Home Capital Group is the parent company of Canada’s largest non-conforming mortgage lender, Home Trust. At the end of 2016, Home Capital had $26.4 Billion under administration. For people with bad credit or are self-employed, Home Trust was in many cases the first choice for a mortgage. While high-risk mortgage lenders typically offer higher interest rates than banks, the rates at Home Trust were among one of the lowest, and with lenient lending requirements.
How did the Problems with Home Capital start?
The problems with Home Capital began in 2015 when it had announced that several of the mortgage brokers sending them deals where falsifying applicant information. For the most part, this involved exaggerating the applicant’s income status to have them qualify for mortgages that they could not otherwise. In response, Home Capital cut ties with 45 of the offending brokers. Last month following an investigation by the Ontario Securities Commission (OSC) Home Capital was charged with breaking securities law by misleading investors about the nature of the mortgage fraud. Stocks for Home Capital group began to plummet when they made news headlines regarding a $2 billion line of credit at 10% interest and $100 million commitment fee they were considering. From there confidence in the company has sharply dropped with many consumers withdrawing their money with Home Capital and the likely possibility that the company will be dismantled.
How does this affect average borrowers?
The perfectly average Canadian borrower who can qualify for a traditional mortgage at a bank should see no impact. Canadians who cannot qualify at banks have now lost one of their best options for mortgages. People who already hold a mortgage with Home Trust will likely have to find another lender to renew their mortgage with, as Home Trust does not seem to be approving many mortgages as of late. While Home Capital’s problems are unique to them, many investors are expressing their concerns with close competitors such as Equitable Bank, and Effort Trust.
What will this do to the Canadian mortgage market?
For large banks, there is unlikely to be any downturn, but alternative lenders are already starting to hurt. Share prices of Home Capital’s competitor Equitable sharply declined from 70 centres per share to as low 39.49 per share before levelling out to 50 cents per share. Other alternative financial companies including Genworth Financial and Street Capital have seen similar declines in their stock price. The stocks for these 2 lending companies have been downgraded, which reflects the opinion of investors that these company will continue to perform well. Jaeme Gloyna, a National Bank of Canada analyst put it well: “Home Capital contagion has spread to the entire mortgage market, in particular, alternative mortgage lenders”.
How is this different from the Subprime mortgage crisis in the US?
Home Capital operates in the niche of uninsured sub-prime mortgages, which makes up 20% of Canada’s entire mortgage market. In contrast, 30% of all mortgages in the US were sub-prime during the 2007 housing crash. Of that 20% of sub-prime Canadian mortgage, those belonging to Home Capital make up a small portion. In the US, many of the largest banks were dealing in sub-prime mortgages which led to a systematic failure of the US banking system. Canada banking regulations are much stricter and do not deal in sub-prime mortgages at all. While Canada’s alternative lenders have been shaken up, the country’s overall banking infrastructure should remain strong.
Jonathan May 30th, 2017