Well-meaning regulators, from time to time, lose perspective on the very industry they are assigned to oversee.
There is no better example than in the case of Home Capital Group (HCG.TO) (HCGWX), Canada’s largest non-bank mortgage lender. On April 20th The Ontario Securities Commission (OSC) accused HCG of making misleading statements to investors about its mortgage underwriting. At the heart of their accusations is the use of a handful of mortgage brokers who, it is alleged, have been providing inaccurate information regarding borrowers. This accusation leads to a precipitous withdrawal of deposits used to fund mortgage lending in tandem with a precipitous fall of more than 70 % in the company’s stock price within the space of less than 2 weeks.
The Canadian mortgage market is 75 % dominated by the Big Six chartered banks (Figure 1). Non-bank lenders, such as HCG service borrowers who have found it difficult to secure loans from the Canadian chartered banks. But that does not mean that they are unworthy borrowers. The company offers home loans predominantly to immigrants, self-employed people and others who have non-traditional incomes that make it harder for them to obtain loans from the big banks. American readers should not equate HCG as a subprime lender of the type that brought down U.S. banks in 2008. The Canadian mortgage market is completely different and operates with stricter regulations. The Canadian housing and mortgage market was totally unscathed during the U.S. housing meltdown.
Figure 1 Mortgages Held by Canadian Financial Institutions
In 2015 an HCG investigation resulted in suspending some 50 brokers out of a stable of more than 4000 brokers who work with the company at any given time. However, the company continues to operate under this cloud. Following the OSC’s accusation, the retail depositors have withdrawn more than 90 per cent of their funds from Home Capital’s high-interest savings accounts. In a succession, HCG had arranged a lending facility of C$ 2 billion from an institutional investor. The facility is very onerous regarding fees and other charges, resulting in HCG effectively paying as high as22 % for this lifeline. Not unexpectedly, the share price plunged more than 60 % on this announcement. In effect, the company was forced to destroy the income statement in order to preserve its asset base— a very high price to pay, but the threat was existential.
