A routine audit is leading a Canadian bank to repurchase their “ineligible” mortgages. Montreal-based Laurentian Bank is agreeing to buy back over $125 million in mortgages. The agreement is the result of a routine audit from the Canada Mortgage & Housing Corporation (CMHC). This comes while the bank is trying to improve borrowing standards, after a different third-party audit revealed similar issues.

It’s Not Fraud If You Don’t Collect Documentation, Right?

Laurentian Bank announced an audit of mortgages sold to a TPP revealed “documentation issues and client misrepresentations” in December. Most of it is due to failure to obtain or properly store documents on the borrower. The bank also found “client misrepresentation” to a “lesser extent.” It’s unclear how they know the loans with missing documentation are not “misrepresentations,” but whatever. They did note that these loans are performing in-line with their expectations.

The audit resulted in Laurentian announcing they would need to buy back a few … hundred million in mortgages. In December they had announced it would be up to $304 million. The company noted in their 2017 annual report that, “no employees were implicated in any misrepresentations and the documentation issues appear to have been unintentional.” Not sure if screwing up $304 million in loan documentation by accident makes this better or worse.

Laurentian Bank Will Buy Back An Additional $115 Million of “Ineligible” Mortgages

Nope, that wasn’t all. Yesterday the bank announced a routine audit from another party found “similar issues.” CMHC, the government Crown corp in charge of mortgage liquidity, found mortgages that were “inadvertently portfolio insured.” Issues were found with both mortgages sold to the CMHC’s securitization program, as well as those only insured by the Crown corp.

CMHC has cancelled insurance on those that were improperly insured. The bank will repurchase those sold to the securitization program, once a third-party audit verifies the results. Laurentian estimates it will repurchase between $125 and $150 million.

Laurentian Bank CEO Argues It’s Not An Issue

Once the bank became aware of the issue at the end of last year, they took steps to reform the borrowing process. The bank believes the mortgages “do not represent a credit issue as they are all performing in line with the Bank’s overall mortgage portfolio.” Defaults are always low in a bull market, but that’s a lesson for another day.

The Downside Isn’t Credit Defaults

Mortgage brokers always get wound up when we point out the mortgage market has issues. The problem isn’t the loans themselves. As Laurentian Bank points out, these loans are performing just like other loans. There’s nothing that shows they’ll be of any worse quality at this point.

The problem is a significant number of people contributed to the Canadian real estate market, by slipping through the cracks. They drove prices higher, while many technically should not have been able to do so. As mortgage lending standards improve, the market weeds these buyers out. When this segment is removed, dollar volume drops significantly. Banks have already been forced to remove people buying “too much home” through B-20 Guidelines. Now they’re tackling those that may have needed to fudge documentation to get those loans. The buyer pool is shrinking, and with it goes liquidity at higher prices.

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Photo: Sergio Ortega.