Laurentian Bank continues to review problem mortgages

By Matt Scuffham

TORONTO (Reuters) - Laurentian Bank of Canada (Toronto:LB.TO - News) said on Wednesday it was continuing to review problematic mortgages sold to an unnamed third party last year and may need to repurchase more of the loans.

The Montreal-based lender also reported first-quarter earnings which were below market expectations and its shares were down 1.2 percent at 11 a.m. EST (1600 GMT).

Laurentian said in December that it might have to buy back about C$304 million in mortgages sold to an unnamed third-party purchaser after an audit found "documentation issues and client misrepresentations."

In January, it said it had so far repurchased C$180 million of the problem mortgages and might have to buy back mortgages worth C$392 million in total.

Mortgage lending practices have been under scrutiny in Canada since problems relating to mortgage underwriting procedures were identified at alternative lender Home Capital Group (Toronto:HCG.TO - News).

Ratings agency Standard & Poor's said last week that more evidence of fraud in Canada's mortgage industry could emerge as a result of high house prices and household debt.

Laurentian Chief Executive Francois Desjardins said his bank had overhauled its procedures since the issues became apparent.

"We are increasing governance across the board. All new business is subject to enhanced quality control. We will be paying more attention to the business overall as loans renew and new business comes in," he said.

Laurentian said as its review of the 1,900 mortgages sold uncovers more loans that did not conform to the requirements of the sale, it will either fix the mortgages or repurchase them. The bank said it expected the review to be completed by the end of the second quarter.

The bank also said that the Canada Mortgage and Housing Corporation (CMHC), Canada's federal housing agency, had agreed the bank did not need to perform a full review of mortgages sold to CMHC's securitization programs or make further large-scale repurchases.

Laurentian said in January it had repurchased C$88 million of loans that were incorrectly sold to CMHC securitization programs.

The bank reported earnings per share, before one-off items, of C$1.49 in the first quarter to Jan. 31, compared with C$1.43 a year ago. That was below the average forecast by analysts of C$1.54, according to Thomson Reuters I/B/E/S data.

"The Q1 miss will do nothing to alleviate the negative sentiment on the stock, which in our view, continues to be weighed by the bank’s mortgage-related documentation issues," said Barclays analyst John Aiken.

(Reporting by Matt Scuffham; editing by Chizu Nomiyama and Jonathan Oatis)