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Mortgage lender Home Capital Group Inc. delayed the release of financial results on Tuesday as the company recruits new board members in a bid to restore its credibility, stem the bleeding of deposits and find a potential buyer or investor.
Home Capital is expected to announce as early as this week that it will add members to its board who have experience in restructuring financial companies. The company is the country's largest lender to home owners who typically do not qualify for mortgages from the big banks.
Home Capital's short-term plan is to appoint experienced leaders who help can slow client withdrawals, then quickly decide if the company can survive as an independent business or be sold.
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Searches for a permanent chief executive officer and a new chief financial officer are already under way. Sources familiar with the company say a sale is the most likely outcome.
"Everyone recognizes getting this stabilized is important to the financial system and important to the real estate market," said one investment banker working for Home Capital.
Toronto-based Home Capital was scheduled to report quarterly results on Wednesday.
It postponed the release until May 11 to provide an update "for events that have occurred since the close of the first quarter."
Over the past five weeks, more than $1.6-billion of deposits have been withdrawn from high-interest savings accounts with Home Capital, money used to fund the mortgage business. On April 19, the Ontario Securities Commission revealed allegations that the company improperly disclosed financial information. To shore up the business, the company secured a $2-billion life line from a major pension fund last week, but it came with onerous terms, including an interest rate of 10 per cent.
The company dismissed its CEO this spring and announced that founder and director Gerald Soloway will retire.
Home Capital's interim management team and board say they are "reviewing strategic alternatives" that could include the sale of the company.
Two regional banks – Edmonton-based Canadian Western Bank and Montreal-based Laurentian Bank of Canada – are significant players in the alternative mortgage business and sources said both are interested in acquiring part of Home Capital, but not the whole company. Canadian Western CEO Chris Fowler told the Bloomberg news service on Tuesday the bank will consider "selectively" acquiring loan portfolios, and a Laurentian spokeswoman said the bank would look at acquisitions that are a strategic fit. None of Canada's six big banks are expected to bid.
A number of U.S. private equity funds and large Canadian financial institutions are also kicking the tires at Home Capital. One interested party is private equity fund J.C. Flowers & Co., which also recently bought Citigroup Inc.'s Canadian subprime lender, now called Fairstone Financial Inc., which has $2.5-billion (Canadian) in assets.
But one source working for a potential bidder said the key issue for any buyer of Home Capital is ensuring sources of funds, such as savings accounts and GICs, to backstop the mortgage portfolio.
A spokesman for Home Capital declined to comment on the company's plans.
Other sources said the company does not necessarily need to be sold. A new CEO, an improved board and a lower-cost financing deal similar to the $2-billion line of credit mortgage lender Equitable Group Inc. firmed up with a syndicate of five major banks this week might be enough to right Home Capital's ship.
When Home Capital does report financial results, it will need to show that homeowners are making the payments on the underlying $18-billion worth of mortgages it holds. Last year, defaults were at historic lows, owing in part to surging residential real estate markets. Any buyer or investor will want to see evidence that this has continued. The company's plans to originate new mortgages will also be in question, as its cost of capital – the amount it will cost the company to extend new loans – has skyrocketed thanks to its financing deal with the Healthcare of Ontario Pension Plan.
Mortgage brokers said Home Capital does not appear to have taken any significant steps to reduce the number of mortgages it is granting.
One broker, who did not want to be identified, said Home Capital appears to be focusing on new mortgages for home purchases, rather than refinancing existing ones. Refinancing is generally considered riskier because many people do it to remove equity from their homes to use for other purposes, including consolidating other debts.
However, while the firm remains open for business, some mortgage brokers said they are leery about a mortgage from Home Capital's Home Trust unit.
"There are a large number of brokers who will not refer to Home Trust right now, and that type of confidence is going to take a long time to get back," the mortgage broker said.
However, John Bargis, vice-president of Mortgage Edge, said he is still sending business to Home Trust and believes the company's core mortgage business is sound.
"My agents have inquired about whether or not they should continue sending business to Home Trust, both purchases and refinances, and the answer is yes," Mr. Bargis said.
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Andrew Willis
Janet McFarland