Home Capital, Canada’s largest “alternative” mortgage lender, is borrowing at 15 percent to issue mortgages that will yield less than 15 percent. It’s an interesting business model, but it’s also probably a pretty good bet that Home Capital won’t be around too much longer. From Wolf Richter at wolfstreet.com:
What are homes & mortgages worth when push comes to shove?
Home Capital is Canada’s biggest “alternative” mortgage lender. It’s not a bank – which today is part of its problem because it cannot create money to lend out; it has to obtain it first by attracting deposits and borrowing money through other channels. Through its subsidiary, Home Trust, it specializes in high-profit mortgages to risky borrowers, with dented credit or unreliable incomes who don’t qualify for mortgage insurance and were turned down by the banks. This includes subprime borrowers.
Since revelations of liar loans – What, liar loans in Canada?! – surfaced in 2015, things have gone to heck. Now it’s experiencing a run on its deposits. Teetering at the abyss, it obtained a $2 billion bailout loan on Thursday. The terms are onerous. And on Friday, the crux of the deal emerged – the amount of mortgages it has to post as collateral. It’s a doozie.
It sheds some light on what insiders think mortgages and the homes that back them are worth when push comes to shove. A bone-chilling wake-up call for the Canadian housing and mortgage market.
This is when the whole construct started falling apart:
On July 15, 2015, Home Capital announced that originations of high-margin uninsured mortgages had plunged 16% and originations of lower-margin insured mortgages had plummeted 55%, and that it had axed an unspecified number of brokers. Shares plunged 25% in two days [Largest “Alternative” Mortgage Lender in Canada Denies “Systemic Problem” in Housing Market].
On July 30, 2015, it disclosed, upon the urging of the Ontario Securities Commission, the results of an investigation that had been going on secretly since September 2014 into “falsification of income information.” Liar loans. It suspended 45 mortgage brokers who’d together originated in 2014 nearly C$1 billion in residential mortgages, or 12.5% of its total [Liar Loans Pop up in Canada’s Magnificent Housing Bubble].
To continue reading: Chilling Thing Insiders Said about Canada’s House Price Bubble