Home Capital says new mortgage rules could hurt business

TORONTO (Reuters) - Home Capital Group Inc HCG.TO said on Thursday it expected tougher new rules on mortgage lending proposed by Canada's financial regulator to have a material impact on its business.

FILE PHOTO - The entry to the Home Capital Group's headquarters is seen at an office tower in the financial district of Toronto, Ontario, Canada on May 1, 2017. Picture taken using a wide angle lens. REUTERS/Chris Helgren/File Photo

Shares in Home Capital, Canada’s biggest non-bank lender, were down 4.2 percent to C$13.19.

The new so-called “B20” guidelines propose stricter checks on uninsured mortgages, and a clampdown on regulated lenders teaming up with unregulated private lenders to circumvent rules limiting how much they can lend against a property.

“We believe that if B20 is implemented as proposed it could well have a material impact on our business strategy going forward,” interim Chief Financial Officer Bob Blowes told analysts on a conference call, a day after the company reported second-quarter losses that were greater than expected.

Regulators are looking to rein in risky lending, amid fears of housing bubbles in the cities of Toronto and Vancouver, and are concerned that loans enabling homebuyers to borrow up to 90 percent of a property’s value will turn toxic if prices begin to retreat.

Reuters reported in January that regulated mortgage providers were teaming up with unregulated rivals called Mortgage Investment Corporations (MICs), which pool money from wealthy individuals, to get around rules limiting how much mortgage providers can lend against a property.

The Office of the Superintendent of Financial Institutions (OSFI) said in July it was considering “expressly prohibiting co-lending arrangements that are designed, or appear to be designed, to circumvent regulatory requirements.”

Blowes said Home Capital had, for the past few years, referred borrowers to third-parties that would offer second loans to help them make down payments on property purchases. He said it stopped offering the arrangements in May.

“I think today roughly one in eight of our customers would have some kind of co-lending structure that we were aware of,” he said.

OSFI has also proposed stricter stress tests on uninsured mortgages which analysts say will make it harder for Home Capital and other alternative lenders to originate mortgages.

“The near-to-medium term outlook remains uncertain,” said National Bank of Canada analyst Jaeme Gloyn. “We continue to recommend investors await better visibility on Home Capital’s performance as well as macro risks.”

Last month, Home Capital appointed Yousry Bissada as its new chief executive, tasking the mortgage industry veteran with reviving the company’s fortunes. He plans to reassess the company’s business plan over the next three quarters.

Reporting by Matt Scuffham; Editing by Jeffrey Benkoe and Tom Brown