify at chartered banks because of their work history or other circumstances. Their clients include self-employed workers and new immigrants to Canada. Higher revenue from loans rejected by banks will add to earnings in Home Capital's first-quarter results, to be released May 2.

"We see opportunities with people that are really high-calibre borrowers with good proof of income, but their circumstances are a little different," said chief executive officer Gerald Soloway, who was interviewed with Reid. "We haven't had to go down the credit scale; we've been able to go up the credit scale, which is an unusual phenomenon."

Banks are paring back loans to below-prime borrowers amid signs house prices are starting to fall. The Canadian Real Estate Association on April 16 said prices in Canada dropped 1.7 per cent in March from the previous month, led by a 3.1 per cent decline in Vancouver. Finance Minister Jim Flaherty said he's "encouraged" by signs of a housing correction in Vancouver, preferring the market to "correct itself" without government intervention.

Toronto-Dominion Bank, the country's second-largest lender, stopped originating non-prime residential mortgages as of March 31, spokesman Mohammed Nakhooda said. The loans, offered through TD Financing Services Home Inc., represented about 0.2 per cent of the bank's mortgage portfolio.

"This decision was based on a number of factors, including a regular review of our secured-lending risk-management strategies," Nakhooda said. "To remain competitive in the business in the current environment would require us to increase our risk profile, something we concluded was no longer in our risk appetite."

Canadian Imperial Bank of Commerce, the country's fifth-largest bank, said in March it was considering the sale of its FirstLine Mortgages broker. The bank said it wants to shift mortgage renewals into its branch network, where it can sell more products.

Increased risk management has led some banks to reject loans, Reid said.

"Two years ago, they wouldn't have turned that deal down," he said.

An influx of non-prime lending will benefit Home Capital, Soloway said. The company is expected to earn $1.50 a share before one-time items in the first quarter, up from $1.24 a share a year earlier, according to the average estimate of six analysts surveyed by Bloomberg News.

"We have had a very good first quarter," said Soloway.

— Bloomberg