For days now, investors and industry types have been impatiently waiting to hear why Home Trust terminated numerous mortgage brokers. Today we got Home’s explanation.
The company said the following in a disclosure requested by the Ontario Securities Commission:
- 45 individual mortgage brokers were cut off (about 1% of the company’s broker relationships)
- The alleged reason: “Falsification of income information” (i.e., fraud, albeit the company doesn’t refer to it as such)
- It found no evidence of falsification of property values
- These shunned brokers originated $960.4 million of single-family residential mortgages in 2014, out of $7.6 billion in total Home Trust originations
- 60% of the questionable mortgages were for Home Trust’s prime “Accelerator” products (i.e., they were largely insured mortgages)
- This potential fraud was identified by “an external source” in late 2014, the company says.
Home said it is “comfortable” this issue is not widespread in its portfolio, adding, “The Company continues to actively monitor the subject mortgages and notes that there have been no unusual credit issues.”
You can read about the measures the company took to prevent this from happening again here: link. These include “requests for more detailed documentation and income verification from brokers.”
Interestingly, we’ve been approached by three lenders asking if we know which brokers Home terminated. It seems that several lenders and mortgage investors are trying to identify these allegedly shady originators, so they can ban them.
We’ll have full analysis of these developments after the company’s 10:30 a.m. conference call Thursday. If you’re following this saga, you can listen in on that call here: http://www.homecapital.com/ir_webcasts.asp
Let’s hope HCG name’s names and tell us what year(s) those mortgages were originated.
and open themselves to a potential lawsuit… I don’t think so!
However, if they wanted to, HCG could make that information available to RedX and then RedX subscribers could have access?
Falsifying a mortgage app is a criminal offence (ie. “uttering a false document”). These brokers should be disciplined by their professional bodies at a minimum, criminally charged at worst.
Plus as a public corp., HCG is risking investor action if it is shown they are not merely “helpless dupes” in this crisis.
One broker and brokerage represented about $400 Million of the bad paper and the rest was broken up among the others, the rest only average about $12 Million of annual volume each so the big offender was by far the most active. I have no doubt whatsoever that HT has provided a full report to FSCO (it’s an Ontario brokerage) which is exactly the right procedure. It would be illegal to simply forward the info about the brokerage to other lenders.
This broker and brokerage were the #1 producers at HT, they received support from HT for all their charitable donation requests, they were trusted and believed in and they completely betrayed HT. I am certain all the HT executives were shocked and saddened. It’s one thing when a random broker cheats its another thing when its the top broker. These despicable people deserve to be investigated by FSCO and dealt with accordingly.
I know this is a temporary set back for HT, they will improve HT’s document review systems and there will be no repetition. HT will recover, heck, I think next quarter they may just rock it out and choke the short sellers very nicely. HT is an important company for the mortgage brokerage space and I am certain they will continue to thrive.
I’m curious Ron, what law is broken by HT publicly stating they’ve terminated Joe Blow broker?
Wow Ron, talk about putting lipstick on the pig! We are talking about 45 brokers that were terminated, not some small group of bad apples. They submitted thousands of loans, and there must have been dozens of people on the HT side involved in processing these loans. Apparently this went on for more than a year (and remarkably, nine months after this was discovered, they still don’t know how many pre-2014 loans were involved!). This is a breakdown of the highest order
HT is purported to have an underwriting function that looks at 1000s of loans a year. You would think with that kind of volume, that the humans involved would have a pretty good innate sense of when a claimed level of income was off. You would also think, in this day and age, if you are not going to take the obvious step of calling the employer to confirm the salary, that you would have software that flagged outliers by firm or by position. And finally, you would think there would be some QA function within the firm that did a thorough scrub of a certain percentage of files as a means of identifying fraud or at a minimum creating a sentinel effect to keep everyone honest. The manifold failures of some very basic banking functions here, implies a culture that is very loose when it comes to loan quality. There are 3 Cs to a good loan. HT was apparently only concerned with 2 of the 3.
This should be a wake up call for the industry that things have gone off the rails. It has been a known issue for nine months. Where is the investigation from FSCO – it is well past time for that to have been initiated? HT waiting nine months to inform its shareholders of this, and even then, apparently had to be prodded by the OSC into providing very partial and not terribly satisfying disclosure. There is something very rotten in Denmark. You guys need to sober up and get in front of this before the capital markets lose faith in the Canadian financial system.
Tomas, It’s impossible to simply publish names of brokers terminated for cause because that is libelous without providing the cause of termination which then becomes litigious, it’s impossible for HT to forward info to other financial institutions because they would have to prove the allegations by supplying the private mortgage information of hundreds of individuals so that’s impossible. If HT just whispered the names of the individuals to other FI execs they would leave themselves open to lawsuit so that is not happening. HT is allowed to forward the information to FSCO who as a government agency can safeguard privacy and can launch an investigation into the mortgage brokers on their own.
Ron,
So there’s litigation risk, but it’s certainly not illegal. The broker or brokers in question would be foolhardy to pursue a libel action in which they are criminally culpable. In other words, pursuing a libel action would only illuminate their activities. Hardly prudent. (the word you’re looking for is “tortious”, but that’s another story).
This is a don’t ask, don’t tell situation. If not for the OSC direction to disclose, this story would never have been publicized.
Let’s see if there’s a shareholder class action against HCG, that will reveal all.
Any speculation on who the “rat” was here? Former associate or competitor? I’d bet a cool 20 bucks it was a former associate.
Names are already coming out…..http://business.financialpost.com/investing/home-capital-group-inc-is-used-to-critics-who-say-its-vulnerable-to-a-housing-pop
Luckily for Inter-Finance, Canada rarely punishes white collar crime with a prison term. These folks will live to fight another day.
However, this is an easy target for a HCG shareholder class action. HCG will be afforded an opportunity to amicably settle, should they decline, then it will be the “hard way”.
HCG’s substantial number of US shareholders will likely lead the charge. Now, this is an interesting story.
The culprit here is the lenders love for volume at the expense of quality. I say and I will say it again. Lenders should measure files by the quality of the submission and closing ratios. Forget a requirement for x volume annually. This takes away the pressure of keeping the “promised” volume and the lure of manipulating the file to make if fit.
The consumer than gets the benefit of a broker that truly shops the market instead of “I better place this deal with my promised volume lender”!
There are bandits out there that sully our industry and I feel with an emphasis on quality files, it will sort these people out in the long run.
Just saying!
THANK YOU Daniel Girard. I’ve been raising the topic of quantity over quality for SO LONG… I’m so glad to know others share this opinion.
Correct me if I’m wrong, but the $900M of volume from these brokers was not all deemed to be “bad paper”… only that those brokers REPRESENTED $900M of volume. Did they actually announce the volume for files with “irregularities”?
Even calling it “bad paper” is unfair, as HT confirmed that the loans performed as well or better than the overall portfolio.
Its not fair to disparage a broker because they were cut off because of one or two or even 10 files- if they represented 1000s of deals. I think HT decided to make a statement (or perhaps were forced to make a statement) by casting a wide net.
Also the president confirmed that they are not suggesting the brokers were the SOURCE of the doctored docs, only that they were holding these brokers accountable because the business flowed through them.
As a broker I can attest to the fact I’ve received from time to time, documents that did not appear to be genuine. Sometimes I catch it, other times I have not and been alerted by the lender. This did not make me complicit…
I would be shocked if this hasn’t happened to almost every active mortgage broker/agent at least one time or another. Everyone all of a sudden is sounding very naive.
My last point is that HT admitted during the call that they were a tad lax in their approach to verification. If I deal with lender A who asks for job letter, paystub, and bank statements to confirm payroll deposits then I as a broker will obtain those items – and I would be reasonable assured the client made and worked where they said they did… if lender B only asks for job letter and paystub, how many people here would still ask for the bank statements?
Only a decade ago HT only required a self declared letter for income. There was no responsibility to ensure the clients statement was accurate – no requirement for us a broker to independently verify the clients tax returns, bank statements, NOAs etc…. Their business model did not call for anything more and the proof was in the pudding…thier results and low arrears proved that. However as times changed, attitudes changed, regulations changed and oversight changed accordingly – and so did Home Trust. It didn’t mean they way they did business before was illegal or immoral. It didn’t mean the brokers who did business with them at that time were either.
The times are a-changing… if there is guilt its on the part of everyone involved incl HT to adapt to this changes sooner.
Thanks for posting TObroker, Some very valid points…
Well the name did get named and I find it a bit surprising that the disclosure was attributed to the HT president. So it’s out in the open. Tomas has the right angle on the whistle blower but some of the things about the broker’s behavior are even uglier than has been published. I cannot agree that thirst for volume is the culprit, when lenders work at a high volume with a broker for many years, trust develops and when a broker brutally violates that trust how can you blame the lender?
Ron you’re alluding to information about “the broker’s behaviour” that isn’t public knowledge and probably can’t be proven. You’re also suggesting the broker violated trust which is to suggest they were in on it. If you have other information then I’m sure we would all be pleased to hear it… if not then you’re dangerously contributing to speculation and hearsay.
I am not suggesting to blame a lender for having files with document irregularities nor am I exonerating the broker should they be PROVEN to have doctored information – I think we can all agree that’s inexcusable.
What I would think its fair to say is that said lender may have contributed to a culture that did not place enough emphasis on the broker ensuring the information they obtained was accurate, either because their risk model already accounted for it or because the volume of good business from that broker created an “allowance” for it.
The problem is when you create that culture which WORKS for you for 20 years based on a certain risk model/appetite, then launch a product with a completely different model and appetite (see Accelerator) and try to run them concurrently in the same office with many of the same people.
“Dangerously contributing to speculation and hearsay” wow TOBroker, I don’ think that these posts are all that world shaking. I actually believe that HT did a good job of rolling out the Accelerator product which was something completely new to them. I think that many lenders may be vulnerable to one of their top brokers going rogue, not just HT. I also think that HT continues to do a great job with their “B” business in the face of massive pressure for regulators to install a tighter and tighter underwriting process. Sometimes we may forget just how useful lenders like HT and Equitable Bank are to our space by providing venues to help our clients when no other lender can deliver a solution at the rates these lender provide
Despite the careful wording I get a whiff of “blame the victim” in a few of these comments. Home Trust was the one who was abused and saw their share price take a hit. It’s easy to say that they should have had higher standards or better audit but that is all hindsight, HT did not want false income docs nor did they turn a blind eye to the problem. The media and some brokers can parse HT’s actions however they want but EVERY major lender who has been around long and has grown big enough, has had a big broker go rogue and has had to shut the broker down. It’s just part of any business, lawyers go bad, accountants go bad, realtors go bad, heck a few bankers have gone haywire, it just the way of the world. This was 45 brokers out of 4,000. However this was one of the only times that the media spotlight has been so bright on one of these incidents. Is it possible short sellers lit a fire under the media? Who knows.
The irony is that other folks also falsify documents. They just haven’t been caught yet – or it maybe the case that HT is turning a blind eye to them.