What’s The Fuss About Home Capital?

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…

HomeTrust

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…

55 Comments

Post A Comment

Your email address will not be published. Required fields are marked *

  1. Jack says:

    Coming back to the original question about the impact on the housing market: From reading the comments below, I take it that those with mortgages from Home Capital may face challenges come renewal time. How many mortgages are we talking about? How many in the Toronto area? Does anybody know?
    Those are just immediate impacts. There may be other less direct effects, such as influence of the widely reported story on buyer confidence, or less competition in alternative mortgage market, but for those there are no definite answers.

  2. Buck says:

    HCG -12.53% today.

    No, but seriosusly, this time it’s different.

  3. Terry B says:

    Sub prime slime. This is just a gully…

  4. DonaldQuack says:

    I have some experience with Home Capital, and can say they are a well run company and this is most unfortunate series of events.

    I believe the OSC really went too far – making a relatively minor issue of material disclosure into a full scale bank run that has forced the company into a position that leaves few options other than a sale or liquidation. Reports say that the former CEO and founder Soloway offered to settle with the OSC and personally take responsibility but OSC wanted more blood and go after the company. Who does the OSC serve, and what benefit is there for the public by destroying a company. The only people benefiting are short sellers.

    This has already impacted market sentiment, and the regulators better hope that a white knight shows up to clean this up before any contagion has a chance to spread. All big problems start as small ones, why take a chance on this.

    1. Ralph Cramdown says:

      But you know that Soloway had already received a 1 year trading ban from the OSC on an unrelated matter, for lying to shareholders, right?
      http://www.grantspub.com/files/presentations/Grants%20Presentation%20Cochoesv10.pptx.pdf
      Page 40.
      How many times should a serial offender get to make a deal to avoid criminal proceedings? I guess it’s OK as long as you’re not a shareholder?

      1. Rickdeckard says:

        Hardly a reason to destroy a valuable company providing lending to many entrepreneurs and immigrants who don’t fit the big bank borrower profile.

        OSC seems to be full of blowhards trying to make a name for themselves. Whether or not there was material information not disclosed is still only an allegation and nothing is proven. OSC heads need to roll.

        1. Ralph Cramdown says:

          Which bit don’t you feel is proven? Home admitted that it terminated dealings with a handful of brokers for fraud, and that those brokers had written about $2 billion of business with Home — which, given the size of their book, makes it very much material. And they didn’t disclose for months.

          The OSC isn’t destroying this company, the people who lend it money are. It is the nature of any maturity transformation business (i.e. that borrows short term money and lends it long term) that it must conduct itself as chastely as a nun, or risk a run on its deposits. This has been known for a few hundred years now (see Bagehot’s Lombard Street).

          Terence Corcoran’s piece in the Financial Post is the saddest thing you’ll read all week. It reads like the end of an episode of Scooby Doo: “…and I would’ve gotten away with it if it hadn’t been for those meddling kids!”

          1. R says:

            Ralph, I have to disagree with you. The questionable loans only accounted for 5.3% of HCG’s outstanding loan assets and 2% of net income (see 29 July 2015 press release). HCG decided that the loans were unlikely to cause abnormal credit losses and indeed, the last 2 years have proven that they were right. Moreover, many of those mortgages were insured by CMHC, so HCG would have been protected in case of defaults.

            I share your concerns about Soloway’s conduct, but OSC should have dealt with him individually through settlement, instead of destroying an entire company. Therefore, I think Terence Corcoran’s article is spot-on.

          2. Ralph Cramdown says:

            Mortgage lending is a low margin business. If 5% of your book is crap and 20% of those mortgages default, you’re going to lose a LOT of money. And no, CMHC won’t pay if the borrower income was fraudulently declared. What the past two years have proven is that if house prices keep going up, nobody defaults — but we knew that already.

            Read through Home’s releases starting with their first quarter results. First it was low oil prices and the weather. Then the story about the brokers started coming out in dribs and drabs in a series of press releases over the next few months. I’m sorry, but if you know that originations are down because you just stopped doing business with a group of paperhanging brokers who were doing huge volumes, and you blame the weather, you’re just lying.

    2. Joel says:

      I agree. This was a minor offence and a large charge that lead to a run on their deposits. The mortgages are performing very wetland before the money was taken out they were projecting $275 million in profit for the year.

      I deal with them a lot and they take their jobs very seriously and work to ensure that there are no fraudulent files.

    3. Negotiator says:

      The OSC can’t make anything into a bank run. They only announced that they were taking action within their jurisdiction.

      You know what happens to a stock when investors no longer feel that they can rely on the trustworthiness of its reporting? It goes down the tubes. Home Trust has no one to blame but themselves. OSC is doing its job in regulating the market.

  5. Mortgage Jake Abramowicz says:

    As I posted on FB.

    Ok I read it. And Toronto Realty Blog by David Fleming David Fleming I have to say, this is one of your worst posts ever.

    1. There was no change to the bank act in 2016.

    2. There’s no reason that The Ontario and Federal Govts would want HCG to fail, hence their meeting.

    3. The big-5/6 have never been in this same lending space, at least not for the 14+ years I’ve been doing mortgages.

    Your post is widely inconsistent with your natural ability to call BS when you see it, and your natural ability to research facts properly.

    This is crazy man! You could not have been any more wrong than you are here.

    Now what I’ll add here is this: This isn’t a major problem (yet) but if Home Cap fails, then it might become a bit of a problem. You think it’s easy to buy $16-18B in assets? Think again. There aren’t buyers lining up out the door for this book.

    Second, this book is doing well only because the market has ripped up like crazy. If it didn’t, it wouldn’t be doing so well.

    SO let’s not assume everything will be ok if/if not Home Cap goes under, because it might lead to some problems.

    Already we’ve seen a 1. 50-100bps increase in rates on alt-prime lending and 2. a tightening of lending on this market.

    This could have a trickle-up effect that’ll blow your pants off before you know it, just like the recent 180-degree change in the market has kicked the ass of many sellers and agents.

    So, there’s a story. It’s how you choose to interpret it is the question.

    1. Sevyn says:

      I disagree with Mortgage Jake – Home Trust has been around for a long time and MOST of my friends are with HOME TRUST. If home trust was not around they wouldn’t have mortgages. They are not bad people they just need help. Most of them are self employed OR have a blemish on their credit. I myself started my first mortgage with Equitable trust and guess what? They wanted 15% down minimum to lend to me – and what was wrong with my credit – NOTHING – I had alll R1s. However I owed 1700.00 to my college – which was paid in full but on the collections part of my bureau – AND NONE – I REPEAT NONE of the big banks would approve me. NONE. So I put 20% down and stayed with them for 6 months – at 5.64% interest…broke the mortgage to go elsewhere and the collections had disappeared. So thank heavens for places like Equitable or Home Trust – So please don’t even go there with – that if the market didn’t skyrocket there would be no Home Trust – that is not true!!! They would still be around. It is quite unfortunate that the big 5 – have too many rules forcing other people to go to alternative lenders such as Home Trust. I am also a mortgage agent and for you to say you have been doing this for plus 14 years makes no sense to me. Home Trust needs to be around and will be around – and if not – another alternative lender.

      1. Chris says:

        Sorry but your personal anecdotes don’t supersede the verifiable fact that fraudulent mortgages were originated at Home Trust; this isn’t even up for debate, the company admitted it (after the whistle was blown by an insider).

        In a fast appreciating and highly liquid market, such as we are in today, companies like Home Capital can thrive due to low default rates. If/when that trend reverses (prices stall or decline, demand for homes reduces) that is when the default rate rises, and sub-prime lenders like HCG get clobbered. So Jake is absolutely correct that Home Capital’s book is doing well because the market has been on fire.

        Finally, are you actually suggesting that people should be allowed to borrow as much money as possible, and to hell with the government imposed rules that are adhered to by the big banks…?

      2. Boris says:

        Your little personal story isi irrelevant.

        British man, circa 1939 to his wife: “The Germans are going to invade Britain. We need to get out of the city, stockpile supplies”
        Wife: “By sisters cousin married a guy who was half German. He isn’t that bad a guy! No way Hitler invades England!”

        This is what you just did. It’s really unintelligent. Stop it.

        1. Chris says:

          Christ Almighty, Boris, I never thought I’d see the day where I agreed wholeheartedly with not just one, but two of your comments.

          But, alas, you’ve hit the nail on the head with this one and your other comment (about reasons why HOOPP gave HCG $2B).

          And no, I’m not being sarcastic.

    2. Chris says:

      I would certainly agree with your last few points. If Home Capital goes under (aka when Home Capital goes under, in my opinion), there will almost definitely be repercussions. The small number of interested buyers in their assets shows how little appetite there is to scoop up their books. As I said in another comment, perhaps the largest immediate impact will be the reduction of liquidity in the lending market. Either way, Home Capital’s implosion will have consequences beyond just their shareholders.

  6. Jayne says:

    Funny, just last Thursday an agent I met back in December 2016. Called me to mention that because of the home capital drama I better list & sell right now, then whatever resulting crash that’s supposed to happen I can buy cheap.

    I told him I don’t have any dealings with Home nor did I understand what he was talking about since I hadn’t checked the news about. Thanks for confirming that phone call was nothing more then a scare tactic that fell on deaf ears

    Some agents are too thirsty for their own good.

  7. Buck says:

    HCG is done. No lifeline ever works out.

    Whether it affects the broader market is another discussion.

    To say that it won’t affect the broader market is projecting or naive. It might not, but it could. Time will tell.

    Not sure why David can’t admit there’s some fissures in this market.

    1. Chris says:

      I’m curious to see if the contagion spreads to other alternative lenders, like Equitable Group, First National, etc. or to others in related areas like Genworth. They’ve all taken pretty big hits to their stock values in the past week.

      EQ is now in full blown damage control mode, saying that the big six banks are offering them $2B of emergency funding if needed. If the lack of confidence does spread, they’ll be the next ones to go down, as they’ve been found to have hired a number of employees fired from Home Capital after the mortgage fraud fiasco.

      1. Mortgage Jake Abramowicz says:

        Why would you say Equitable/First National as if they are in the same lending space?

        They aren’t. Not close.

        1. Chris says:

          The market seems to think they’re in the same lending space, even if you don’t. Both equitable and first national have seen their stock prices hammered in the past week.

          1. Mortgage Jake Abramowicz says:

            Even if I don’t? It’s not about what I think, it’s what I know. The market can react how it wants but the fact is, the market is wrong if it lumps those two together.

            Equitable: alt-prime business. non-income-confirmable. no cmhc involvement.
            First Nat: Prime time AAA1 business, securitized and backed by CMHC.

            Makes sense?

          2. Chris says:

            My mistake, I thought you were implying Equitable and First National were both not in the same lending space as Home Capital.

            Yes, I would agree with you, EQB is much closer to HCG than FN is to either one.

            That being said, to dismiss the market is a bit wrong-headed in my opinion. The crux of the issue at HCG (and EQB to a lesser degree) is that the market has lost confidence in them. If the market loses confidence in FN by proxy (aka contagion), that could spell serious trouble for what is, as you pointed out, a far less risky lender.

      2. Mortgage Jake Abramowicz says:

        They hired 4, allegedly who are not there, and/or are under such a microscope the slightest hint of a sunray will burn them like an ant on the hot sidewalk. Let’s cool it 😉

  8. JDF says:

    Let’s be clear. Home Capital did not “discover” the broker fraud.

    “Home Capital Group Inc. began suspending mortgage brokers after its board of directors received a letter from an anonymous whistle-blower last fall pointing it to problems with some of its mortgages.”

    Granted this issue should have garnered the market reaction back in 2015 that it is having today. The regulator is looking at the timeliness of that particular disclosure as the issue which is driving the subsequent market and customer reaction. Agreed that there is no new issue of fraud.

    The whistle blower went directly to the Board, not Management….was Management aware ? are they part of the narrative ? Who knows ? Is the whistle blower a notorious short seller ? Maybe….however, if there was nothing to find…….there would have been nothing found….instead we they found 45 brokers behaving badly. Are we confident that the underwriting rules have tightened and that the brokers are not back submitting offers (under different brokerages ?)………well until we have new Management and board members, we can never be certain…..given that also changed last week – time will tell.

  9. Potato says:

    Some missing info: in the statement of allegations, look for “phantom ticking” and “project Trillium”. Then see the company’s response.

    For fans of the cockroach theory (never just one), the previously undisclosed phatom ticking allegation suggests mgmt was hiding more from the initial incident. And their response indicates that they have no problem withholding info from shareholders — so then people start to ask what else are they hiding?

    Combined, it’s a crisis of confidence, which leads to a run on the bank.

    Lots of other tidbits to the story if you dig, but those I think were the main shockers that kicked off the bank run.

    IMHO, the equity is worthless and Home Capital will get swallowed by another institution in a forced marriage or run off — increased cost of funding will kill them as a going concern, and most buyers will likely want more than a 7% haircut to buy the assets, given the disclosure and confidence issues. They are not TBTF. As for whether it’s the first pebble of the avalanche… too hard to say. Likely not: it’s a small part of the market, and as much as I’m a bear in the long term, and as much as catalysts can be surprising, it may take a few other pinpricks.

    1. R says:

      People who talk about the “cockroach theory” speak as if the big banks have no problem handling mortgage fraud. For example, see the article below – a TD mortgage specialist made a fake employer letter for a client with fake letterhead so as to get the mortgage approved. Although he was caught and he resigned, he was later granted a license to work as a mortgage sub-broker. This is because the provincial Financial Institutions Commission found that TD had put intense pressure on the mortgage specialist in order to build business.

      http://www.theglobeandmail.com/real-estate/the-market/mortgage-fraud-on-the-rise-among-brokers-trying-to-help-clients-qualify/article27051297/

      1. Ralph Cramdown says:

        Every lender has problems with fraud. Interestingly, a few years ago TD outsourced its mortgage underwriting for broker originated deals to First National, but not for bank branch originated deals. I thought that was pretty strange.

        But if one lender has lax underwriting and poor internal controls, word gets around among brokers, and that lender gets a disproportionate amount of the questionable and fraudulent deals being done, guaranteed. “HCG discovered that its Accelerator underwriting team, including one of its highest
        volume underwriters, was falsely documenting that they had completed income verification steps
        when they had not actually done so (“Phantom Ticking”) for a large proportion of mortgages
        underwritten, and further that employment/income information used to support the mortgage
        applications had been falsified.” — https://www.osc.gov.on.ca/documents/en/Proceedings-SOA/soa_20170419_home-capital.pdf

        I’m sure a number of mortgage brokers discovered this before HCG did. But as long as prices keep rising, everything turns out fine.

  10. John says:

    I like how you go on about people not wanting to wait for the facts, but you go promoting some sort of conspiracy theory by just “asking questions”.

    1. Mortgage Jake Abramowicz says:

      well said.

  11. Buck says:

    It’s really a consumer confidence issue. IF HCG has been giving bad loans, and consumers get nervous, then deposits at other subprimes will be pulled, and the mortgage market will be affected, and THEN housing will be affected. Still a couple of years away from a crash.

    1. Libertarian says:

      I agree. Real estate demand has been on fire because everyone believes in it as a guaranteed investment. Once that belief goes away, so will the demand.

      If David (and others) are right that Home Capital is not in trouble, this would be a good time to buy the stock, if you have some play money laying around. Although, it might be too late because the stock has been rebounding lately.

      1. McBloggert says:

        Down 8.5% today…

      2. Chris says:

        I wouldn’t touch that stock with a ten foot pole. Between the OSC hearing tomorrow, and their (delayed) earnings report next week, the potential for bad news could significantly worsen the tailspin.

        If you have some play money laying around, you’re probably better served to hit the craps table than to put it on HCG.

      3. Buck says:

        David is a realtor, not a stock analyst.

      4. Libertarian says:

        Yes, most investors in HCG have abandoned ship. Yes, HCG’s future does not look bright. Yes, David is not a stock analyst. Yes, this is gambling. But there have been a number of articles in the Globe & Mail the last few days discussing how other investors think there is value in HCG’s assets. Chances are HCG will be bought out and if that happens, it’ll be at a higher price than what it’s trading for today. It’ll never return to its peak price, but that’s not what I’m predicting.

        1. Mortgage Jake Abramowicz says:

          Or perhaps they’ll buy it for 1/10th of today’s price. Those billionaire hedge fund guys can afford to wait. Most normal investors don’t. Big difference.

        2. I Like Logic says:

          I don’t think there is debate that HCG has valuable assets. The question is if the value of those assets exceed the size of its liabilities. If it doesn’t the stock is worth $0

  12. I like Logic says:

    I agree with you that this will not cause a cooling or crash. I’m on the camp that the only thing that will cool down the market is a rise in rates, but a raise depends on many economic aspects – not just the housing market.

    That being said, I do find it very strange that no one yet has put a bid to buy Home Capital already. If the loans are as good as you say, by now there would be offers to swallow Home Capital. That’s what I find worrisome.

    1. Jason says:

      I don’t think its worrisome at this stage. The institutions that are bidding on the assets (private equity) want the best deal possible and will wait until there’s blood in the water. They then have to go over the books and get comfort on the loans. I would be concerned if this wasn’t resolved by the end of May. As an investor who has obtained mortgages from Home Capital in the past, I always found that their vetting process was quite thorough compared to some of the banks. I agree that this is mostly a confidence issue. To suggest that there’s not mortgage irregularities at other banks is naive! I know that you’re not suggesting that, but everyone seems to be scapegoating Home Capital for stuff that happens all the time. They are guilty of mismanaging the issue and bad judgment for sure, but there hasn’t been any conclusive evidence of fraud on their part…yet! The harder it becomes to obtain a mortgage, the more ‘creative’ mortgage brokers and borrowers tend to get.

      1. Chris says:

        A $2B loan with an effective interest rate between 10-22.5% makes it pretty clear that the water is already bright red. I also find it odd how a supposedly solid company was unable to find any source of emergency funding with rates even marginally better than the usurious terms offered by HOOPP.

        Makes me think that it’s far more than just the HISA depositors who have lost confidence in Home Capital.

    2. Negotiator says:

      You underestimate how long it takes to conduct due diligence and structure a deal.

  13. Chris says:

    Well I’m just happy to hear a summary of your opinion! Thanks!

    I’m reserving judgement on Home Capital until we hear more from the OSC. Personally, I think the company is done; given the pace of withdrawals, they should be nearing almost no money left in their High Interest Savings Accounts.

    I find the entire deal between HOOPP and Home Capital very odd, and it raises a lot of red flags due to the conflicts of interest.

    I agree that this is more of a stock market story, but it does have implications to the housing market. It will impact liquidity (and the ease of which people are able to get a loan). It was also very curious that Jim Keohane said on BNN that each dollar they had loaned HCG was backed by $2 of mortgages…seems a very high rate of collateral for a supposedly solid company with a strong set of books.

    Oh well, guess we will see how things pan out!

    1. R says:

      Chris, while I agree with you that Home Capital is a risky investment, I think there is still hope for the company. While the $2 billion credit line with its criminal interest rate will probably kill 4-5 quarters worth of earnings, I think it does allow Home Capital to continue making payments to depositors for over 6 months, even if we assume that most of the HISA balances and 75% of the maturing GIC amounts are withdrawn. If Home Capital continues to make all payments promptly, as they have been doing so far, or if they find a good buyer, confidence can be restored. I read an article somewhere saying that even the liquidation value of HCG is around $30/share, so there is a case to be made for buying HCG now.

      Hopefully, a new buyer can sue HOOPP and get the interest rate reduced (given the obvious conflict of interest and the insanely high interest rate for a fully SECURED loan).

      1. Chris says:

        R, you’re more optimistic than I am. I don’t see how HCG survives this. They’re borrowing money at 10-22.5% in order to loan it back out in the form of mortgages at, what, 1-5%? In order to re-attract people to their HISA and GIC offerings, they’ll need to offer higher interest rates (and even then it may not be enough to overcome the lack of confidence).

        As if that wasn’t enough, HCG has had their credit score downgraded twice in the past week by both S&P and DBRS.

        As I said in another comment, I’m not willing to put any money anywhere near this company (whether betting for or against it), but if I were, it would be on Home Capital going to zero.

  14. M says:

    The OSC released a Statement of Allegations so the investigation phase is over, they’ve got a case to prove and they’re moving toward a regulatory hearing /litigation.

    1. Jason says:

      True, but their case doesn’t allege fraud at Home Capital. I believe it relates to misleading investors surrounding appropriate timely disclosure. It implies bad governance, but no evidence that anyone at Home Capital committed fraud. We’ll see as the story continues to play out.

  15. Boris says:

    The way the HOOP loan is structured, the initial $1B is sceured against $2B in deposits (effectively ring fenced), plus their massive standby fee, deal fee and interest rate. Your comment about “Why would they invest $2b into something that was going under”. Answers:

    – They were/are conflicted in the first place. This can lead to weird/bad deals.
    – It’s a very good deal for HOOP even in the case of HCG insolvency – HCG CAN effectively require a bailout/writedowns and HOOP can (and already has started to) asset strip
    – It is a public pension plan with all kinds of other political/bureaucratic pressures and interests outside of simply making returns. IE the Caisse bailing out Bombardier over and over. Another reason why government pension plans should be entirely outsourced to the private sector.

  16. Jack says:

    Even if there are some aspects of this that we don’t know, or maybe will never know, we do know something. We are seeing a classical run on the bank (or a shadow bank in this case), we know that. And since, as David says, it seems that the run was triggered by an insignificant event that happened two years ago, that tells us that many people are nervous and ready to run. So that’s what we know.

    Beyond that, we can all just speculate. Presumably the problems at Home Capital mean that fewer alternative mortgages will be issued, which will decrease demand somewhat, although nobody knows how much.

  17. DC says:

    This isn’t 2008. It’s 2005/2006. See Countrywide. It’s all the same quotes. “This time it’s different”. “Our institutions are strong”.

    Defaults start happening when sales numbers go down, not when its easy to sell a home.

    1. Andrew says:

      somebody here gets it. This is a DIP situation, not a credit situation. Keohane has effectively agreed that the equity is worthless.

      1. Mortgage Jake Abramowicz says:

        What is DIP (sorry)?

        1. Ralph Cramdown says:

          Debtor In Possession financing. An emergency loan extended to a no longer quite going concern by its now senior creditors.

          This situation doesn’t quite qualify since the crooks (and yes, I can say this because senior management has already been done up by the OSC in another matter with a prior company) are still running things. The debtor is not in possession.

      2. Chris says:

        Keohane even called it a DIP loan in an interview on BNN…then he realized what he had said, and started stumbling, and claimed he forgot what the P stood for!

TWEETS