As this story continues to develop, I can’t help but think: there’s no real story here.
I mean, there is a story: that Home Capital’s stock plummeted, and there was a run on their deposits.
But what’s the story behind that? Nobody knows. Yet.
Let’s look at what we know so far, what questions need answering, and then delve off into conspiracy theories…
All too often in society today, people don’t want to know the story behind the story.
They want a headline.
They want an immediate conclusion.
And if the opportunity arises to look further, they turn their attention to a shinier object.
Let’s say, for argument’s sake. that President Donald Trump (that still sounds weird…) were to say, “Barack Obama tapped my phones. This is Nixon/Watergate. He’s a bad (sick) guy.”
I think roughly 50% of America will take that as given, and require absolutely, positively, no follow-up.
A lot of people, even if offered clarification, wouldn’t be interested!
I believe this is based on a combination of things, ranging from our shortened attention spans, to the sheer amount of people, places, and things vying for our attention, to the immediacy we’ve grown accustomed to as technology advances.
So when the story about Home Trust broke last week, and continued into this week, I wasn’t surprised when nobody really asked “what’s happening, and why.”
We know what happened.
That’s the easy part.
But what really happened, and why did it happen? That’s what I want to get to today.
First, perhaps, a recap.
Back in 2015, Home Trust suspended relationships with forty-five mortgage brokers, now dubbed “the home-trust forty-five,” amid claims of fraudulent mortgage applications. Of the 45, 18 were independent, and the other 27 were from two different brokerages.
After the discovery of this fraud, Home Trust restricted their lending practices, increased scrutiny and underwriting practices, and tightened the reigns on their lending.
But nothing really happened of consequence until last week, when the Ontario Securities Commission announced they would be investigating how the mortgage fraud was reported (or not…) to their investors.
News of the investigation caused investors to withdraw their deposits, and the stock price of Home Capital Group (the holding company) began to plummet.
These “investors,” keep in mind, are not you and I.
This is the part of the story (one of many) that the media isn’t telling.
These are institutional investors, hedge funds, and all-purpose big-dogs.
Just in their high-interest savings account alone, investors withdrew approximately $1.09 Billion of the $1.41 Billion in holdings, in the space of one week.
That is the story, in a nutshell.
But since this story broke, the speculation has run absolutely wild!
It’s a classic example of mania, exacerbated by the combination of round-the-clock media coverage, and today’s society’s penchant for careless and wild speculation.
The real estate bears are coming out in full force, saying, “This is it! The crash is coming!”
BNN, The Huffington Post, Bloomberg and the like simply can’t get enough of this.
And in my humble opinion, and feel free to tell me if I’m wrong, this is merely a stock market story, and has little, if anything, to do with real estate.
So there. Now take your shots.
Much of the general public, for oh-so-long, has wanted to see the Canadian real estate market, most notably Toronto, crash.
Even though many of those folks own houses, they still want to see a “cooling” or a “drop” of some sort.
So when the story about Home Capital first broke, it didn’t take long for people to make the connection that they so desire, and suggest that a run on Home Capital’s deposits, and a crash in their stock price, would lead to a real estate Armageddon.
But who are Home Capital Group, and Home Trust?
Home Trust is an alternative lender, and although the uninformed, bitter, bearish public wants to assume that means some sort of loan-shark, or high-risk institution, they are not. They are an “alternative” lender, which by definition means an alternative to the Big-5 banks, who have different lending practices.
The Bank Act of Canada, which was last amended in December of 2016, restricts how the Big-5 banks can operate, and how they can lend.
But what if you’re self-employed, or looking for a stated-income mortgage, or you have a large down payment but have bad credit?
“Should” you be able to get a mortgage?
The bears, and the fiscally conservative-and-afraid would suggest “no,” but the free markets throughout the globe’s most prosperous nations would suggest otherwise.
There is a need for alternative lenders in Canada, and a big one!
Home Trust is the largest alternative lender, representing about 1% of all mortgages in the country.
The changes to the Bank Act in 2016 left a huge void, and left many Canadian consumers high and dry.
Home Trust has filled that void, and they’ve been busier than ever before.
They are the oldest alternative lender in Canada, the most successful, and some, perhaps naively, would suggest they are too big to fail. They have weathered many storms before this one.
On Monday, as this story was still developing, it was announced that the Healthcare of Ontario Pension Plan (HOOPP) was extending a $2 Billion line of credit to Home Capital, at a 10% interest rate, with 2.5% rate on undrawn amounts (which of course caused more deposit withdraws, and the stock to dive further).
This makes little sense, considering Home Trust’s mortgage book contains primarily loans in the 5% range.
Lending out money at 5%, that you’ve borrowed at over 10%, doesn’t make financial sense.
So what’s the real story here? Because this can’t be it.
There’s so much uncertainty, so many unanswered questions, and so much speculation, that as I said – there really isn’t a true story here.
And while I was a huge fan of the “X-Files” growing up, and I did just watch “J.F.K.” on the weekend, I want to ask a few questions, and pose a few hypotheticals, just to let the conspiracy folks run wild.
First and foremost, I find it interesting that the entity that bailed out Home Trust – the Healthcare of Ontario Pension plan, has a CEO, Jim Keohane, that holds a seat on Home Capital’s board.
Conflict of interest? Yeah, I think so.
Mr. Keohane said he recused himself from discussions with the lender last week, and stepped away from the board.
Said Mr. Keohane:
“With the possibility of us getting involved with a deal with Home, clearly that changes the business relationship between HOOPP and Home. It’s obvious a conflict exists there.”
Home Capital’s Chairman, Kevin Smith, was also sitting on the board of HOOPP.
Now I work in a very different world from these folks, and I have no idea how corporate finance works. This might be very common, and perhaps deals between massive corporations, who have many executives holding seats on other corporations boards, are quite common.
But it bears mention, just because of all the speculation about Home Capital’s future.
The conspiracy theorists are already asking, “Was this the best deal available for Home Capital?”
Maybe. Maybe not.
We’ll truly never know.
But you have to ask yourself: why would HOOPP provide $2 Billion in loans to a company that the knew were going to fail?
Again, the risk of sounding naive, I don’t think the folks running HOOPP got to where they are today by extending credit to companies whose imminent demise they saw coming.
I believe that Home Capital is too big to fail, and HOOPP sees this.
It’s a great deal for HOOPP, nobody is denying that. This loan is secured against mortgages.
But does anybody find the timing of all this a little bit coincidental?
Not to sound like Fox Mulder, trying to convince Dana Scully about Area 51 here, but why did this happen a week after the Liberals’ latest attempt to “cool the housing market?”
Think about it.
For the better part of a decade, the CMHC and the Bank of Canada have been undertaking measures to cool the Canadian housing market.
And nothing has worked.
They’ve done away with 40-year amortizations and 107% financing.
They’ve increased minimum down payment requirements, multiple times, at multiple price thresholds.
They’ve tightened restrictions on investment properties.
They’ve increased CMHC premiums.
They’ve increased qualification standards.
They’ve spent almost ten years reigning in lenders, and tightening lending practices.
And yet nothing they have done, has cooled the market.
So you’re telling me that two weeks after “the big three” in Bill Morneau, Charles Sousa, and John Tory, met to discuss the red-hot housing market, and one week after the Liberals announced their stillborn 16-point plan to create a “fair” housing market, suddenly Home Capital’s stock plummets and their deposits are depleted?
Something is missing here, folks
And that is the story behind the story.
Those investors that withdrew deposits last week know something that the rest of us don’t. Exactly what they knew, has yet to come to light.
This is why I said at the onset that there is “no story.”
Other than a stock dropping, and a run on deposits, there’s simply no story, because there’s no information.
There’s just wild speculation, and round-the-clock coverage on BNN.
And even if we started to play the “what would happen if Home Trust failed” game, would the bears still be calling for the market to crash?
Make no mistake, Home Trust has a “good book” on their hands. Their book of loans is great, it has a high rate of return, and it would be hugely in demand.
On Tuesday, Andrew Moor, the CEO of Equitable Bank (one of Home Trust’s competitors) said that he was “not interested” in Home Trust’s book of mortgages. Well what the hell is he going to say? “We hope they fail so we can pick up their massive book of high-interest mortgages?”
This is the story that’s being created out there, folks. When you ask somebody a question they can’t provide the real answer to, and they say the opposite of what they would otherwise say, can you really draw conclusions from that?
If Home Trust went under, the other alternative lenders would be lined up to buy their book of business.
However, and I’m now into the “wild speculation” department, if Home Trust went under, I think the government would step in and allow the Big-5 banks some leeway with lending regulations, so that they could take on the $16 Billion in mortgages that Home Trust currently has.
Don’t forget, the Big-5 banks used to be in this lending space.
It was through government regulation that they were forced out, which created a need for alternative lenders like Home Trust in the first place.
And I’m sure if the Big-5 had their druther, they’d be lending in the alternative space, where the returns are much higher.
Now it’s important here, once again, to remember that “alternative” is not a scary word.
These returns are high, but these are not high-ratio, they are not sub-prime, and they are not dangerous.
This is not USA, circa 2008.
This is about liquidity, not delinquency.
And it’s becoming increasingly popular to draw an exceptionally inaccurate connection between “the US banking crisis” and “Home Trust.”
One scandal/crisis/story does not equal another, automatically, because you want it to.
And the more that is written on Home Trust and Home Capital Group, the more speculation that enters the media (especially social media), the more the real estate bears and/or the uninformed masses are creating a connection where there isn’t one.
So for all the folks that want a housing crash, or decline, or drop, or cooling, or leveling off – this isn’t it.
Call me a real estate cheerleader. Call me an eternal optimist.
But until we know why investors pulled their deposits from Home Capital Group, there’s no story here.
I haven’t had a single buyer or seller client ask me about this, and in the media interviews I’ve done so far this week, all the columnists and interviewers have agreed with me.
The real estate market in Toronto may, in fact, one day, decline.
But that day isn’t today.
And as much as you want it to be, and as much as you want to use Home Capital as the catalyst, that day won’t be tomorrow either…