Home Capital troubles are stalling Canada's nascent mortgage bond market, insiders say

Trouble at lender Home Capital Group Inc. is stalling efforts to create what would be the closest thing Canada has to a subprime mortgage bond market.

At least two bond sales are on hold in Canada as investors wait to see how the Home Capital situation shakes out, according to people with knowledge of the matter. While discussions on both bond offerings were in early stages, one of the deals would be backed by loans from MCAP Corp., and the other, marketed by Royal Bank of Canada, with loans from Home Capital and Equitable Group Inc., said the people, who asked not to be identified because the talks are private.

All three of those firms focus on borrowers that the biggest banks shy away from, such as people who are self-employed and have irregular income. Their loans are often known as “alt-A” mortgages.

These alternative lenders are coming under increased scrutiny as Home Capital faces allegations from the securities regulator that it failed to properly disclose an internal probe into fraudulent mortgage applications. Home Capital this month took out an expensive $2 billion loan to fight off an exodus of customer deposits and an almost 80 per cent plunge in its shares since the end of March.


“At the moment, investors are a little bit gun-shy,” said Mark Carpani, a money manager at Ridgewood Capital Asset Management, which oversees $1.1 billion in assets. He usually looks at residential mortgage bond sales, but is more hesitant about them now.

Representatives for Home Capital and Equitable declined to comment. A senior executive at MCAP did not return calls seeking comment.

It's too soon to say whether the pause is anything more than a hiccup in the nascent market for mortgage bonds without government backing in Canada. The nation's mortgage bond market, like the U.S.'s, is dominated by top-rated securities with a form of government-backed insurance. In Canada's case, the insurance comes from the Canada Mortgage and Housing Corp., which was backing about $440 billion of outstanding securities at the end of September.

Bankers and mortgage lenders have been testing investor demand for mortgage bonds with no federal support. So far, these bonds have been backed by prime home loans. MCAP sold such securities in 2014. In the last few weeks, Bank of Montreal sold a $2 billion mortgage-backed securities deal bundling prime residential mortgages originated by the bank, spokesman Paul Gammal said by email. The big Canadian bank planned to purchase the top three tranches of the debt, equal to about 98 per cent of the principal, according to a Moody's Investors Service report.

RMBS Deals

Lenders and bond underwriters have this year also been looking at selling bonds backed by loans that aren't prime. For the deal backed by Home Capital and Equitable loans, Royal Bank of Canada held investor meetings to gauge interest on what was tentatively discussed as a $250 million transaction, according to people with knowledge of the matter. Those bonds are to be issued by Steel Curtain Capital Group LLC and Ashley Park Financial Services.

For the deal backed by MCAP mortgages, National Bank of Canada has held meetings with investors, with an initial tranche of less than $100 million. That offering would be issued by New Latitude Capital Corp. RBC, National Bank, Steel Curtain and New Latitude declined to comment. No one at Ashley Park was immediately available to comment.

Government regulations that came into effect last year tighten access to government insurance, which could create an opening for more issuance of mortgage-backed securities backed by uninsured mortgages. The rule changes were part of ongoing efforts to cool the housing market, particularly Toronto's, which saw average home prices increase 25 per cent in April.

The Ontario Securities Commission accused Home Capital of failing to properly disclose an internal probe into fraudulent mortgage applications. The lender has hired bankers to pursue strategic options, including a possible sale of assets. The company suspended its dividend and added two former pension fund executives to its board, according to a statement Monday.

A resolution of Home Capital's troubles might be needed to make investors more comfortable again with securitizing nonprime mortgages made by alternative mortgage lenders, said Richard Hunt, an analyst at Moody's Investors Service in Toronto.

“It's not sort of the mainstream part of the Canadian market,” Hunt said. “The perceptions might be a little harder on them.”

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