The impact of the mortgage lender's demise could be widespread across Canada and felt for years
A few months back it seemed like trouble with a Capital ‘T’ had hit the Canadian housing market. Home Capital Group, a Toronto-based alternative mortgage lender, has watched as its stock sank to flat line-like numbers, causing frenzied customers to yank close to $1 billion from its deposit accounts. Just yesterday, Home Capital Group stock went up by 15% after reaching a settlement with the Ontario Securities Commission. We are still unsure what will happen with the remaining deposits and the GICs that are coming up for renewal. How will the company regain investor confidence, and what effects will it have on the housing market and the Canadian economy?
So what exactly happened? Let’s break this pie down into some easily digestible pieces. When the news of the meltdown hit in April of 2017, Global News, among others, reported that the Ontario Securities Commission (OSC) had alleged Home Capital had broken securities. Basically, the OSC claimed that Home Capital had discovered a number of brokers who deliberately falsified loan applications and then lied about it.
Sound familiar? I thought it might. In fact, it kind of reads like a chapter of The Big Short. Essentially, the company was accused of making “misleading disclosure” (read: statements made up of lies about the event) after uncovering the brokers’ fraudulent behaviour. Home Capital has claimed these allegations are unmerited.
What’s of particular interest in this case is that these brokers allegedly fudged the facts way back in 2015. But it wasn’t until news broke that customers began siphoning their money out of the company, triggering a massive deficit in Home Capital’s liquidity. In May, Home Capital announced that it had secured a $2 billion line of credit, which evidently did little to appease concern. In fact, it seems to have made a lot of people even more nervous. A significant portion of this $2-billion dollar line of credit has already been used up, and there are speculations that Home Capital Group is looking at the big banks to refinance this loan.
Whoa! Who is Home Capital, Again?
Home Capital is also home to its major subsidiary, Home Trust Company. It is through the latter that they offer alternative mortgages by providing uninsured mortgages to clients unable to borrow from the big banks. These clients may have bad or damaged credit, a short credit history, are self-employed, or experiencing extenuating circumstances.
If it’s hard to believe that a mere 45 brokers could do so much damage, think about this. Home Trust Company’s third-quarter earnings report, the total value of outstanding loans generated by the 45 brokers was a mind-spinning $1.72 billion. Or, put another way, nearly 10% of the company’s total outstanding mortgage loans, giving new meaning to the term ‘dues paid.’
Analysts from the National Bank of Canada have said that the shockwaves have spread to the mortgage market on a whole. Home Capital on the other hand has already cut ties with the involved brokers, reducing the number of mortgages the company holds but the overall balance has declined as more customers have paid into their loans.
Cutting Buyers Out of the Market
This story has been of particular interest to brokers like myself who have been dealing with B-lenders more and more as of late. Increasingly stringent criteria for mortgages, coupled with the ballooning prices of real estate have forced many of my clients to build relationships with a lender outside of the large federal institutions. Any further potential problems could paralyze certain segments from entering the market entirely.
For example, an alternative lender can be an excellent option – particularly in the short-term while you continue to build your credit and establish your financial health. Even temporary options, while the interest rates are higher, at least cater to those in extraordinary circumstances who might otherwise lose their opportunity to break into the market. From those suffering damaged credit due to extenuating family or health circumstances to those who are self-employed with low reported income but respectable earnings and lot of liquidity – sometimes an alternative lender is not the only choice, they are the best choice. B-lenders can also work well when a refinancing is needed.
With incomes in BC a paltry fraction of what it costs to purchase a home, debt has skyrocketed. Another piece by Global reported that household debt has grown by 80% since 2005. That’s $1.8 trillion, $1.2 trillion of which is mortgage loans. However, it is important to note that not of all this amount is outstanding. This amount includes values of untouched home lines that homeowners have placed on their home and are sitting empty.
In a market as complex as today’s the one piece of advice I would offer a new buyer is not to let low mortgage rates dictate your choice to buy. It can cloud your judgement and cause you to make a tempestuous decision. Factoring in even a small modification to your rates will allow you to assess your ability to weather financial storms.