HCG.to - Home Capital Group

[960v]

Any ideas in regards to what happened today?  (besides the math making sense for a long term buy)  I see nothing obvious and saw nothing on SEDI in regards to insider activity; although SEDI shows 79,000 shares (1.2mil) purchased by insiders in NOV17.

[gurjot]

TD upgraded the stock.

[rb]

It's still a dogshit company

[960v]

Dog****?  Buffet tried to buy 40% of it and he doesn't really strike me as dog**** buyer.  Although the deal he good was pretty sweet! ::)

[rb]

Dog****?  Buffet tried to buy 40% of it and he doesn't really strike me as dog**** buyer.  Although the deal he good was pretty sweet! ::)

Number one it wasn't Buffett, it was one of the Ts.

 

Number two it was one of the Ts.

 

Number 3. It was an usurious deal. I don't know who you are but you can get a better deal from your credit card company than HCG got from Berkshire. That puts it squarely into the DOGSHIT category.

 

Number 4. Berkshire made numerous deals with dogshit companies as long as it benefited them handsomely.

[BG2008]

Dog****?  Buffet tried to buy 40% of it and he doesn't really strike me as dog**** buyer.  Although the deal he good was pretty sweet! ::)

Number one it wasn't Buffett, it was one of the Ts.

 

Number two it was one of the Ts.

 

Number 3. It was an usurious deal. I don't know who you are but you can get a better deal from your credit card company than HCG got from Berkshire. That puts it squarely into the DOGSHIT category.

 

Number 4. Berkshire made numerous deals with dogshit companies as long as it benefited them handsomely.

 

I don't know much about Home Capital.  But I once recall having a conversation with a guy about an investment in Imperial Capital (a dog shit company that owns life settlements policies).  The other shareholders' argument was that some really smart guy provide loans at 12% interest was is an indication of merit for the equity.  "They are smart, so they must've done a ton of diligence"  I hate that line of argument.  When you're getting your face ripped off at usurious interest rates, that's not automatically an argument for the equity.  Just my 2 cents.  Imperial has either filed for BK or undergone a restructuring since. 

[960v]

Have you guys looked at their quarterly and annual reports?  Their numbers are very nice for the price; heck they don't have any debt on the balance sheet... and are trading below book!  They may even turn a small profit this year; that's not bad for a company that nearly went under 6 months ago.  This looks to me like a one term event fueled by people reliving the 2008 financial crisis in their heads 8)

 

1.  It is a Buffett deal... http://www.homecapital.com/press_releases/2017/Warren%20Buffett%20on%20how%20he%20struck%20the%20Home%20Capital%20deal.pdf

2.  Even if it was does it matter?  Do you really think he doesn't look at their deals. 

3.  Usurious it was in tangible terms but better then most options given by other creditors; although the intangible 'asset' of having Berkshire give you a thumbs up may be worth it to attract future depositors and customers

4.  Crappy by reputation? Berkshire makes deals when numbers make sense and those are profitable companies which as a capitalist I don't consider crappy  ;D

[Liberty]

nv, the real test of HCG would be if the Canadian real estate market goes pear shaped.

 

Like insurance companies or banks, everything might seem fine in good times, but the quality of the underwriting can come and bite them in the ass years later during more trying periods.

[Peregrine]

 

Berkshire makes deals when numbers make sense and those are profitable companies which as a capitalist I don't consider crappy  ;D

 

I have no opinion on the company at this price, just think that you might be investing not only alongside Buffett, but also against him.

The 9% interest BRK is making is shifting the value from equity to debt. his initial equity portion is only 1/5 of his debt position.

Also, Buffet has said future BRK returns will not beat the index by much, which implies target yield between ~10% (historical standard) and ~6% (considering current market valuation might be borrowing returns from the future). Since he got the equity for $10.3 per share, BRK already earned a 6-10 years of target returns.

 

But perhaps it implies at least some downside protection?

 

Lol at the people in this thread commenting on a company that they know nothing about.

 

Newsflash: HCG had long repaid the line of credit from Berkshire (they did it a month after first securing the line). Berkshire's position in the company is now pure equity.

[TBW]

Hcg's  lending as explained in the KPMG report sounds shockingly bad. That should be read by anyone prior to investing.

 

To make matters worse they have no reserves. At even 2% reserves, slightly above US average (they are subprime lender...) would wipe more than 25% of its equity out.

 

If Cad housing keeps dropping this is likely a 0. If not maybe it does ok. Keep in mind new regs drastically favour bigger banks so think volumes drop

[960v]

Liberty - This does trouble me some although the low interest rates at the moment seem to reduce the risk; I do take comfort in the following  Q3 Total Capital Ratio: 22% /  Q3 Leverage Ratios: 8%/  Q3 LTV:54% / Q3 Default Ratio 0.31%

A margin of safety does seem to be present; although I would like to see their efficiency ratio return to normal ;D  Currently at 114.5% vs  ~38% in 2016.

 

LightWhale- The initial revolver loan / attempt to buy 40% of the shares was intriguing; thankfully HCG paid off the loan so BRK is just a shareholder at the moment although the high interest rate revolver remains available.  You make a good point in regards to BRK not being able to beat the index by much, they simply have so much money that they are forced to invest in capital heavy business.  However, this is not a Union Pacific, GM or Delta this is out of his old preferred playbook; what intrigues me the most is that he is even playing with these small figures...  Perhaps he sees an expansion potential in the company throughout Canada?  Currently they are mostly out of the Toronto area.

[Peregrine]

Hcg's  lending as explained in the KPMG report sounds shockingly bad. That should be read by anyone prior to investing.

 

To make matters worse they have no reserves. At even 2% reserves, slightly above US average (they are subprime lender...) would wipe more than 25% of its equity out.

 

If Cad housing keeps dropping this is likely a 0. If not maybe it does ok. Keep in mind new regs drastically favour bigger banks so think volumes drop

 

It's embarrassing how little you know, Tim.

[LightWhale]

thanks for being blunt Frank, comment removed, the first part of it was ill-informed

[TBW]

Enlighten me

[960v]

I was not aware of the KPMG report thanks for the mention of that; the fact that it was an internal report makes it seem like people had the right idea but keeping shareholders in the dark was dumb...  (Unrelated - It is funny how KPMG just got a black eye for that same timeframe in the WSJ  ;D ;D ;D)

 

Their reserve numbers seem adequate: Q3 2017 Total Capital Ratio/Common Equity Tier 1 Capital Ratio: 21.25% / Leverage Ratio: 7.89%  I believe Canada has slightly different definitions but FDIC defines Well Capitalized at TCR> 10% / T1CR >6% / Leverage Ratio >5% 

Cash on hand: 2.6bi and that damn 2bi BRK revolver; also LTV: 53.7% seems pretty good

 

From what I have seen so far the new regulations may make things interesting.  Potential boost for HCG?  Interesting article below.

https://www.theglobeandmail.com/report-on-business/new-mortgage-stress-tests-could-disqualify-10-of-buyers-bank-of-canada/article37109981/

 

HCG themselves is undecided  :o

 

from Q3 Report -

"It is unclear what impact the revisions to B-20 will have on the real estate and mortgage markets as a whole, particularly

when combined with changes under the Ontario Fair Housing Plan announced by the Ontario Ministry of Finance in April

2017. The Company has identified a number of strategies to mitigate the impact of stress testing and co-lending changes

while maintaining overall credit quality. However, management will require a period of time to fully assess the market impact

from the changes and what the net impact will be on the Company’s addressable market and product suite offering. The

Company will attend OSFI information sessions before the end of the year to receive further clarity on certain revisions such

as income verification and co-lending standards."

 

[Guest 50centdollars]

Hcg's  lending as explained in the KPMG report sounds shockingly bad. That should be read by anyone prior to investing.

 

To make matters worse they have no reserves. At even 2% reserves, slightly above US average (they are subprime lender...) would wipe more than 25% of its equity out.

 

If Cad housing keeps dropping this is likely a 0. If not maybe it does ok. Keep in mind new regs drastically favour bigger banks so think volumes drop

 

It's embarrassing how little you know, Tim.

 

Frank - why don't you actually say something instead of idiotic one liners. Please tell us what went on at Home Capital. I need a good laugh.

[gurjot]

earnings released today.  little lower than what i was hoping for.  any comments from anyone?

[960v]

A deliberate recovery effort is ongoing; Q2 really hurt 2017.  Lets hope for a uneventful 2018.  The great unknown is still the overall Canadian housing market (hence the discount price); interesting discussions albeit heated at times throughout this forum.  There is also a decent summary behind the Financial Times paywall if interested from last week. 

 

Curious to see if Insiders continue to buy like they did after Q3.

 

 

 

 

 

[960v]

Small Insider Buy from new independent director seems to be it for this quarter

 

3136470 2018-02-16 2018-02-21 Control or Direction :

Paul Haggis and Bonnie Haggis 10 - Acquisition or disposition in the public market +5,950 16.9764 5,950

 

Bio - http://www.homecapital.com/directors_officers.asp

[Peregrine]

Hcg's  lending as explained in the KPMG report sounds shockingly bad. That should be read by anyone prior to investing.

 

To make matters worse they have no reserves. At even 2% reserves, slightly above US average (they are subprime lender...) would wipe more than 25% of its equity out.

 

If Cad housing keeps dropping this is likely a 0. If not maybe it does ok. Keep in mind new regs drastically favour bigger banks so think volumes drop

 

It's embarrassing how little you know, Tim.

 

Frank - why don't you actually say something instead of idiotic one liners. Please tell us what went on at Home Capital. I need a good laugh.

 

I just looked back on this thread and found interesting just how sheepish a lot of the posters in this thread were. Instead of actually informing themselves of facts, they read into innuendo and took the word of an aggressive short pack at face value. Now with two years past, I think a post mortem is appropriate.

 

As regards to your response, how about starting with the fact that the crisis that Home faced had nothing to do with the quality of its mortgage book - it was a run on the bank triggered by 1) flighty demand deposits directed by brokers who bought into the BS following the OSC's publication of findings related to the income verification issue back in 2015; 2) spurred by rampant misinformation spread on social media by said shorts; and to a lesser extent 3) hysteria surrounding Canadian real estate and the financial system writ large at the time.

 

As for the actual income verification fraud, the numbers bandied about at the height of the crisis was a complete obfuscation, either willingly or ignorantly spread. The suspended brokers accounted for $2 billion of (mostly insured) mortgages at the time - it didn't mean that $2 billion were underwritten with made-up income. In fact, when the whole investigation was wrapped up in 2016, the company found about 7% of the mortgages underwritten by the suspended brokers had income issues. Moreover, there was never any performance issues with the mortgages in question - both CMHC and Genworth came out with statements that Home's Accelerator (insured) mortgages perform better than their overall portfolios. Also, the problem mortgages were basically completely discharged by the time the OSC leveled its allegations in 2017.

 

At the heart of the OSC complaint was the timeliness of disclosure to public shareholders. And in contrast to the prevailing opinion at the time, Home did disclose immediately to their mortgage insurers (CMHC and Genworth) and to OSFI once they discovered the problem. They didn't disclose immediately to public shareholders probably because their lawyers didn't view it as material. Reasonable people can disagree on this point. The issue related to a handful of brokers and insured mortgages earn a tiny spread and are not material to profitability. On the other hand, I subscribe to the view that any meaningful bad news should be reported immediately and I question past management's judgment on abdicating their duty to a bunch of cover-your-ass lawyers here.

 

As for the actual business, there has not been some mortgage market armaggeddon as many suggested - despite steeply falling prices in a few major Canadian markets and a cooling down of others. Despite what many think, falling prices does not mean the mortgages suddenly default in masse. Home's mortgage portfolio continues to perform very well and the credit quality of their typical borrower have even improved after B-20 as the prime bucket shrank (the CEO of the largest monoline in Canada recently said that today's Alt-A was prime just 5 years ago). Moreover, Home's operations and profitability continues to improve as they grow back into their previous size. And because their balance sheet has remained strong throughout their liquidity crisis, they've been able to buy back nearly 30% of their shares at very cheap prices since the end of 2018 (a price level, of course, that was available thanks to the misinformed or the plain dishonest).

[Gregmal]

This stuff isn't uncommon, in fact it happens all the time. Theres plenty of threads here where there are good laughs to be had due to this type of behavior. For whatever reason, people are often emboldened by load mouth short sellers. No need to get upset by it; their stupidity creates opportunity. Just make sure you avoid the landmine, if indeed there is one.

 

Tesla- its been a fraud since $400 per share ago and it'll be any day that Elon gets indicted and the company gets shut out of the capital markets...(want a REALLY, REALLY good laugh, go read the most recent TSLA VIC writeup by the bitter short who now even manages to get it hilariously wrong taking NO POSITION!)

MDXG- the 8K heard round the world at $1.25 was "definitely" the death knell.

Burford- they loved it at 3x book and wanted no part at 1x. Everyone knew it was a fraud but waited til after MW to proclaim it(except Schwab), even though MW provided nothing new

 

Theres plenty more, but those are just the first few that came to mind. Quite amusing.

 

[KCLarkin]

I just looked back on this thread and found interesting just how sheepish a lot of the posters in this thread were. Instead of actually informing themselves of facts, they read into innuendo and took the word of an aggressive short pack at face value. Now with two years past, I think a post mortem is appropriate.

 

As regards to your response, how about starting with the fact that the crisis that Home faced had nothing to do with the quality of its mortgage book - it was a run on the bank triggered by 1) flighty demand deposits directed by brokers who bought into the BS following the OSC's publication of findings related to the income verification issue back in 2015; 2) spurred by rampant misinformation spread on social media by said shorts; and to a lesser extent 3) hysteria surrounding Canadian real estate and the financial system writ large at the time.

 

As for the actual income verification fraud, the numbers bandied about at the height of the crisis was a complete obfuscation, either willingly or ignorantly spread. The suspended brokers accounted for $2 billion of (mostly insured) mortgages at the time - it didn't mean that $2 billion were underwritten with made-up income. In fact, when the whole investigation was wrapped up in 2016, the company found about 7% of the mortgages underwritten by the suspended brokers had income issues. Moreover, there was never any performance issues with the mortgages in question - both CMHC and Genworth came out with statements that Home's Accelerator (insured) mortgages perform better than their overall portfolios. Also, the problem mortgages were basically completely discharged by the time the OSC leveled its allegations in 2017.

 

At the heart of the OSC complaint was the timeliness of disclosure to public shareholders. And in contrast to the prevailing opinion at the time, Home did disclose immediately to their mortgage insurers (CMHC and Genworth) and to OSFI once they discovered the problem. They didn't disclose immediately to public shareholders probably because their lawyers didn't view it as material. Reasonable people can disagree on this point. The issue related to a handful of brokers and insured mortgages earn a tiny spread and are not material to profitability. On the other hand, I subscribe to the view that any meaningful bad news should be reported immediately and I question past management's judgment on abdicating their duty to a bunch of cover-your-ass lawyers here.

 

As for the actual business, there has not been some mortgage market armaggeddon as many suggested - despite steeply falling prices in a few major Canadian markets and a cooling down of others. Despite what many think, falling prices does not mean the mortgages suddenly default in masse. Home's mortgage portfolio continues to perform very well and the credit quality of their typical borrower have even improved after B-20 as the prime bucket shrank (the CEO of the largest monoline in Canada recently said that today's Alt-A was prime just 5 years ago). Moreover, Home's operations and profitability continues to improve as they grow back into their previous size. And because their balance sheet has remained strong throughout their liquidity crisis, they've been able to buy back nearly 30% of their shares at very cheap prices since the end of 2018 (a price level, of course, that was available thanks to the misinformed or the plain dishonest).

 

I haven't followed this closely lately, but your comments are generally true. The shorts were wrong. But the run on the bank altered the fundamentals. The problem wasn't the loan book. It was the funding sources. This is why these types of businesses are attractive shorts (wish I remembered this before going long ADS).

 

[Peregrine]

I just looked back on this thread and found interesting just how sheepish a lot of the posters in this thread were. Instead of actually informing themselves of facts, they read into innuendo and took the word of an aggressive short pack at face value. Now with two years past, I think a post mortem is appropriate.

 

As regards to your response, how about starting with the fact that the crisis that Home faced had nothing to do with the quality of its mortgage book - it was a run on the bank triggered by 1) flighty demand deposits directed by brokers who bought into the BS following the OSC's publication of findings related to the income verification issue back in 2015; 2) spurred by rampant misinformation spread on social media by said shorts; and to a lesser extent 3) hysteria surrounding Canadian real estate and the financial system writ large at the time.

 

As for the actual income verification fraud, the numbers bandied about at the height of the crisis was a complete obfuscation, either willingly or ignorantly spread. The suspended brokers accounted for $2 billion of (mostly insured) mortgages at the time - it didn't mean that $2 billion were underwritten with made-up income. In fact, when the whole investigation was wrapped up in 2016, the company found about 7% of the mortgages underwritten by the suspended brokers had income issues. Moreover, there was never any performance issues with the mortgages in question - both CMHC and Genworth came out with statements that Home's Accelerator (insured) mortgages perform better than their overall portfolios. Also, the problem mortgages were basically completely discharged by the time the OSC leveled its allegations in 2017.

 

At the heart of the OSC complaint was the timeliness of disclosure to public shareholders. And in contrast to the prevailing opinion at the time, Home did disclose immediately to their mortgage insurers (CMHC and Genworth) and to OSFI once they discovered the problem. They didn't disclose immediately to public shareholders probably because their lawyers didn't view it as material. Reasonable people can disagree on this point. The issue related to a handful of brokers and insured mortgages earn a tiny spread and are not material to profitability. On the other hand, I subscribe to the view that any meaningful bad news should be reported immediately and I question past management's judgment on abdicating their duty to a bunch of cover-your-ass lawyers here.

 

As for the actual business, there has not been some mortgage market armaggeddon as many suggested - despite steeply falling prices in a few major Canadian markets and a cooling down of others. Despite what many think, falling prices does not mean the mortgages suddenly default in masse. Home's mortgage portfolio continues to perform very well and the credit quality of their typical borrower have even improved after B-20 as the prime bucket shrank (the CEO of the largest monoline in Canada recently said that today's Alt-A was prime just 5 years ago). Moreover, Home's operations and profitability continues to improve as they grow back into their previous size. And because their balance sheet has remained strong throughout their liquidity crisis, they've been able to buy back nearly 30% of their shares at very cheap prices since the end of 2018 (a price level, of course, that was available thanks to the misinformed or the plain dishonest).

 

I haven't followed this closely lately, but your comments are generally true. The shorts were wrong. But the run on the bank altered the fundamentals. The problem wasn't the loan book. It was the funding sources. This is why these types of businesses are attractive shorts (wish I remembered this before going long ADS).

 

It was and is still a good business that suddenly ran into a confidence issue. Many credit Berkshire for bringing confidence back but their deposits were already growing following the OSC settlement, which happened before the announcement of the Berkshire deal.

 

The great irony about the whole situation is that they only started the brokered demand deposit product after OSFI, their regulator, forced them to diversify their funding sources a few years prior to the run on the bank. Previously, their mortgages and deposits were almost completely term matched.

 

Re: ADS. Don't really know what you mean here because credit card loans are by nature short term and turn over quickly.

[KCLarkin]

Re: ADS. Don't really know what you mean here because credit card loans are by nature short term and turn over quickly.

 

I just mean these types of businesses are attractive to short sellers (which shorts brand as "sub-prime).

[960v]

Special situations are hard to value and leave significant room for error/profit.  In the Army, they always told us not to fight the last war. Perhaps some folks were blinded by 2009 in the rearview mirror.

 

I continue to be a shareholder and have very much enjoyed the modest price increase.  8)  If Canada continues its qualified immigration policy, I will heed the words of Munger: "Sit on your ass."

 

I may even go to the shareholder meeting this year, last year's Q&A was rather entertaining.