Bloomberg News

Home Capital Targets Uninsured Mortgages to Boost Profit

June 06, 2011

(Updates share price in eighth paragraph.)

June 6 (Bloomberg) -- Home Capital Group Inc., the Canadian lender that offers home loans to people unable to borrow from larger banks, is focusing on more profitable uninsured mortgages as housing demand increases, President Martin Reid said.

“You’ll see activity in that space will increase a lot,” Reid said in a June 1 interview in Toronto, where the company is based. “The profit margins are much larger.”

Most of Home Capital’s business typically came from mortgages not insured by Canada Mortgage and Housing Corp. After the 2008 financial collapse that was caused by a flood of subprime mortgages, clients found it harder to borrow and uninsured loans fell to a third of the firm’s new originations.

By year-end, uninsured mortgages may represent as much as 75 percent of Home Capital’s new originations as clients return to the housing market, Reid said. Uninsured, or Alt-A, mortgages account for about 20 percent of a C$1 trillion ($1 trillion) mortgage market in Canada, he said. They’re often taken by clients who work as independent contractors or freelancers and aren’t eligible for loans at chartered banks.

Such mortgages are more profitable than insured loans because they typically carry higher rates, Reid said. For example, a consumer may pay 3.99 percent on an insured five-year mortgage, compared with as much as 6.5 percent uninsured.

“There’s really a lack of lenders in that space,” said Reid, 51. “There’s a bit of vacuum to fill.”

His firm originated insured and uninsured mortgages valued at C$1.37 billion in the first quarter, a 3 percent increase from the same period a year earlier.

‘Not For Sale’

Home Capital fell 63 cents, or 1.2 percent, to C$53.60 at 4 p.m. in trading on the Toronto Stock Exchange. The shares have risen 3.5 percent this year.

Canada’s largest banks aren’t interested in buying Home Capital because the banks are focused on holding safer mortgages that can be generated using automated computerized methods, said Home Capital Chief Executive Officer Gerald Soloway. The question of a takeover comes up frequently by investors.

“Offer us C$100 a share, and I think the board will accept,” Soloway, 72, said he told shareholders at Home Capital’s annual meeting last month. “Other than that, we’re happy to continue being in business. We’re not for sale, we’re not looking for a sale. But if they really wanted to, they know where we are.”

--Editors: David Scanlan, Peter Eichenbaum

To contact the reporter on this story: Sean B. Pasternak in Toronto at spasternak@bloomberg.net.

To contact the editors responsible for this story: David Scanlan at dscanlan@bloomberg.net; David Scheer at dscheer@bloomberg.net.


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