For real estate agents in the Toronto area, the troubles facing Home Capital Group could be a bellwether for turbulent times ahead for one of Canada’s largest real estate markets.
Home Capital Group focuses on subprime lending and the publicly traded company’s stock plummeted by 60 percent in just a day.
According to a report by Business Insider, the company is facing a liquidity crunch, as its capital for subprime mortgages has virtually evaporated.
While the alternative lender is a small player in Canada’s $1.4-trillion residential mortgage market, there are plenty of reasons for real estate agents, and all Canadians, to be concerned. Many analysts see a company that is everything that is bad about the mortgage industry — shady lending practices, inadequate internal controls and alleged management misconduct. This is the sort of activity that led up to the U.S. housing crisis in 2007. David Madani, a senior economist with Capital Economics in Toronto, said recently that is something the country wants to avoid.
“The rapid growth in non-traditional mortgage lending does have some potentially ominous parallels with what happened in the U.S. a decade ago.”
Finance Minister Bill Morneau said in a statement that he was watching the Home Capital situation “very closely,” and that he’s been in touch with the heads of federal financial regulatory agencies.
According to critics, the looming risk wouldn’t be so great if the regulatory response to Home Capital had been swifter and forceful.
In Ontario, mortgage professionals are kept in check by the the Financial Services Commission of Ontario (FSCO). When Home Capital stated that it had suspended some of the brokers in its network, the agency conducted its own review into the matter. It has been noted that the improper conduct of the 45 brokers disqualified them from working with Home Capital—but apparently not with other institutions. This doesn’t surprise Bruce Joseph, principal broker at Anthem Mortgage Group in Barrie, Ontario.
“There’s not enough punishment or enforcement to scare people out of engaging in this.”
According to Mike Rizvanovic, a financial services analyst at Veritas Investment Research, this kind of sketchy behavior is not limited to Home Capital.
“It’s an industry-wide problem. When you have a hot market where people are reaching more and more just to get that home that next month they can’t afford, then they’re going to get more creative.”
Business Insider pointed out in its report that sub-prime lending has become a staple in the Canadian housing market, particularly in Toronto, where Home Capital is based. For real estate agents, less loans for subprime borrowers will be available. Toronto will likely see a loss of buyers who can no longer secure a loan. The market surely will be the impact and real estate agents should brace for the impact.
And that internal investigation by Home Capital in 2015 found that its internal controls were inadequate and had not detected the scale of fraudulent documentation flowing through the firm. Moreover, if a mortgage lender faces such an issue that rattles confidence during a positive market, the potential ramifications if the market were to turn would not be sunshine and lollipops.
For real estate agents keeping score, the Home Capital Group saga is reminiscent of the case with New Century Bank a decade ago. It was the second largest subprime lender in the United States, but smaller than Home Capital. When it faced a liquidity crunch, there was no way out and the company ultimately filed for bankruptcy.
And the rest, as they say, is history.