Laurentian buys back $180M in ‘problematic’ mortgages, more repurchases to come

Laurentian Bank of Canada says it has so far repurchased $180 million of problematic mortgages it identified late last year, while increasing the total target for its buy-backs to around $392 million.

The Montreal-based lender revealed in December that it might have to buy back about $304 million in mortgages sold to unnamed third-party purchasers, loans that were judged “problematic” or that failed to meet certain “purchase criteria.”

“Those issues resulted in the Bank repurchasing some mortgages and enhancing its quality control functions and underwriting procedures, and may result in it being required to repurchase additional mortgages,” said a prospectus supplement dated Jan. 9 of this year, which was filed in connection with an approximately $125-million offering of Laurentian shares.

In the same supplement, Laurentian said it has now repurchased approximately $89 million in mortgages sold by its B2B Bank unit to a third-party buyer.

Those loans were affected by “documentation issues and client misrepresentations,” which the bank uncovered through an audit, according to the bank’s management discussion and analysis for the fiscal year ended Oct. 31, 2017.

Laurentian says it has also repurchased another $91 million in mortgages that had been “inadvertently sold” to the third party. The problems that led to the mistaken sale “have been resolved,” the document said.

But Laurentian also disclosed last year that, after expanding the scope of its audit, some mortgages had been “inadvertently portfolio insured” when they may not have actually been eligible for coverage. The bank said it had sold $76 million of these mortgages to another buyer.

The bank said in its prospectus supplement that the other third party buyer had “confirmed” to Laurentian the loans in question, as well as another $12 million in mortgages, “are no longer eligible for portfolio insurance.” Those “ineligible” loans would also be repurchased before the end of its second fiscal quarter, putting the total repurchase target “in the range of $392 million,” a Laurentian spokesperson said in an email.

The affected mortgages, however, are but a sliver of the $36.7-billion portfolio of loans and acceptances Laurentian held as of the end of its fiscal 2017. The 172-year-old lender also said that the fallout from the buy-backs would not cause a material impact to its operations, that no employee had been involved in any misrepresentations, and that any paperwork problems “appear to have been unintentional.”

“The above repurchases from the Third Party Purchaser and the Other Third Party Purchaser are not expected to be material to the Bank’s operations, funding or capital,” Laurentian said in a statement Wednesday.

There is still more work to come because of the previously disclosed issues, including an already announced review regarding $1.157 billion in mortgages underwritten in the bank’s branch network and sold to the buyer. Laurentian said in its supplement that it had agreed with one of the unnamed third-party purchasers on the “nature and scope” of the audit. 

‘Documentation issues’

In its management discussion and analysis last year, the lender had said it audited a limited sample of the mortgages underwritten in its branch network that had been sold to the third party and found “documentation issues.” Laurentian said then that it would review mortgages stemming from its branch network that had been sold to that third party, and possibly repurchase any “problematic” loans, if need be.

“The Bank … will review approximately 1,900 mortgages out of the 9,500 mortgages underwritten in the branch network and, to the extent that this review uncovers additional mortgages that do not conform with the requirements of the Third Party Purchaser facility, the Bank will either fix such non-conforming mortgages or repurchase them,” the bank’s Jan. 9 supplement added. “The 1,900 mortgages selected represent the mortgages that were considered to represent a greater risk to the Third Party Purchaser based on the term remaining on the loans, the payment record of the borrowers on the loans and the origination channel for the loans.”

Laurentian said it had also come to terms with the purchaser on the “protocol” for reviewing the other 7,600 mortgages, which will either be reviewed when they come up for renewal or won’t be reviewed at all.

Laurentian has estimated that there may be approximately $124 million in “non-conforming,” branch-underwritten loans in total, “although the definitive amount will only be determinable upon completion of the audit,” the supplement said. The bank said the review is expected to take approximately four months.

Laurentian said that it had provided $61 million to a third-party buyer — in addition to a $40-million deposit announced in Dec. 2017 — via cash reserve deposit, to be released after the bank buys back all of the mortgages that do not pass muster and after the purchaser audits the review done on the 1,900 mortgages.

Laurentian chief executive officer François Desjardins previously called the mortgage situation “a process and paperwork issue that we have to resolve.”
Twitter: @geoffzochodne

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