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Baby, we got a bubble!?

Home Capital has a $500 million market cap. It's book value is $1.6 billion as of 12/31/16.

If the Board of Directors ordered management to suspend all new operations, laid off all but a skeleton staff and used proceeds from mortgage sales or mortgage payouts to payoff it's debts, most of which are deposits I believe, wouldn't there be a $1 billion+ surplus?

Obviously the value of its mortgage book is severely impaired and someone- auditors or management- are committing a massive fraud on its investors and the market.
 
Assuming they get the funds to prop themselves up, is there any danger here unless people start defaulting?
Home Capital has a $500 million market cap. It's book value is $1.6 billion as of 12/31/16.

If the Board of Directors ordered management to suspend all new operations, laid off all but a skeleton staff and used proceeds from mortgage sales or mortgage payouts to payoff it's debts, most of which are deposits I believe, wouldn't there be a $1 billion+ surplus?

Obviously the value of its mortgage book is severely impaired and someone- auditors or management- are committing a massive fraud on its investors and the market.
It should be noted they have a ton of super high (by 2017 standards) interest GICs that will be maturing soon, approximately $600 million per month. Given all the fear around this company, that $13 billion worth of assets Home Capital has could be wiped out completely in just a couple of years (or sooner). Luckily it's all CDIC insured.

http://www.theglobeandmail.com/repo...tal-puts-itself-on-the-block/article34827321/
 
I'm just as concerned about what this means for HOOPP, the pension plan that decided to prop them up, for a price. Apparently HOOPP negotiated some really high interest rates for their loan to the tune of $2 billion (out of their holdings of $70 billion), but that is just even more worrying, because only a company in horrible shape would ever agree to those terms.
The CEO of HOOPP went on BNN to discuss this, so I guess I wasn't the only one concerned.

He says that for ever $1 of loan provided, $2 of mortgages were used as collateral. Furthermore, approximately the mortgages are about 70% of the value of the homes, which according to him means that each $1 of loan is protected 2.8X over. Put in different terms, the homes would need to drop in value by about 65% for them to break even.

So lets go through that math.

$1 billion loaned.
$2 billion in mortgages used as collateral.
The mortgages represent 70% of the home values, which means the homes are worth $2 billion / 0.7 = $2.86 billion.
$1 billion / $2.86 billion equals 35%, which means 65% of the home values must be lost for them to break even.
 
uh... :

After news of the HOOPP lifeline emerged on Thursday, the CEO of the pension fund announced he would step down from his job on Home Capital's board of directors, citing the potential conflict of interest.

HOOPP chief executive Jim Keohane had been a director of Home Capital since last year and had been nominated to be re-elected at the mortgage lender's annual meeting, scheduled for May 11.
 
So what I see here are a couple non-traditional mortgage lenders in trouble, who each have a small fraction of the overall mortgage market here. They are suffering because of the bad/illegal business decisions of Home Capital, not because the mortgages they own have started to default in any significant number.

Meanwhile, in Toronto anyway, we have a supply vs. demand problem with builders seemingly unable to keep up with demand both on the ownership and rental side. We have historically low interest rates and an economy growing faster than any of the G7 nations.

I'm not an economist, but the only way I can see the market going down is if people start dumping their properties faster than the demand can soak it up. Is there anything new in here that would cause this? It seems to me like nothing significant has changed, and that this is still all hinging on the questions we had a couple weeks ago. How many units are sitting vacant, and what proportion of units are held by foreign buyers that will be hit with the new 15% tax.

Please educate me if I'm missing something here.
 
So what I see here are a couple non-traditional mortgage lenders in trouble, who each have a small fraction of the overall mortgage market here. They are suffering because of the bad/illegal business decisions of Home Capital, not because the mortgages they own have started to default in any significant number.

Meanwhile, in Toronto anyway, we have a supply vs. demand problem with builders seemingly unable to keep up with demand both on the ownership and rental side. We have historically low interest rates and an economy growing faster than any of the G7 nations.

I'm not an economist, but the only way I can see the market going down is if people start dumping their properties faster than the demand can soak it up. Is there anything new in here that would cause this? It seems to me like nothing significant has changed, and that this is still all hinging on the questions we had a couple weeks ago. How many units are sitting vacant, and what proportion of units are held by foreign buyers that will be hit with the new 15% tax.

Please educate me if I'm missing something here.
The part you are missing is that the market can be quite irrational. Indeed, the reason why Home Capital is in such deep trouble is because there has been a run on the bank based on fear with people clearing out their accounts.

By the descriptions of the fundamentals Home Capital should have just been worried about bad PR and maybe some write downs and adjustments impacting profitability over the near term, but instead they are in complete crisis mode and have had to take a subprime loan themselves with horrible terms from HOOPP at double digit interest rates just to survive long enough to be sold.
 
The part you are missing is that the market can be quite irrational. Indeed, the reason why Home Capital is in such deep trouble is because there has been a run on the bank based on fear with people clearing out their accounts.

By the descriptions of the fundamentals Home Capital should have just been worried about bad PR and maybe some write downs and adjustments impacting profitability over the near term, but instead they are in complete crisis mode and have had to take a subprime loan themselves with horrible terms from HOOPP at double digit interest rates just to survive long enough to be sold.

What's the likely scenario if they fail then? Would the owners of the properties they hold the mortgages for be forced to pay everything back immediately? They were able to secure their lone from HOOPP using the mortgages they own as collateral. That would seem to indicated that they hold some value. I'd have thought that those mortgages would be sold off to other institutions instead of forcing foreclosure. Maybe some disruption to the market results but I'm still having trouble understanding why a full on market crash might happen.
 
It's not just HCG. Equitable Group is getting slaughtered on the market too. The contagion effect is going to bring to light the questionable lending practices by sub prime lenders throughout the country. There's still a lot of uncertainty hanging over everything. If we were to take everything that's been said at face value, we would've believed that everything was just rosy back in 2015 when HCG's cracks started to show and they downplayed it.

Despite the favourable terms of the loan from HOOPP, they're still soliciting a quick sale. If HOOPP would make bank on the mortgage value, they should hope that they end up with the mortgage portfolio and not get paid back the loan. But the media appearances by the head of HOOPP (a former director at HCG) suggests he's just trying to boost confidence in order to get a sale. The mortgages might not be worth that much and they want it off their hands. I'm making an assumption here but so is anybody else who believes everything is being overblown.
 
Clearly $100's of millions worth of mortgages are severely impaired. Perhaps borrowers are making payments because they're personally on the hook. It's hard to know the real story.


The HOOP money just buys them time to cover the redemptions by the deposit holders. Meantime I'm sure the Big 6 are furiously combing over their mortgage book to figure out what those loans are really worth. That can't be anywhere near book value or the shares wouldn't be trading at 1/3 of the price.

As far as eveything being stable and defaults low, well this is an organization that is clouded by a fraud investigation for 2 yrs who just fired their long time CEO. I wouldn't believe anything they report unless verified by a new auditor.

I'd be curious to know how big their 2nd mortgage portfolio is. That could easily get wiped out to nothing in the Alberta or Maritimes market one would think. When things start going downhill it happens quickly. Between throwing a receiver in looking to liquidate and legal costs and fees, SH equity can get hit really badly.
 
What's the likely scenario if they fail then? Would the owners of the properties they hold the mortgages for be forced to pay everything back immediately? They were able to secure their lone from HOOPP using the mortgages they own as collateral. That would seem to indicated that they hold some value. I'd have thought that those mortgages would be sold off to other institutions instead of forcing foreclosure. Maybe some disruption to the market results but I'm still having trouble understanding why a full on market crash might happen.
I'm no expert but:

- It is not just Home Capital.
- Their major mortgage business is subprime.
- In the subprime market, Home Capital is a major player.
- A large portion of those mortgages are 1-2 year terms.
- Some of the mortgages were obtained through fraud.
- Big banks don't like subprime.

So while yes someone will buy those mortgages at a discount, who is going to renew them when their (short) terms end, esp. with other subprime lenders feeling the heat? I suspect it will end up being somewhat harder for subprime borrowers to get mortgages going forward. Would it be enough to cause a meltdown? Maybe not but certainly the possibility of a meltdown cannot be ignored.
 
What's the likely scenario if they fail then? Would the owners of the properties they hold the mortgages for be forced to pay everything back immediately? They were able to secure their lone from HOOPP using the mortgages they own as collateral. That would seem to indicated that they hold some value. I'd have thought that those mortgages would be sold off to other institutions instead of forcing foreclosure. Maybe some disruption to the market results but I'm still having trouble understanding why a full on market crash might happen.

Agreed. The bottom line is, people still need places to live. Toronto is not going to turn into Smolensk c. 1962 with multiple families occupying run-down apartments.

Even if there is a sudden dump -- not wholesale but significant -- of housing on the market, there are so many buyers lining up to get into bidding wars now, you can bet they'll be there when this happens. It's not like they're gonna vapourize, Leftovers-style. (I love that show.)

So little changes, or there's a minor correction. Even if prices dip, say, 20% then they pretty much go just where they were a year or so ago and that's after most people now in houses bought in, no? Condos in our building are up Y-O-Y about 20%, and that's an average which doesn't account for size, extent of renovation, views etc. There's nothing available right now and agents are driving us crazy. The last suite that went up for sale launched a mob scene in our lobby and went for 26 per cent above asking -- although we all think it was under priced to provoke a bidding war. (And no, no empty suites except for two where the owners passed away without wills and no direct heirs, i.e. children.)

The issue of cheap money and subprime mortgages is something else entirely.

Incidentally, my investment guy sent me this yesterday FWIW. (I could be horribly wrong but I don't think it's worth the non-paper it's written on.) It's dated June 2016.

<You may not know who Marc Cohodes is, but the 55 year old retiree is a Wall Street legend. So when the man the New York Times once called “the highest-profile short-seller on Wall Street” decided to come out of retirement, we were dying to get in contact with him to see what he was betting against – turns out it’s the Canadian housing market.>

SNIP

<Home Capital Group (HCG) is where Marc is betting the implosion of this industry will begin. Despite not being a household name, HCG has built a mortgage portfolio that’s around 1/5th the size of BMO, impressive considering BMO had a 160 year head start. Shortly after Marc began shorting HCG, an anonymous letter to the board of directors explained irregularities in their numbers, which forced the board to launch an investigation. The board revealed around $1 billion in fraudulent loans, that they traced back to 45 brokers. They stopped doing business with the brokers, and that $1 billion was quietly adjusted to $1.9B.

“Home Capital Group has admitted to $1.9B in fraudulently underwritten mortgages last year alone,” he explained. “FSCO, who regulates the brokers, hasn’t punished the brokers. The problem is when there’s criminal behaviour going on—and originating fraudulent mortgages is criminal behaviour… you’re allowing one class of individual to benefit another. If you allow it to go on, what’s the deterrent?”
 
HCG has several problems. I bought puts a week and a half ago on tips from friends. Made a good bit. Though to be fair, none of them expected this fast a collapse.

There's HCG's trouble with regulators, only starting. The hearings are coming this week. Then there's HCG's coming liquidity crunch as they could possibly at least $6 billion in GICs cashed out by year end. Insured or not, people don't like keeping money in unstable banks.

Lastly, there's the shady business of them shifting non-performing loans to another company, of which one of the directors was involved with. See "Re-charge Corp."

Marc Cohodes shorted them a year ago and I wished I had jumped on the short then. HCG was at $50. But I don't have the cojones he does. The scarier part to me is the links inside that industry. Two former HCG directors are now with EQB. The 45 brokers resorting to fraud? None were convicted and nobody knows who they are working for now.

Canada does not have credit default swaps like the US that really exploded their banking system. But we do have CDOs, MBSs, and sectors with shady lending practices. Not to mention a highly over-leveraged general population. This is not going to end well.

I don't think we'll see 50% plunges. There's simply too much demand in Toronto for that. But I don't think it's going to be a mild 10% drop a year of stagnation either.
 

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