Observers cite increased anxiety amid Home Capital’s troubles

Observers cite increased anxiety amid Home Capital’s troubles

Observers cite increased anxiety amid Home Capital’s troubles A greater unease has settled among industry players as lender Home Capital continues to struggle with rapidly depleting deposits, which declined by around $600 million so far this month (from approximately $13.5 billion at the end of April 2017).

Market observers noted that the alternative lender’s situation is exhibiting remarkable similarities with that of U.S. subprime lender New Century, which encountered significant problems around a year and a half before the 2008 collapse of several major financial institutions.

“Regulators have their heads in the sand,” veteran short-seller Marc Cohodes told the Financial Times. “They should have said, ‘these guys are done, the big banks will pick up the slack, we’ve got rid of a bad actor’. Instead, they’re trying to sweep it under the rug, trying to pretend it’s a one-off.”

Livermore Partners managing director David Neuhauser backed up the remark, stating that the Home Capital crisis is “not an encouraging sign of the health of the Canadian housing market and the country’s broader financial sector.”

Moody’s downgrade of Canada’s big six banks last week seemed to provide evidence for creeping fears that Canada might be on the brink of a major housing crisis.

Bank of Nova Scotia, Canadian Imperial Bank of Commerce, National Bank of Canada, Royal Bank of Canada, Bank of Montreal (BMO), and Toronto-Dominion Bank (TD) had their Moody’s ratings on two key metrics lowered by one notch.

“Continued growth in Canadian consumer debt and elevated housing prices leaves consumers, and Canadian banks, more vulnerable to downside risks facing the Canadian economy than in the past,” Moody’s senior vice president David Beattie announced.

However, Bank of Canada governor Stephen Poloz noted that at present, no signs of a fiscal “contagion” appear to be spreading from the troubled lender.

"We’d be looking for signs that there are problems with the (financial) system as opposed to preoccupying ourselves with individual institutions,” Poloz said over the weekend.

“The question would be: What caused this? Is it something unique to the institution itself, or is it something in the system? … I think this situation (Home Capital) is pretty clear on that; it’s idiosyncratic.”


Related stories:
No signs of ‘contagion’ from Home Bank so far - BoC chief
Moody’s downgrades Canadian banks amid fears of housing crash
 
3 Comments
  • Jim D 2017-05-19 10:31:04 AM
    I don't agree with these "observers" who are comparing Home Capital with the US Sub Prime Crisis.

    The Sub Prime Crisis arose from mortgages that were structured to fail. Mortgages were granted with 18 month "teaser" rates to unqualified borrowers. To compound the matter, the sub prime paper was hidden in a bundle with good debt and rated as AAA to al the institutions. When the teaser rates expired, and defaults skyrocketed, the whole scam was exposed.

    My experience with Home Capital is that they are very conservative with appraised values particularly in equity takeout and refinance situations.

    What is their default rate? Losses from default??
    I think this crisis of confidence stems from regulators discovering some sloppy underwriting practices.
    Not an actual massive default A La Us Sub Prime.
    The fact that other banks are willing to buy their book of business shows the underlying strength of their portfolio.
    Jim D
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  • Fed Up Ontario Broker 2017-05-19 1:37:30 PM
    Please, stop giving Cohodes any legitimacy, or a soap-box, when he and the OSC are the real criminals wiping out shareholder value for what was really not a material impact to Home Trust's operations. He's a self-interested short-seller, with a shady background, and he's not highly regarded in many circles. Do some actual research.

    Also, claiming that their deposits "declined by around $600 million so far this month (from approximately $13.5 billion at the end of April 2017)" is poor reporting designed to create a sensationalist illusion comparing two completely unrelated numbers with each other because of the huge gap between them. A better comparison would be "down to $12.9 billion from $13.5 billion at the end of April," but I guess that doesn't create good enough click-bait for you, and doesn't sound nearly as bad as the way you phrased it.

    I sincerely hope that, if there is any kind of mortgage or real estate market collapse as a result of excessive government interference and irresponsible distorted journalism, that all the so-called journalists and bureaucrats would actually suffer economic hardship. But that will never happen, since journalists and bureaucrats have no concept of what it is like to take the entrepreneurial risks or work in a job where actual performance is rewarded commensurately.
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  • Phil 2017-05-21 12:09:23 PM
    What people are not seeing is camouflaged,,,this lender had a run on deposits/GICs, so you need at least 10 percent on deposit to loan out 10 times the amount,or have 10 percent on reserve....the people withdrew to BUY properties!!!! and went to a different lender because the people needed a downstroke.....now do you see why
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