May 1, 2017

The journey of Home Capital & its impact on borrowers

Last week was a bumpy ride for Home Capital Group Inc. (TSX: HCG), the Parent company of Home Trust. The company’s stock price nosedived almost 65% in one day, from $17.09 / share on April 25, 2017 to $5.99 / share on April 26, 2017. The journey commenced in 2014 when the company ran into some compliance issues with the regulators, having to do with fraud cases and lack of disclosure to its shareholders. Despite the fact that the company has taken the right measures to address the issues at hand, recent media coverage and the negative buzz that an independent stock shorter as well as a US credit agency have created has led many stakeholders to sell company shares and withdraw their funds from the company’s interest earning saving accounts. These events have led the company to obtain a line of credit facility for 2 billion dollars from Healthcare of Ontario Pension Plan (HOOPP) in order to be able to cover the withdrawals and keep the business going.

I have had many inquires about the events described above, and their implications. I will elaborate and respond to these inquiries below. I will refer to Home Capital Group Inc. as Home Trust, since that is the more familiar name.

Before commencing, I would like to make one point very clear: I do not support misconducts under any context. As such, I do not support the wrongdoings that Home Trust has committed to date. However, the company has now apologized for those actions. Furthermore, it has taken steps to implement the right measures by cutting off its relationship with the 45+ brokers that fed their system with detrimental and fraudulent transactions. In addition, they have reshuffled their corporate structure, which in my opinion was much needed. Thus, I do not advocate the notion that the company be closed in its entirety simply due to the neglectful or wrong acts of a few. Even politicians in our political system sometimes intentionally or unintentionally face some issues, but we have witnessed many times that those issues did not lead to their demise. Regardless, my comments below are made based on my observations of events to date and do not apply to any future events that may occur with this mortgage lender.

Why is the existence of Home Trust or companies like it vital to the Canadian mortgage market and Canada as a whole? Can’t banks play their role?

In my opinion, Home Trust or other similar alternative lenders are the financial treasurers of Canada. The existence of such companies is fundamental to our economic prosperity as Canadians, due to the fact that they provide borrowers with options, creating competition and progress. Home Trust has been one of the leading players in Canada’s growing alternative mortgage sector, a sector which has proven to be much needed for us as Canadians. These companies have eased the borrowing abilities of many self-employed borrowers as well as those that do not fit in the banks’ lending framework. I have to clarify that these companies do not provide mortgages to “just anyone who has a pulse,” as some say. Rather, their risk mitigation schemes are very stringent and borrowers have to provide documentation to prove affordability. There are many who are able to afford the payment of their mortgage, but are not able to qualify for a bank loan because of the restriction the mortgage default insures impose on Canadian banks . As such, this segment of society is not catered to by the banks. Companies like Home Trust cater to that group, who are able to then engage in further business activity. Thus, banks cannot play their role if these companies no longer exist.

What does this all mean for the borrowers that are thinking of purchasing a property?

If the show goes on, Home Trust and its competitors may have no choice but to increase interest rates on their borrowers due higher cost of funds. They may even have to even lower the loan to value percentage on each mortgage to attract some investors. Such moves will ultimately lower borrowers’ ability to qualify for either purchases or refinances.

One of the reasons why Canada’s Economy is leading among other G7 countries is because of the 20% contribution that real estate activities make to our overall GDP. Recently, the Ontario Government has implemented 16 pointers in an attempt to create a much-needed slow-down in the market. The untimely and unwanted media stories of Home Trust if continued may even slow activities further. As Canadians we must hold all players in the Real Estate and Mortgage industries accountable for their actions, but we shouldn’t take steps that would ultimately damage our Economy and well-being as a whole.

Written by Reza Ghazi, CEO of GreenFlow Financial

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