The Alternative Mortgage Landscape

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The Alternative Mortgage Landscape

Home Capital Group began with a simple premise: Many Canadians were being turned down for mortgages by the big 6 banks, but were in fact good customers that could meet their debt obligations. This philosophy grew Home Capital, from its humble beginnings in 1989, to the country’s largest alternative mortgage lender with an estimated $18-billion in home loans.

Lately, Home Capital group has been floundering under regulatory scrutiny of its underwritings and disclosure standards, and investors are fleeing. The company’s future is in doubt, driving concerns about the potential spread to other Canadian lenders.

The trouble began back in 2015 when Home Capital Group announced that it had suspended 45 mortgage brokers for submitting fake or altered verification documents. This was the first time the Ontario Securities Commission (OSC) was called upon to investigate Home Capital Group. Earlier this month, things took a turn for the worse. The OSC alleged that 3 current and former senior executives, including newly retired CEO Mr. Soloway, did not properly disclose these underwriting irregularities to investors, which has further eroded confidence in the company.

Home Capital’s deposits were $13.35 billion and their high interest savings accounts amassed to $2.02 billion by the end of 2016. Since news had broken that the alternative mortgage company had run into insecurities, depositors have pulled funds from savings accounts and have begun cashing in their GIC’s.  As of April 27, 2017, deposits had dipped to $12.97 billion and savings accounts had plummeted to $521 million.

Funds are being withdrawn rapidly from Home Capital Group. To cope with this, Home Capital Group has been given a $2-billion high interest line of credit from the Healthcare of Ontario Pension Plan (HOOP). The line of credit did not come cheap as the group will have to pay an interest rate of 22.5% for the first $1-billion it borrows, a 2.5% interest rate on any undrawn balances and an overall 10% on the full amount.

The company’s problems are also weighing on the share prices of other mortgage lenders, smaller regional banks, mortgage insurers and even the biggest banks.

  • Equitable Group (mortgage lender) – fell 32% on Wed & 17% on Fri
  • Genworth (mortgage insurer) – fell 8% on Wed
  • Canadian Western Bank – fell 5%
  • RBC – fell 3.6% over the three days

Some investors believe that what we are observing with Home Capital Group is the first sign of an overheated housing market that has begun to crack. Canadian home prices could decline if deposit brokers withdraw funding from other alternative lenders, essentially shrinking the number of prospective home buyers in the market.

What Does This All Mean?
There have been analogies drawn when Lehman Brothers Holdings Inc. failed and caused the housing correction in the United States. However, it is way too soon to draw such conclusions. Consumer confidence in the process is low and the public is being left with more questions than answers. How will the market respond to the news? Will other financial institutions follow suit? Or will financial institutions place tighter rules on their practices?

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