Home Capital gets $1.5 billion lifeline

Embattled mortgage lender Home Capital group has found a lifeline in the form of an unknown “third party buyer”, that will purchase up to $1.5 billion of its mortgages. Home Capital’s stock shot up almost 30 percent after the news broke this morning, indicating a potential return of investor confidence to the company saddled with fraud allegations.

“This purchase arrangement is designed to give us the ability to continue to serve as many customers as possible in the mortgage broker channel, and we are optimistic that there can be opportunities for future growth,” said Bonita Then, interim Chief Executive Officer of Home Capital, in a press release.

Home Capital has roughly $13 billion in mortgages on its books. The dramatic run on its deposits, which left the company precariously low on cash, was the result of a withering report by the Ontario Securities Commission that accused Home Capital executives of failing to appropriately disclose results of an internal fraud investigation to its shareholders.

So how does this affect Home Capital mortgage holders?

Because this mystery buyer of sorts is not buying the company’s mortgage business outright, but merely purchasing a portion of its mortgage assets, it is unlikely that mortgage holders will be affected at all, says James Laird, President of Canwise Financial, a Toronto-based mortgage brokerage.

“Look, it’s just a transfer of ownership to another mortgage provider. You won’t even know if you are part of that $1.5 billion group. Your mortgage terms are not going to change because someone else is holding your mortgage.”

According to mortgage expert Rob McLister of Ratespy.com however, if you’re a mortgage holder coming up for renewal, meaning that your mortgage is close to reaching its five-year term, you might not find yourself with as favourable a mortgage rate as you used to have.

“It depends on what kind of borrower you are. If you’re a prime borrower, meaning that you’ve met all your mortgage payments, any new mortgage provider would probably provide you a similar rate to what you’ve been getting at Home Capital. But if you’re a non-prime borrower, meaning that you don’t have a great credit history, then you might be dealt with higher rate options upon renewal,” McLister told VICE Money.

One of the biggest reasons why Home Capital has had to aggressively pursue all available lending avenues after the run on its deposits, is because it could face the risk of not having enough money to lend out when its current customers are due to renew their mortgages. If that scenario took place, Home Capital mortgage holders would surely opt to find other mortgage providers, blowing up the company’s mortgage business altogether.

Home Capital uses money deposited into GICs and savings accounts to help fund its mortgages. Selling $1.5 billion of its mortgage assets in exchange for cash will pump in some much-needed liquidity into the company.

“$1.5 billion won’t last very long,” warns McLister. “If they can’t find a buyer quickly enough, they’re going to have to wind down the company and sell off all their remaining mortgages.”

Alternative lenders like Home Capital are in the business of providing lending options to Canadians who don’t have the best track record of managing their finances. It’s a risky operation because of the higher-than-average potential of defaults, but lenders like Home Capital mitigate that risk by charging high interest rates.

It’s an ironic business model indeed, considering that people who can’t meet their credit payments, can’t possibly afford the interest charges when they start piling up.

In housing markets like Toronto and Vancouver however, the risk of lending to Canadians with poor credit history is largely buried under rising home prices. Banks and non-bank lenders often gauge the growth in equity of a home when determining the amount of money to lend. If a mortgage is in arrears, no big deal — lenders will simply repossess the property, and sell it at market value.

The only caveat? That home prices keep going up, no matter what.

“It’s a really sad situation,” Laird says, in reference to Home Capital’s recent troubles. “We’ve got a 30-year Canadian success story that fills an important part of the home financing market in Canada. They’re just helping out hard-working Canadians and new immigrants who want to buy a home for their family.”

Canada is currently the most indebted nation among OECD countries. For every one dollar of disposable income, we owe $1.67. More than half of Canadians are a mere $200 away from not being able to pay their monthly bills, according to a recent survey conducted by the accounting firm MNP.

Between 2004 and 2015, home prices in Toronto rose 70 percent more than household incomes did. In fact, the house price-to-income ratio in Vancouver and Toronto right now, is higher than cities like Los Angeles and Miami in the lead up the 2008 mortgage crisis.

Home Capital is due to report its latest financial earnings on Thursday, May 11th.

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