the collapse of Home Capital Group

[Buster]

Some thoughts.

- We're in deep shit in Canada. The housing bubble, finally, looks like it might be ready to tilt.

- There was a large market for depository funds to finance non-bank mortgage lenders. Essentially the "high interest" savings accounts you see advertised are guys seeking equity to lever up into the mortgage market. But like any leverage, if the underlying assets move a bit, then your position moves a lot. If people start pulling their cash (and they are, a lot), then the same psychological phenomenon that creates bubbles works in reverse.

- Canada does not have the policy bullets left to handle a severe mortgage crisis. We either take it on the chin, and allow the correction in Canada to occur fast (ouch), we try to re-flate the bubble with cheap credit (and see CAD go to... 50 cents?), or we see Snowboarder buy up the paper. I think the last is actually quite likely. May god have mercy on our souls.

- Canadians are pretty dumb, on average. But they think they are smart. Which is worse than the average American who probably knows they are dumb.

- Will the shit-show that is the Vancouver and Toronto RE markets kill the other markets, or have we in Calgary already had all the meat flayed from the bones? Probably see a bigger impact than I would like.

- the Canadian banks are going to rip us a new a-hole in the coming years collecting their pound of flesh.

- Home Capital is not the problem, it is a symptom of the problem. Those underlying assets are starting to stank up the joint. But the real problem is the Price to Income ratio for homes in Canada. If the majority of the market can't afford their mortgage payment, then all of the discussion of foreign capital is moot.

[b_t]

are you an economist?

[Sentry]

Originally posted by b_t
are you an economist?
Negative, he is a meat popsicle.

[Rarasaurus]

The lenders will be more Leary and may tighten their lending policies. This and interest rate increases may slow the market based on what people qualify for.

Calgary has had a lot of downward pressure already for the last 2 years but stayed remarkably flat in residential RE. We still have highest GDP per capita in Canada and highest wages. The lower Canadian dollar helps our energy sector realise more profits. We are not far off 2000 to 2008 market parameters where Alberta did very well.

I do see a problem with Vancouver and Toronto for sure though.

The crap assets HCG has will be sold off for a loss and their investors are the ones that are hurt. Day to day people will feel little impact.

[Buster]

Originally posted by Rarasaurus
The lenders will be more Leary and may tighten their lending policies. This and interest rate increases may slow the market based on what people qualify for.

Calgary has had a lot of downward pressure already for the last 2 years but stayed remarkably flat in residential RE. We still have highest GDP per capita in Canada and highest wages. The lower Canadian dollar helps our energy sector realise more profits. We are not far off 2000 to 2008 market parameters where Alberta did very well.

I do see a problem with Vancouver and Toronto for sure though.

The crap assets HCG has will be sold off for a loss and their investors are the ones that are hurt. Day to day people will feel little impact.

I think this is a rather generous interpretation of what is going on. Although I certainly hope you are right.

I think Calgary's soft landing over the last couple of years is somewhat to do with the same policies that have inflated GTA/GVA prices. (I'm of the view that foreign capital is over-represented as factor in the actual pricing. Not absent, but over-stated.)

Even so, if this is the tip of the iceberg, then Calgarians will be dragged down by the policy decisions, which happen at a national level.

[Rarasaurus]

For sure on the side of optimistic and agree there is a risk we get dragged down by future national policies.

I do not know what policies inflated the other markets as I only remember policies that have tried to cool the market get imposed the last 2 years.

If oil and Nat Gas can climb a bit more I think Calgary will be in a position to weather it the best country wide. If CAD dollar goes down a bit more to 0.65 this helps us on the corporate profit and GDP side.

[roopi]

Imminent Housing Crash Thread 2.0 :whocares:

[88CRX]

Originally posted by roopi
Imminent Housing Crash Thread 2.0 :whocares:

No kidding.

Would be great if it would just crash and get it over with. Quit fucking around.

[Swank]

Originally posted by roopi
Imminent Housing Crash Thread 2.0 Beat me to it.

[ZenOps]

Bubble is relative. Houses tend to be priced in dollars, dollars, yen, yuan and other currencies that are constantly being printed in ever greater quantities.

Now, if you look at it compared to raw dollar printing - the one thing that is in a bubble compared to the 1970's is post secondary education in some parts of the world (like the US)

Rap, rock and country singers along with some football players might also be bubble-ish, but that is a micro economic factor as there are so few of them percentage wise compared to the bulk of the economy.

http://www.sportingintelligence.com/2011/01/20/from-20-to-33868-per-week-a-quick-history-of-english-footballs-top-flight-wages-200101/

Baller! Compared to 1960, the average wage of a footballer has gone up 1,693x. Now that is what you call wage mobility. If the trend continues in about 50 years a footballer should probably be making about $100 million per week.

[revelations]

Canadian mortgage default numbers are rising somewhat, but not at their peak of the past 10 years. We were at 0.28% back in February - down from the peak of 0.45% of Feb 2010.

http://www.cba.ca/Assets/CBA/Files/Article%20Category/PDF/stat_mortgage_db050_en.pdf


The collapse of a a lender due to loss of liquidity - how does that affect the rest of the PRESENT mortgage holders through other institutions?

[Manhattan]

Talk about fear mongering.

Home Capital is tanking because of allegations of fraud in their lending practices and loss of trust in their management. Not because their home loans are going bad. Their deposits were being cashed out at a high rate because of the scandal and they were more or less forced to take on some very burdensome financing.

:closed:

[ercchry]

Rules are already way tighter than they use to be... don't believe me? Go try and shop around for a mortgage for a purchase price of over $1.5m with ONLY 20% down

It's amazing how tight lenders get when they actually need to have the loan on the balance sheet and can't insurance and sell it off

Between that and the new qualifying rules for regular high ratio, I think we are being very proactive for any crash van or Toronto may see

[Buster]

A bubble isn't really relative. If you look at simply a bubble as it relates to the value of a currency (ie inflation), then you would presume that asset prices would correlate to other areas - labour, etc. This isn't happening. Personal cash-flow to price ratio is more important than simply nominal home prices inflating.

What is happening with HCG is less important than why it is happening. If it is an indicator in a turn of confidence...well confidence goes down just as fast as it goes up. This is very similar to the US mortgage crisis in that respect. With people saying almost identical things in response to the New Century crisis.

[suntan]

HCG has $20 billion in mortgages. Wow, that's a lot!

The total mortgage market in Canada is...








$1 TRILLION.

This like if your house burned down to the ground and people then said Calgary's housing market is going to shit.

[Hallowed_point]

Originally posted by ercchry
Rules are already way tighter than they use to be... don't believe me? Go try and shop around for a mortgage for a purchase price of over $1.5m with ONLY 20% down

It's amazing how tight lenders get when they actually need to have the loan on the balance sheet and can't insurance and sell it off

Between that and the new qualifying rules for regular high ratio, I think we are being very proactive for any crash van or Toronto may see

Agree strongly.

[ercchry]

Not to mention HCG is already rebounding and have access to a new $2b balance sheet...

And genworth claims that HCG actually has less defaults than average

https://www.google.ca/amp/business.financialpost.com/investing/home-capital-shares-inch-up-as-it-secures-firm-commitment-for-2-billion-line-of-credit/amp

[Xtrema]

Originally posted by suntan
This like if your house burned down to the ground and people then said Calgary's housing market is going to shit.

The question is nobody knows how deep this goes and whose money is tied up in this.
https://images-na.ssl-images-amazon.com/images/I/51NEBPHiLjL.jpg

[Buster]

Originally posted by ercchry
Not to mention HCG is already rebounding and have access to a new $2b balance sheet...

And genworth claims that HCG actually has less defaults than average

https://www.google.ca/amp/business.financialpost.com/investing/home-capital-shares-inch-up-as-it-secures-firm-commitment-for-2-billion-line-of-credit/amp

Their "rescue package" is of a nature it looks to me like they are trading the remaining value of their assets for an opportunity for insiders to get out.

[Buster]

Originally posted by suntan
HCG has $20 billion in mortgages. Wow, that's a lot!

The total mortgage market in Canada is...








$1 TRILLION.

This like if your house burned down to the ground and people then said Calgary's housing market is going to shit.

You're making an argument that this is an isolated incident, with an isolated company, and that systemic issues in the RE market and the residential mortgage market had nothing to do with it. fine. I'll listen to that argument.

But this isn't a situation in isolation. there is plenty of data to support the notion that this is a symptom of greater systemic issues.

Look at it another way. If there WERE issues with the RE market and home mortgage market in Canada, and those issues were to bubble to the surface at the head of various serious issues....it would look exactly like this at the start. If you were to play a thought experiment about what a mortgage/RE crisis in Canada would look like in its nascence....you might dream up this scenario.

[ercchry]

The REIT holders and the insurers are the ones that will take the majority of the hit of there was to be a crash, alternative lenders are holding a very small percentage of the bag

[suntan]

Originally posted by Buster


You're making an argument that this is an isolated incident, with an isolated company, and that systemic issues in the RE market and the residential mortgage market had nothing to do with it. fine. I'll listen to that argument.

But this isn't a situation in isolation. there is plenty of data to support the notion that this is a symptom of greater systemic issues.

Look at it another way. If there WERE issues with the RE market and home mortgage market in Canada, and those issues were to bubble to the surface at the head of various serious issues....it would look exactly like this at the start. If you were to play a thought experiment about what a mortgage/RE crisis in Canada would look like in its nascence....you might dream up this scenario. I don't think you understand how mortgages are underwritten in Canada.

The USA had(has) a big problem. A lender can write a mortgage and then securitize that mortgage. That mortgage is now an investment vehicle, sorta like the world's most insane bond. It then gets sold on a market. Granted it's an OTC market, but hell bonds are all sold OTC as well so there's still a big market for them. So of course the problem here is that no one actually knew what the risk profiles of the lendees actually were once the things were securitized because that information was never brought along. So of course since the new buyers were never aware of the risks involved, everything came crashing down once the lendees started being unable to make payments on the underlying loan.

In Canada the lender that writes a mortgage must keep it until it matures. Period. There is no way to slough them off.

Also, it seems that you don't seem to realize that the mortgages that HCG wrote are still being repaid by the lendees. That was never the problem.

So tell me, what is it precisely you think will take down the RE market?

[revelations]

Originally posted by Xtrema


The question is nobody knows how deep this goes and whose money is tied up in this.
https://images-na.ssl-images-amazon.com/images/I/51NEBPHiLjL.jpg

Total Big Short jenga moment there ....

3hG4X5iTK8M

[ercchry]

Originally posted by suntan


In Canada the lender that writes a mortgage must keep it until it matures. Period. There is no way to slough them off.



:rofl: :rofl: :rofl:

You REALLY think that 100% of mortgages are just sitting on the books?!

[ExtraSlow]

Originally posted by Buster
- Canada does not have the policy bullets left to handle a severe mortgage crisis. We either take it on the chin, and allow the correction in Canada to occur fast (ouch), we try to re-flate the bubble with cheap credit (and see CAD go to... 50 cents?)

How much cheaper could credit get? This bullet has long been fired.

[suntan]

Originally posted by ercchry


:rofl: :rofl: :rofl:

You REALLY think that 100% of mortgages are just sitting on the books?! Alright then, tell me how they're securitized.

[ercchry]

Originally posted by suntan
Alright then, tell me how they're securitized.

Current rules? Yes, there are a small percentage that now have to sit on the books... LTV<65% and purchases (not loan amount) over $1m and some refinances... basically anything uninsurable needs a balance sheet... but this is all since November of last year... so most of this prior to will fall into this next paragraph:

ANYTHING that gets an insurer to sign off on it either on the front end or via bulk insurance on the back end can and is sold off as an investment vehicle just like south of the border... difference being that these loans are insured but that's about it

New rules are seeing lenders share the risk with insurers though... November was a big surprise for everyone in the industry and we're just now starting to see how it's shaping up. So far the biggest thing is just more down payment on uninsurable lending and higher rates for conventional vs high ratio

[Hallowed_point]

I think that ercchry is a mortgage broker, so I suspect that he does know the in's/out's. I couldn't believe all the questions that I was asked by the bank prior to getting approved. It was a real eye opener as a first time buyer. In retrospect, I'm glad it wasn't just a "ehhh ok sure here's a loan." :nut: :eek:

[ercchry]

*not a broker, I just work with them

[HiTempguy1]

Originally posted by Hallowed_point
I think that ercchry is a mortgage broker, so I suspect that he does know the in's/out's. I couldn't believe all the questions that I was asked by the bank prior to getting approved. It was a real eye opener as a first time buyer. In retrospect, I'm glad it wasn't just a &quot;ehhh ok sure here's a loan.&quot; :nut: :eek:

Yea, compared to people's experiences from 5+ years ago, things seem to have changed quite a bit.

[Buster]

Originally posted by suntan
I don't think you understand how mortgages are underwritten in Canada.

The USA had(has) a big problem. A lender can write a mortgage and then securitize that mortgage. That mortgage is now an investment vehicle, sorta like the world's most insane bond. It then gets sold on a market. Granted it's an OTC market, but hell bonds are all sold OTC as well so there's still a big market for them. So of course the problem here is that no one actually knew what the risk profiles of the lendees actually were once the things were securitized because that information was never brought along. So of course since the new buyers were never aware of the risks involved, everything came crashing down once the lendees started being unable to make payments on the underlying loan.

In Canada the lender that writes a mortgage must keep it until it matures. Period. There is no way to slough them off.

Also, it seems that you don't seem to realize that the mortgages that HCG wrote are still being repaid by the lendees. That was never the problem.

So tell me, what is it precisely you think will take down the RE market?

Let me ask you this: do you think that HCG operated with zero leverage?

Next: was the US meltdown as a result of mortgage companies going bust? Or was that a symptom of other issues? Is it possible for demand to decrease (ie prices go down) in the RE market, without a reduction in liquidity?

You are making the claim that RE is Canada is healthy because people still have access to mortgages. I'm saying a turning point in consumer confidence with respect to home prices would look exactly like what we are seeing in the economy right now. Perhaps it isn't. But it would look like this.

[ercchry]

With the knee jerk reactions you see in the markets I don't think you can take a single event, especially one that started with an Ontario securities complaint as a sign of anything yet

The 08 meltdown was due to a few variables but on the lending side, it was thanks to unchecked lending, rampant sub-prime, stated income... teaser rates, never in a thousand years able to afford the money lending which we are much stricter about especially since then... but the real issue was all those loans were passed off as being A files, when they were pure garbage

When it comes to housing I believe you have to look at larger picture stuff like employment, industry shifts, etc

If all of a sudden the remaining Canadian labour force is automated... yeah we're going to have a problem.

Rental vacancy rates are probably a great indicator too, as these will be the most leveraged individuals who will default on their multiple properties before the average primary owner starts to default, also with the stricter heloc rules and refinance rules it's going to be tough to dig a deeper hole for those who are out of work

I think you have to trust that the majority of people making lending decisions are acting in good faith and under current salaries people can afford to pay their bills... and being that only those uninsured (which requires deep equity in the property) are the only ones in this province that can even mail in their key, and we are the most relaxed province that there will not be mass defaults in this country

[Feruk]

HCG failed because of potential fraudulent activities of the board which caused a run on withdrawals of deposits in their HISA and other liquid assets. The ONLY way I see that tying into an underlying concern about real estate was if the board was lying about the health of the underlying mortgages. That's what I can't figure out. Anyone care to help?

[suntan]

Originally posted by ercchry


Current rules? Yes, there are a small percentage that now have to sit on the books... LTV&lt;65% and purchases (not loan amount) over $1m and some refinances... basically anything uninsurable needs a balance sheet... but this is all since November of last year... so most of this prior to will fall into this next paragraph:

ANYTHING that gets an insurer to sign off on it either on the front end or via bulk insurance on the back end can and is sold off as an investment vehicle just like south of the border... difference being that these loans are insured but that's about it

New rules are seeing lenders share the risk with insurers though... November was a big surprise for everyone in the industry and we're just now starting to see how it's shaping up. So far the biggest thing is just more down payment on uninsurable lending and higher rates for conventional vs high ratio Jesus I was expecting you to mention mortgage back securities but nope, not even that.

[Buster]

Originally posted by ercchry
With the knee jerk reactions you see in the markets I don't think you can take a single event, especially one that started with an Ontario securities complaint as a sign of anything yet

The 08 meltdown was due to a few variables but on the lending side, it was thanks to unchecked lending, rampant sub-prime, stated income... teaser rates, never in a thousand years able to afford the money lending which we are much stricter about especially since then... but the real issue was all those loans were passed off as being A files, when they were pure garbage



Every bubble has similarities to ones in the past - and then it has differences that people tend to ignore.

For instance, Canada does not have rate shell-games that were such a big part of the US market. I would say that that environment created a specific timeline for the ticking bomb.

But Canada has had nearly 10 years of emergency low rates created through public policy. You can compare something things, but you can't ignore the frothy things in Canada's market that weren't present in the US but could be a contributor.

But the market is a reflection of peoples' aggregate desire to spend "X" on a house. If that demand psychology shifts, it doesn't matter what the rates or the rules say, you will see the same self-fueling of the downword spiral that you saw on the upward one.

[tirebob]

Crisis averted???

http://globalnews.ca/news/3408989/home-capital-stock-mortgage-loan/

[ercchry]

Originally posted by suntan
Jesus I was expecting you to mention mortgage back securities but nope, not even that.

Really I didn't?! Wtf was I talking about in paragraph two? Did you go and google something? Cause a second ago you believed lenders were fully on the hook for all lending in this country :nut:

[suntan]

Originally posted by Buster


Let me ask you this: do you think that HCG operated with zero leverage?

Next: was the US meltdown as a result of mortgage companies going bust? Or was that a symptom of other issues? Is it possible for demand to decrease (ie prices go down) in the RE market, without a reduction in liquidity?

You are making the claim that RE is Canada is healthy because people still have access to mortgages. I'm saying a turning point in consumer confidence with respect to home prices would look exactly like what we are seeing in the economy right now. Perhaps it isn't. But it would look like this. What does their balance sheet say? You do know how to read a balance sheet yes? But what does it matter anyhow? Lots of businesses have debt. So what?

What's the "turning point in customer confidence"? Did people stop buying homes in Toronto and Vancouver? Are people walking away from their homes? What???

[suntan]

Originally posted by ercchry


Really I didn't?! Wtf was I talking about in paragraph two? Did you go and google something? Cause a second ago you believed lenders were fully on the hook for all lending in this country :nut: I was lying to see what people would say.

[ercchry]

Originally posted by suntan
I was lying to see what people would say.

:rofl: :rofl:


You really are a piece of work

[suntan]

Originally posted by ercchry


:rofl: :rofl:


You really are a piece of work I used to lie on CP on financial topics all the time to see who would call them out. Let's just say there isn't a lot of financial knowledge there.

[Feruk]

Originally posted by suntan
I used to lie on CP on financial topics all the time to see who would call them out. Let's just say there isn't a lot of financial knowledge there.
Wait, aren't you the guy who called HCG a good buy at $17?

[mr2mike]

So who lent HCG the $2B?

[ercchry]

Originally posted by mr2mike
So who lent HCG the $2B?

Nothing official... but word is Ontario health care pension

[Buster]

Originally posted by mr2mike
So who lent HCG the $2B?

View it as a loan (basically debtor in possession financing), on the liquidation value of the assets.

This isn't some generous bailout, saviour facility. It's a way for insiders to smoothly get their money out, so that the shareholders can be left holding the bag. This is always how it goes.

[ercchry]

Originally posted by Buster


View it as a loan (basically debtor in possession financing), on the liquidation value of the assets.

This isn't some generous bailout, saviour facility. It's a way for insiders to smoothly get their money out, so that the shareholders can be left holding the bag. This is always how it goes.

It's a line of credit with specific terms... not to mention they don't have $2b in assets or their market cap would be mildly higher... it's business as usual, they need access to a balance sheet and that's what this is

[mr2mike]

Yep Ontario pension fund gave the loan.
Coincidence that the guy running that fund is on Home Capital's board of directors?

Edit: they're not paying that back. This is going to go pop long before that.

[Buster]

Originally posted by ercchry


It's a line of credit with specific terms... not to mention they don't have $2b in assets or their market cap would be mildly higher... it's business as usual, they need access to a balance sheet and that's what this is

Business as usual? I can't see that.

[ercchry]

Originally posted by Buster


Business as usual? I can't see that.

Until they start denying lending... I can see it. So many rules in place for financial institutions to keep them running

[mr2mike]

The wheels are definitely more than just wobbling.


http://business.financialpost.com/news/fp-street/home-capital-bleeds-another-291-million-in-withdrawals-in-just-one-day

Home Capital Group Inc. said clients continue to pull their demand deposits from the alternative mortgage lender’s subsidiary, with $291 million in withdrawals from high interest savings accounts on Thursday alone.

That’s on top of the $472 million drop in demand deposits — which help Home Capital fund mortgage lending — at its subsidiary Home Trust on Wednesday, the Toronto-based company said in a statement, as concerns mount about the company’s ability to fund its operations going forward.

[Cash Money Hoes]

From the above post:

http://business.financialpost.com/n...in-just-one-day

Read the last paragraph of this article. It references falsification of income as the reason for the hearing with regulators. The company subsequently cut ties with brokers that likely brought them the deals.

If the brokers are bringing them falsified deals, it is not a huge leap to believe that other financial institutions that use brokers to originate loans may have mortgages with falsified borrower income info on the books as well.

As noted in this thread earlier, short term teaser rates and rate resets in the US triggered further defaults and sped up devaluation of the MBS, liquidity crisis etc..

While we don't have this to the same degree in Canada, the above article suggests that what we do share with the pre 2008 US mortgage market, is the presence of borrowers that have circumnavigated lending rules which are in place to provide stability to the market in tough times. The wide spread existence of buyers that were over leveraged and didn't have the regulated income to support the mortgage debt was the underlying issue that facilitated the collapse in 2008.

It will be very interesting to see how far this reaches.

Lets just hope this is not an analog to Lehman Brothers.

[Buster]

securitization of the debt underlying an asset class is not a necessary condition for that asset class to see a bubble.

The MBS situation in the US allowed the RE market issues to spread to the overall financial world in the US. It also created an environment, through the ease of access to credit, for the bubble to form.

In Canada, we have other mechanisms perform a similar function: government assumption of mortgage risk for almost no compensation (CMHC insurance is vastly under-priced), and a very long stretch of loose monetary policy.

This mantra that "WE DONT HAVE RMBS LIKE AMERICANS WE ARE FINE" just doesn't make any sense to me.

[Rarasaurus]

Originally posted by Buster
securitization of the debt underlying an asset class is not a necessary condition for that asset class to see a bubble.

The MBS situation in the US allowed the RE market issues to spread to the overall financial world in the US. It also created an environment, through the ease of access to credit, for the bubble to form.

In Canada, we have other mechanisms perform a similar function: government assumption of mortgage risk for almost no compensation (CMHC insurance is vastly under-priced), and a very long stretch of loose monetary policy.

This mantra that &quot;WE DONT HAVE RMBS LIKE AMERICANS WE ARE FINE&quot; just doesn't make any sense to me.
To say CMHC is under funded is a bit of a stretch. With default rates at 0.5% and CMHC fees at 3.6% there is enough buffer should default rates go up even 6 times.

[Cash Money Hoes]

Originally posted by ercchry


It's a line of credit with specific terms... not to mention they don't have $2b in assets or their market cap would be mildly higher... it's business as usual, they need access to a balance sheet and that's what this is

I think you are mixing up Assets with Equity. Looking at their most recent balance sheet HCG held 20b in Assets and had about 1.6b in equity.

At $18/share the stock roughly mirrored value of equity for the company. Market cap is now down to $690mm. They may still have equity close to where they were before this announcement (based on reported assets and liabilities) but as a result of the revelation that they may be holding some shit mortgages assets (and implication of higher future default rates) and the leveraged nature of this business, even a small uptick in defaults has a multiplying effect on the evaporation of equity.

[ianmcc]

Not sure what it means for the average Calgarian but it did prompt me to renew our mortgage today for a 5 yr fixed term JIC. I wanted to go variable but the wifey likes the security of fixed term.

[Buster]

Originally posted by Rarasaurus

To say CMHC is under funded is a bit of a stretch. With default rates at 0.5% and CMHC fees at 3.6% there is enough buffer should default rates go up even 6 times.

Not quite how it works.

Would the market choose to price the insurance for the lowest quality borrowers in the country, with the least equity, at the rates that the CMHC uses? Hell no. (That's why the gov't has to do it, btw).

It's WAAY under-priced.

[Rarasaurus]

Originally posted by Buster


Not quite how it works.

Would the market choose to price the insurance for the lowest quality borrowers in the country, with the least equity, at the rates that the CMHC uses? Hell no. (That's why the gov't has to do it, btw).

It's WAAY under-priced.

Most insurance companies take in money and aim to payout 40% to 60% of revenue I believe. CMHC is paying out 15% on the average year. Genworth is their private sector equivalent so yes the free market is also in at these rates. Highest default rates were for a couple years in the 80s at around 3% in Alberta. That's 30 years of straight profits at today's premiums. I want in on those odds. You find the investors I'll sell it.

[Buster]

Originally posted by Rarasaurus


Most insurance companies take in money and aim to payout 40% to 60% of revenue I believe. CMHC is paying out 15% on the average year. Genworth is their private sector equivalent so yes the free market is also in at these rates. Highest default rates were for a couple years in the 80s at around 3% in Alberta. That's 30 years of straight profits at today's premiums. I want in on those odds. You find the investors I'll sell it.

I wouldn't sell mortgage default insurance at CMHC rates to my worst enemy....at least in this market at this time.

Credit Default insurance is not the same thing as insuring a regular asset. You are also insuring the leverage underlying the transaction. For instance, you are not just insuring that the bank is made whole on the nominal value of the purchase and loan transaction, but also insuring them against the potential of the fall in value of the asset.

Genworth aside, the insurance and re-insurance industry in the world is deep and sophisticated. And yet, CMHC has priced almost everyone out of the market. Why?

If this insurance is so profitable, why aren't the banks rolling that insurance into their own products, and keeping the risk on their books? They aren't. At these prices, they are more than happy to offload the risk onto the Canadian taxpayer.

In the end, we don't know. When governments get involved in price-setting, the market is not allowed to function. If the financial industry was forced to solve its own problem with risk of default on hig leverage mortgages, we would see the pricing of the insurance (or the rate the FI would charge) would have worked to balance the RE bubble in Canada automatically. But alas, we have a bunch of smart bureaucrats setting the price for both the capital (ie interest rates) AND the insurance. The law of un-intended consequences will bite you.

[Buster]

ZH posted a pretty good review of the topic today. Pretty much in alignment with what I said:

this is a bandaid to shore up the company so the insiders could get out (which they already have). HOOPP gets a massive fees in the form of a usurious interest rate. They are given a super-senior security position over the good assets in the book. They might have to wait for the thing to go through bankruptcy court before getting all of their capital out, but that's fine for them. Other institutions will pick over the carcass for decent remaining mortgage assets.

Then they stick a fork in the whole thing.

What a shit show.



Panic Bank Run Leaves Canada's Largest Alternative Mortgage Lender On Edge Of Collapse

By Tyler Durden
Created 04/29/2017 - 16:33
Tyler Durden's picture [1]
by Tyler Durden [1]
Apr 29, 2017 4:33 PM
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After two years of recurring warnings (both on this website [4]and elsewhere [5]) that Canada's largest alternative (i.e., non-bank) mortgage lender is fundamentally insolvent, kept alive only courtesy of the Canadian housing bubble which until last week had managed to lift all boats, Home Capital Group suffered a spectacular spectacular implosion [6]last week when its stock price crashed by the most on record after HCG revealed that it had taken out an emergency $2 billion line of credit from an unnamed counterparty with an effective rate as high as 22.5%, indicative of a business model on the verge of collapse .

Or, as we put it [6], Canada just experienced its very own "New Century" moment.



One day later, it emerged [7]that the lender behind HCG's (pre-petition) rescue loan was none other than the Healthcare of Ontario Pension Plan (HOOPP). As Bloomberg reported, the Toronto-based pension plan - which represented more than 321,000 healthcare workers in Ontario - gave the struggling Canadian mortgage lender the loan to shore up liquidity as it faces a run on deposits amid a probe by the provincial securities regulator. Home Capital had also retained RBC Capital Markets and BMO Capital Markets to advise on “strategic options” after it secured the loan.

Why did HOOPP put itself, or rather its constituents in the precarious position of funding what is a very rapidly melting ice cube? The answer to that emerged when we learned that HOOPP President and CEO Jim Keohane also sits on Home Capital’s board and is also a shareholder. But how did regulators allow such a glaring conflict of interest? According to the Canadian press, Keohane had been a director of Home Capital until Thursday, but said he stepped away from the boardroom on Tuesday to remove the conflict of interest when it became clear HOOPP might step in as a lender.

Keohane further clarified on Friday that he doesn’t view the Home Capital investment as risky because the pension plan will be provided with $2 worth of mortgages as collateral for every $1 it lends to Home Capital.

“We take comfort from the underlying asset portfolio, so we are not looking at Home Capital as a credit,” said Mr. Keohane in an interview with Business News Network television. He added that a correction in the housing market is not of great concern, since the values of homes would need to plummet by more than 65 per cent for the fund to make no return beyond the value of its principal commitment.

Furthermore, it appears that Canada's pensioners are priming all other company lenders: Keohane also said that the funding syndicate would rank above Home Capital’s other lenders.

“We have security interest in the collateral we’ve received, so we have the right to sell that collateral if we don’t get paid. And then the balance that’s left over would go to recovery for other creditors.”

The implication is that as long as HCG's mortgages dont suffer greater than 50% losses, HOOPP's pensioners should be money good. Of course, if this is indeed Canada's "subprime moment", any outcome is possible. As for other lenders, or the prepetition (because there will be a petition here, the only question is when and in what form) equity, that's some $4 billion in assets that was just stripped from existing collateral.

"The Best Price May Come From Breaking Up The Company"

In any case, the company's frenzied, emergency measures to stabilize the near-insolvent mortgage lender were not nearly enough, and despite HCG stock posting a modest rebound on Friday between hopes of a rumored sale and a short squeeze, those hopes may be dashed soon because as the Globe and Mail reports [8], the depositor bank run that gripped Home Capital Group in the past week, only got worse after the company revealed just how precarious its funding situation had become.

First, any hope the company, or rather its investors may have held of a sale, appear dashed. Investment banking sources cited by the G&M said "the best possible price may come from breaking up the company and selling portions of its mortgage portfolio to regional financial institutions." Which also implies that aside from a few select assets, there is no equity value left, or in other words, any potential buyer is now motivated to wait until HCG liquidates, and then picks off the various assets in bankruptcy court.

There are structural limitations as well: Home Capital currently holds $18-billion in home loans outstanding, "a portfolio that would be difficult to swallow for rivals in the alternative mortgage sector, such as credit unions, small mortgage lenders, Montreal-based Laurentian Bank and Edmonton-based Canadian Western Bank." These institutions, along with private equity firms, could still bid for pieces of Home Capital, the G&M admits. The only question is why they would do so before a bankruptcy filing.

While one prominent name features on the list of potential buyers, that of PE giant J.C. Flowers whose CEO J. Christopher Flowers earlier this year said he expected to expand the company’s Canadian real estate lending business, Canada’s six big banks are notable for their absence on a list of bidders. The reason is that Home Capital lends money to home buyers who have been turned down by the major banks and none of these institutions is expected to enter the alternative mortgage sector by acquiring the company.

National Bank of Canada proactively called the equity analysts who follow the company this week to say it would not bid on Home Capital after being asked if it was a potential buyer. Needless to say, the big banks would be quite delighted if one of their "bottom picking" competitors would suddenly go bankrupt.

"When you have a bank run people get spooked"

Which brings us to the most imminent risk facing Home Capital Group, and its subsidiary, Home Trust.

Recall, that on Thursday we observed that as concerns about HCG's viability mounted, depositors were quietly pulling their funding from from savings accounts at subsidiary Home Trust. By Wednesday, when Home Capital revealed it was seeking a $2-billion loan to backstop its sinking savings deposits, shareholders ran for the exits, driving down the company’s share price by 65 per cent on Wednesday alone, and heightening the sense of panic.

On Friday, the company revealed that high-interest savings account balances fell another 36% to $521-million by Friday morning, down by a whopping $293 million from $814-million Thursday and more than $2-billion a month ago.

In other words, had it not been for the emergency HOOPP loan, the company would likely be insolvent as of this moment following what may be the biggest bank run in recent Canadian history; which also explains why the interest rate on the loan is above 20%.

“When you have a run on the bank, people get spooked and they sell and ask questions later,” said a Bay Street investment banker. “It’s investor psychology that takes over.”

As is usually the case, regulator appeared on the scene.... just one day too late.

Canada’s banking industry regulator, the Office of the Superintendent of Financial Institutions (OSFI), has gathered data from other financial institutions this week, both to monitor for signs of a broader depositor panic and to track where funds are moving as they leave Home Trust.



OSFI sent an urgent request Wednesday to several smaller and mid-sized financial institutions and credit unions to provide the regulator with up-to-date information about their savings accounts, according to a source. Specifically, OSFI wanted to know the institutions’ most recent account totals for high-interest savings accounts, as well as data on recent redemptions and current levels of high-quality liquid assets.

The request, which the OFSI said had to be fulfilled "as soon as institutions are able", is seen as an attempt to take the pulse of the market by tracking where deposits flowing out of Home Capital may be going, and to gauge whether there is any contagion among other institutions. In recent days, some smaller and mid-sized institutions have also struck up early-stage discussions about whether multiple institutions could join together to explore a deal to buy some of Home Capital’s assets.

As for Canada's big banks, they have already decided that HCG won't survive. Several months ago, Canaccord Genuity Group Inc. told its financial advisers they could no longer steer investors to high-interest savings accounts at Home Capital or rival alternative mortgage lender Equitable Bank. Client money already placed with either bank had to be moved within 60 days.

Then, after Home Capital revealed in March it was under investigation by the Ontario Securities Commission over its disclosure practices, Canadian Imperial Bank of Commerce introduced a cap of $100,000 per client for purchases of Home Capital guaranteed investment certificates (GICs), which is the maximum level covered by Canada’s deposit insurer.

A spokesperson from Royal Bank of Canada said that, “several weeks ago” the bank introduced a $100,000 cap on Home Capital GICs bought through a full-service broker, although there were no limits for purchases through the firm’s discount brokerage. On Thursday, RBC also released the following entertaining price target scenario: it still has a price target of $8 but fear not, even if RBC is wrong, it promises at least $4/share in residual value. We are not quite as optimistic.

[9]

Additionally, late last week, Bank of Nova Scotia said it would stop selling all GICs sold by Home Trust, but said Monday that policy was amended to a limit of $100,000. Bank of Montreal’s brokerage unit also confirmed it has a $100,000 limit on Home Trust GICs but would not say when it went into force.

As G&M adds, the OSC news shook investors, but the panic was heightened as news of the banks' moves to cap investor deposits slowly seeped through Bay Street in subsequent days, raising concerns that major financial institutions were pulling away from Home Capital.

"We Are Out Of The Position"

When asked if Home Capital could survive this run on its deposits, Keohane - formerly at HOOPP, and the company's last remaining source of funding - said it was possible. “I think it’s a viable business,” he said. “Their cost of funding is going to go up, which may impact earnings… it’s always a possibility that some other institution may have an interest in taking the entity over. If you can have access to a lower funding cost, I mean, it’s quite an attractive purchase.”

Most disagree, and it is safe to assume that the depositor run won't stop until every last dollar held at HCG has been withdrawn.

Meanwhile, late on Friday, Home Capital’s second biggest shareholder, Calgary-based QV Investors disclosed that it liquidated its position, selling 8.4 million shares. QV Investors previously held a 12.8% stake in Home Capital. Toronto-based Turtle Creek Asset Management is Home Capital’s biggest shareholder with 13.6% stake.

On Saturday another prominent investor bailed, when Calgary-based Mawer Investment Management sold 2.75 million shares of the alternative lender, CIO Jim Hall said told Bloomberg in a phone interview. “We are out of the position,” Hall said. Mawer also has reduced holdings in Canadian alternative- lender Equitable Group.

All these investors will now be forced to explain to their LPs how they missed a ticking timebomb which so many, this website included, had warned about for year.

Home Without The Capital Group

As for Home Capital Group, or more aptly Home Without The Capital Group, the future is bleak, and a bankruptcy liquidation appears the most likely outcome. What impact such an event will have on the broader Canadian housing market remains to be seen. Last week, shortly after HCG's rescue loan announcement stunned the otherwise sleep Toronto tape, the Canadian housing regulator warned of "strong evidence of housing-market problems [10]." Looking back in a few months, that may prove to be a vast understatement.

[max_boost]

Originally posted by 88CRX


No kidding.

Would be great if it would just crash and get it over with. Quit fucking around. lol yup just do it.

[Buster]

Bunch of shit gone down since our last exchange on this.

HCG is pretty much done. I'm pretty sure they are almost, or entirely, out of writing mortgages at this point. They are selling off assets - and it looks a lot like a controlled demolition. Once the "good" assets are sold, they will let the thing go into bankruptcy, and the shit-eaters will pick over the corpse getting pennies on their dollars.

At this point HCG is an afterthought, though. The big Canadian banks are under the spotlight as of today.

https://www.bloomberg.com/news/articles/2017-05-10/six-canadian-banks-cut-by-moody-s-over-consumers-debt-burden


Six Canadian Banks Cut by Moody's on Consumers' Debt Burden

Toronto is seeing 1200 new listings every 24 hours right now. And the rate of additions is increasing. Our previous discussions about an "imminent" crash might be corrected to: it's here forks. Hang onto your butts.

One thing that has been raised a couple of times in this thread that is worth correcting - default rates on a mortgage book would go up as a result of declining asset prices. But they would not be the cause of the crash. Just because a mortgage book is not seeing larger default rates, does not mean anything. To see significant default rates requires the actual market to deflect down. In a rising market people who are at risk for default can liquidate their house easily, and everyone is made whole. In a declining market, it is much more difficult to liquidate the asset to avoid a default. In other words, default rates would be a lagging indicator not a leading indicator.

[Sugarphreak]

...

[ercchry]

Yeah HGC started telling brokers last week to take any live deals they had and move them else where... done for sure

As for a crash? I think you're over simplifying it, I'd say speculative real estate deals are a minority and most people are buying to have a roof over their heads, or to put one over someone else's head. For these people to default it's going to take a decrease in population and underlying economical issues, not simply a lack of demand and a decrease in prices

[Meback]

Moody is always behind the times. A down grade in the banks over "consumer debt burdens" means that the problem is already becoming more troublesome. Hell, currently you can lease a car for 60-84 months, when the norm in the past have been 48. - This is proof that consumers are already cash strapped. ohh. Lets not even mention about all the vehicles that are getting repo'ed

In regards to housing, yea like Ercchry said "most people are buying to have a roof over their heads, or to put one over someone else's head." While this is true, you have to factory in the ability to service mortgages, with the economy the way it is right now, this is becoming more difficult for some people. I believe that for housing to crash. We need a scenario where Job Loss is so severe that it results in mortgage default, with the banks tighten up lending.

[Feruk]

Or how about a 2% increase in interest rates? That'll bring it down pretty fast.

[ercchry]

Originally posted by Feruk
Or how about a 2% increase in interest rates? That'll bring it down pretty fast.

Considering that's basically at the qualifying rate... doubt it, especially with how many current owners are on fixed 5yr terms

[Buster]

I don't subscribe to the notion that people were buying into rocket ship prices because they were looking for a roof over their heads. It was pure speculation.

You can tell for a couple of reasons:

- the correlation to rental rates. If people considered housing just a roof expense, you would see a closer coupling of rental rates and home prices, and a higher rate of rental rather than purchase

- the rate at which people subscribe to the notion that renting is just "payng someone else's mortgage".


In either case, the rationale for purchasing a house in an inflating market is to capture an equity gain. That's speculation, by definition.

[ercchry]

Just look at beyond for examples; two types of buyers primarily

1. "I need to buy now before I get priced out of the market"

2. "It's a bubble and I will rent and save my pennies till prices correct"

In calgary over the past two years it's been the #2 mindset that's propping up the entry level to mid tier homes and for those in TO I bet it's the same way

Actually I can tell you what I'm seeing out there as I have a bunch of friends in the area

The ones that can stand it are living at home till well into their late 20s saving for down payments

The ones that can't are renting tiny condos in TO proper

And the ones that are actually pulling the trigger are avoiding TO all together cause they simply can't afford to buy there and are buying in Barrie, or much further south (even have some friends that just bought in Windsor of all places after renting in TO for multiple years)

If TO or the GTA starts to fall you best believe there are many millennials just sitting on the sidelines waiting for their chance to buy within a 1hr commute of their workplace which will make for a very soft landing, just like calgary (suck it sugarphreak)

[Buster]

I don't disagree with that. A deflationay event can come quickly (usually associated with a liquidity crisis in addition to an asset-value-confidence crisis).
Or they can deflate more slowly as people enter the market as it goes down.

However, deflating bubbles have shown that people actually do NOT pull the trigger when asset prices are in decline, for two reasons:

1. they think prices will go lower, and

2. prices that are out of step with their earnings can no longer be justified because they are protected by inflating prices. In other words, someone who can barely afford a $1MM home, might buy it on the way up, but they won't buy that same home at $1MM on the way down.

Bubbles are predominantly psychological phenomenon, after all.

[roopi]

Home Capital gets investment, new $2B credit line from Warren Buffett's Berkshire Hathaway

http://business.financialpost.com/news/fp-street/home-capital-gets-investment-new-credit-line-from-warren-buffetts-berkshire-hathaway/wcm/42af6d53-c09e-402d-9d1c-756884cd4e52

[suntan]

Bunch of shit gone down since our last exchange on this.

HCG is pretty much done. I'm pretty sure they are almost, or entirely, out of writing mortgages at this point. They are selling off assets - and it looks a lot like a controlled demolition. Once the "good" assets are sold, they will let the thing go into bankruptcy, and the shit-eaters will pick over the corpse getting pennies on their dollars.

At this point HCG is an afterthought, though. The big Canadian banks are under the spotlight as of today.Stick to spending your money on home renos.

[Xtrema]

Home Capital gets investment, new $2B credit line from Warren Buffett's Berkshire Hathaway

http://business.financialpost.com/news/fp-street/home-capital-gets-investment-new-credit-line-from-warren-buffetts-berkshire-hathaway/wcm/42af6d53-c09e-402d-9d1c-756884cd4e52

How to double your money over night and collect 9.5% on $2B on top.

Really, if you really read into it, Berkshire-Hathaway can purchase the shares on LOC interest payment alone. Took over a company for free!

[ExtraSlow]

Berkshire is smart dudes. +1, would invest.

[Buster]

How to double your money over night and collect 9.5% on $2B on top.

Really, if you really read into it, Berkshire-Hathaway can purchase the shares on LOC interest payment alone. Took over a company for free!

Yup. It's funny people think this is a vote of confidence or some such. This is WB picking a company off the scrap heap for cheap - and not because the fundamentals are good (they aren't). It's because it plays into a bigger overall strategy for him. It also could be a negative indicator of what our regulators plan to do as the Canadian real estate collapse continues. This is in the some vein as when Goldman Sachs borrowed money from him. One thing about WB that is an absolute certainty: he knows things that no one else knows...and will utilize that to his advantage whenever he can.

[Xtrema]

It also could be a negative indicator of what our regulators plan to do as the Canadian real estate collapse continues.

I won't go that far. But a 30% adjustment is definitely built into the deal. If that adjustment never happens, even better.

That said, Buffet only kept Suncor around for 3 years and I don't recall if they got burnt or not.