Laurentian's $300-million mortgage error worries markets

Laurentian is in full-on damage control mode after news got out that the Montreal-based bank had mishandled documentation affecting up to $300-million in mortgages—an error that could prompt it to actually buy the mortgages back.

Markets responded swiftly and harshly, with Laurentian's shares tumbling by 7.9 per cent when the issue was first made public. They dropped another 1.3 per cent a day later. Analysts are nervous that this could be a 'tip of the iceberg' situation, and that Laurentian's troubles could end up mirroring those of the similarly embattled Home Capital, Inc.

"In our view, there are too many unknowns and the potential for the size and scope of [Laurentian Bank's] mortgage investigations to increase is, in our view, high," said Darko Mihelic, an analyst at RBC Dominion Securities Inc.

However, Laurentian representatives insist that the situation is very different from what unfolded at Home Capital this year, and that the problems that allowed these incidents to happen were not intentional or indicative of a greater trend.

"We're very different organizations and this is a very different situation than what happened at Home (Capital)," said François Desjardins, chief executive at Laurentian. "This, to us, is really a process and paperwork issue that we have to resolve."

The affected mortgages made up a very small overall percentage of Laurentian's accounts. And despite the issues, which included client misrepresentation and insufficient documentation, among other things, the loans have performed well.

If this truly is where the issues end, then Laurentian should be able to rebound fairly quickly. Otherwise, we could be in for another drawn-out financial saga.