HCG.to - Home Capital Group

[KCLarkin]

In November, chief financial officer and executive vice-president Robert Blowes announced he was retiring at the end of 2014. In January, chief risk officer David Novak stepped down. More recently, Marissa Lauder, who headed Home Capital’s risk teams, left the company.

 

This may all be priced in but the red flags are waving.

http://business.financialpost.com/investing/home-capital-group-inc-stock-sinks-ahead-of-key-earnings-call-surprise-director-resignation

[LesPaul]

The resignation isn't the problem. The timing of the resignation is. There is either severe (understandable) tension on the board. Or the director is trying to cover his ass. It's a coin flip. Given the very crowded short trade, this will likely pop at some point. But I can also see it dropping below book. Too hard for me...

 

Valid points, thanks - I didn't understand your point initially.

[KCLarkin]

This management simply can't be trusted.

http://business.financialpost.com/investing/home-capital-group-inc-says-45-brokers-suspended-after-discovery-of-falsified-income

[Liberty]

I don't know the details of HCG simply because, as I said earlier, I wouldn't touch anything that has to do with Canadian RE until we're out of this bubble, but I'm watching with my popcorn. Here are some tweets from tonight that I found interesting:

 

"the number to wrap your head around $960.4 mm of originations should be compared to equity of $1,536 mm or 62.5%. Not total assets."

 

"they used weasel wording - $960m is what they originated in 2014 only. How much did those shady brokers originate in total? The number could feasibly be several billion of the total loans on their b/s"

 

"external sources tipped us off " Where are your internal controls? Really?

 

These I wrote: "So HCG has 4000 brokers, but the 45 "bad" ones closed 12% of total new mortgages in 2014? Talk about productive fraudsters!"

 

"What if among the 4000 there's just another 100 bad apples that hasn't been found yet and is as productive as the 45?"

[KCLarkin]

The shorts can't be fully trusted either. The suspended brokers originated $1B in loans but that doesn't mean that all $1B was fraudulent.

[Liberty]

The shorts can't be fully trusted either. The suspended brokers originated $1B in loans but that doesn't mean that all $1B was fraudulent.

 

Of course. But it certainly puts doubt on the whole billion, and that's for 2014. What if they originated many other billions over the 5 years prior? What if there are other bad brokers that haven't been found in this investigation? Where were the internal controls to avoid this kind of stuff? If this is the system working as it should, why is everybody jumping ship?

 

A question I have: Can CMHC later turn around and say "X% of all these mortgage are retroactively not insured because the paperwork wasn't pristine?" Not just for HCG, but others too?

[KCLarkin]

I don't know. There simply isn't sufficient disclosure.

[Potato]

A question I have: Can CMHC later turn around and say "X% of all these mortgage are retroactively not insured because the paperwork wasn't pristine?" Not just for HCG, but others too?

 

I don't think it's ever been tested at a large scale. I found this article from 2013 on put-back risk, but I'm not really left with a clear answer: http://business.financialpost.com/news/fp-street/how-the-banks-stay-in-cmhcs-good-books

[Liberty]

A question I have: Can CMHC later turn around and say "X% of all these mortgage are retroactively not insured because the paperwork wasn't pristine?" Not just for HCG, but others too?

 

I don't think it's ever been tested at a large scale. I found this article from 2013 on put-back risk, but I'm not really left with a clear answer: http://business.financialpost.com/news/fp-street/how-the-banks-stay-in-cmhcs-good-books

 

I feel like if there's a large-scale enough problem that voters become aware of it, politicians will do whatever make them look like they are preventing voters from being the patsies in this thing, even if it's retroactive or even if it means changing the law.

[Uccmal]

I haven't looked at the financials on HCG.  It would be nice if they shared the names of the brokers who were cut off.  It would also be nice to see them prosecute said brokers.  That they haven't done so indicates that the problem is really at HCG and not at the broker level.  They are using the brokers as scapegoats for a larger problem with loose or poor lending practices.  The CEO holds 3 million of 70 Million shares.  With a stake like that he should be more on the ball.  Incompetent?

 

First National is a much better bet, on the long side, IMO.  The cofounders hold around 35% of the outstanding, each, and have navigated through some tough waters since the company was founded.  I also suspect that FN will be investigating the mortgage broker channel pretty throughly after this announcement by HCG.  I know in my own situation, when we remortgaged the house FN sent out an assessor, and our incomes were well documented - rigorous.  But that is only one customers anecdotal report.

 

FN states somewhere in their reports that they only lend less than 5% subprime, but they dont list credit scores of their customers anywhere that I can find.  FN securitizes most of their mortgages but keeps the servicing for themselves - They dont list the customers for their mortgage packages, but seem to have no trouble placing them with institutions. 

[Uccmal]

http://www.cbc.ca/news/business/mortgage-lender-home-capital-cuts-ties-with-45-brokers-for-bogus-documentation-1.3173659

 

They apparently have 65000 mortgages on the books of which 40000 are not insured.  I am not sure what this means since insurance wouldn't be necessary if the downpayment exceeds 20%.

 

And in Canada, once you have paid the insurance to the CMHC you are covered in perpetuity - i.e. you only ever pay the premium once, no matter what. 

[bizaro86]

http://www.cbc.ca/news/business/mortgage-lender-home-capital-cuts-ties-with-45-brokers-for-bogus-documentation-1.3173659

 

They apparently have 65000 mortgages on the books of which 40000 are not insured.  I am not sure what this means since insurance wouldn't be necessary if the downpayment exceeds 20%.

 

And in Canada, once you have paid the insurance to the CMHC you are covered in perpetuity - i.e. you only ever pay the premium once, no matter what.

 

Is Home Capital a bank? A mortgage without insurance has to have 20% down if its regulated financial institution. But private mortgages don't follow the same rules. I was offered zero down loans on my real estate portfolio by a private lender, but the rates were very high. Mortgage insurance wasn't required, because it wasn't from a regulated institution. (It was an unsolicited offer, and I didn't take it)

 

That's a long way of saying that they're uninsured loans may not have 20% down...

 

[KCLarkin]

They are federally regulated.

[permabear]

Just announced NCIB to buy back 3.5m shares. Over the last year, they only bought back 85k shares at $35.

 

http://www.newswire.ca/news-releases/home-capital-group-inc-announces-normal-course-issuer-bid-527459781.html

[Liberty]

http://seekingalpha.com/article/4001541-home-capital-group-time-re-charge-loan-loss-provisions

[Guest notorious546]

anyone familiar with other ideas from the same poster? did those work out? why/why not?

[Peregrine]

http://seekingalpha.com/article/4001541-home-capital-group-time-re-charge-loan-loss-provisions

 

Quite incredible that you can pass off pure conjecture, speculation and reaching as analysis at Seeking Alpha.

[permabear]

http://seekingalpha.com/article/4001541-home-capital-group-time-re-charge-loan-loss-provisions

 

Quite incredible that you can pass off pure conjecture, speculation and reaching as analysis at Seeking Alpha.

 

What specifically do you disagree with from the SA report?

 

Unless the transfer documents themselves are a fraud, the author showed a clear link between a (not-so) independent board member's company acquiring mortgages from HCG, with no related party disclosure. The author's conclusion that these are likely delinquent borrowers is justified, in my opinion.

[Peregrine]

http://seekingalpha.com/article/4001541-home-capital-group-time-re-charge-loan-loss-provisions

 

Quite incredible that you can pass off pure conjecture, speculation and reaching as analysis at Seeking Alpha.

 

What specifically do you disagree with from the SA report?

 

Unless the transfer documents themselves are a fraud, the author showed a clear link between a (not-so) independent board member's company acquiring mortgages from HCG, with no related party disclosure. The author's conclusion that these are likely delinquent borrowers is justified, in my opinion.

 

Those documents do not detail a transfer of mortgages. The Land Registry details transfer of land titles. To insinuate that these were mortgages that were transferred is a falsehood and the reason why they were transferred were that they were non-performing is complete conjecture.

 

Banks sell mortgages all the time. And banks sell land as well.

 

The author of that report just basically found that a board member of HCG works at a law firm that specializes in assisting mortgage lenders and somehow draws the conclusion that HCG is selling non-performing loans to an unrelated entity.

 

At the same time, he obfuscates the following:

1) Less than 10% of the $1.9 billion in mortgages that the 45 suspended brokers accounted for were flagged for possible issues with income verification NOT "at least" $1.9 billion

2) HCG isn't trying to hide the link with Walker, otherwise how did he get his bio from HCG's management circular? Half the links on the director list on HCG isn't working not just Walker's

3) He also clips off various pieces of documents and presents it all as transactions between HCG and Re-Charge. How can we know?

 

I could get into this more, but that'll require more time devoted to rebutting an utterly ridiculous piece.

[permabear]

http://seekingalpha.com/article/4001541-home-capital-group-time-re-charge-loan-loss-provisions

 

Quite incredible that you can pass off pure conjecture, speculation and reaching as analysis at Seeking Alpha.

 

What specifically do you disagree with from the SA report?

 

Unless the transfer documents themselves are a fraud, the author showed a clear link between a (not-so) independent board member's company acquiring mortgages from HCG, with no related party disclosure. The author's conclusion that these are likely delinquent borrowers is justified, in my opinion.

 

Those documents do not detail a transfer of mortgages. The Land Registry details transfer of land titles. To insinuate that these were mortgages that were transferred is a falsehood and the reason why they were transferred were that they were non-performing is complete conjecture.

 

Banks sell mortgages all the time. And banks sell land as well.

 

The author of that report just basically found that a board member of HCG works at a law firm that specializes in assisting mortgage lenders and somehow draws the conclusion that HCG is selling non-performing loans to an unrelated entity.

 

At the same time, he obfuscates the following:

1) Less than 10% of the $1.9 billion in mortgages that the 45 suspended brokers accounted for were flagged for possible issues with income verification NOT "at least" $1.9 billion

2) HCG isn't trying to hide the link with Walker, otherwise how did he get his bio from HCG's management circular? Half the links on the director list on HCG isn't working not just Walker's

3) He also clips off various pieces of documents and presents it all as transactions between HCG and Re-Charge. How can we know?

 

I could get into this more, but that'll require more time devoted to rebutting an utterly ridiculous piece.

 

The Land Registry Office documents show a "Transfer of Charge," (see top left of document beside LRO #) which is a transfer of a lien secured by the property (i.e. a mortgage). It is not a transfer of title, as you suggest.

 

Yes, banks sell mortgages and real property all the time, I agree. However, if a company sells anything to one of its own director's companies, that is by definition a related party transaction and must be disclosed - do you not see an issue with this at least? Regardless of whether it is a transfer of charge or title, how can you dispute that it is a related party transaction?

[Picasso]

[Peregrine]

http://seekingalpha.com/article/4001541-home-capital-group-time-re-charge-loan-loss-provisions

 

Quite incredible that you can pass off pure conjecture, speculation and reaching as analysis at Seeking Alpha.

 

What specifically do you disagree with from the SA report?

 

Unless the transfer documents themselves are a fraud, the author showed a clear link between a (not-so) independent board member's company acquiring mortgages from HCG, with no related party disclosure. The author's conclusion that these are likely delinquent borrowers is justified, in my opinion.

 

Those documents do not detail a transfer of mortgages. The Land Registry details transfer of land titles. To insinuate that these were mortgages that were transferred is a falsehood and the reason why they were transferred were that they were non-performing is complete conjecture.

 

Banks sell mortgages all the time. And banks sell land as well.

 

The author of that report just basically found that a board member of HCG works at a law firm that specializes in assisting mortgage lenders and somehow draws the conclusion that HCG is selling non-performing loans to an unrelated entity.

 

At the same time, he obfuscates the following:

1) Less than 10% of the $1.9 billion in mortgages that the 45 suspended brokers accounted for were flagged for possible issues with income verification NOT "at least" $1.9 billion

2) HCG isn't trying to hide the link with Walker, otherwise how did he get his bio from HCG's management circular? Half the links on the director list on HCG isn't working not just Walker's

3) He also clips off various pieces of documents and presents it all as transactions between HCG and Re-Charge. How can we know?

 

I could get into this more, but that'll require more time devoted to rebutting an utterly ridiculous piece.

 

The Land Registry Office documents show a "Transfer of Charge," (see top left of document beside LRO #) which is a transfer of a lien secured by the property (i.e. a mortgage). It is not a transfer of title, as you suggest.

 

Yes, banks sell mortgages and real property all the time, I agree. However, if a company sells anything to one of its own director's companies, that is by definition a related party transaction and must be disclosed - do you not see an issue with this at least? Regardless of whether it is a transfer of charge or title, how can you dispute that it is a related party transaction?

 

If "Transfer of Charge" means transfer of mortgage, then I am mistaken. I took it to meaning transfer of land ownership.

 

On the related party transaction: Walker was nominated to the board on November 2015, while those transactions were recorded from September - October 2015. Let's see what the company says.

[permabear]

http://seekingalpha.com/article/4001541-home-capital-group-time-re-charge-loan-loss-provisions

 

Quite incredible that you can pass off pure conjecture, speculation and reaching as analysis at Seeking Alpha.

 

What specifically do you disagree with from the SA report?

 

Unless the transfer documents themselves are a fraud, the author showed a clear link between a (not-so) independent board member's company acquiring mortgages from HCG, with no related party disclosure. The author's conclusion that these are likely delinquent borrowers is justified, in my opinion.

 

Those documents do not detail a transfer of mortgages. The Land Registry details transfer of land titles. To insinuate that these were mortgages that were transferred is a falsehood and the reason why they were transferred were that they were non-performing is complete conjecture.

 

Banks sell mortgages all the time. And banks sell land as well.

 

The author of that report just basically found that a board member of HCG works at a law firm that specializes in assisting mortgage lenders and somehow draws the conclusion that HCG is selling non-performing loans to an unrelated entity.

 

At the same time, he obfuscates the following:

1) Less than 10% of the $1.9 billion in mortgages that the 45 suspended brokers accounted for were flagged for possible issues with income verification NOT "at least" $1.9 billion

2) HCG isn't trying to hide the link with Walker, otherwise how did he get his bio from HCG's management circular? Half the links on the director list on HCG isn't working not just Walker's

3) He also clips off various pieces of documents and presents it all as transactions between HCG and Re-Charge. How can we know?

 

I could get into this more, but that'll require more time devoted to rebutting an utterly ridiculous piece.

 

The Land Registry Office documents show a "Transfer of Charge," (see top left of document beside LRO #) which is a transfer of a lien secured by the property (i.e. a mortgage). It is not a transfer of title, as you suggest.

 

Yes, banks sell mortgages and real property all the time, I agree. However, if a company sells anything to one of its own director's companies, that is by definition a related party transaction and must be disclosed - do you not see an issue with this at least? Regardless of whether it is a transfer of charge or title, how can you dispute that it is a related party transaction?

 

If "Transfer of Charge" means transfer of mortgage, then I am mistaken. I took it to meaning transfer of land ownership.

 

On the related party transaction: Walker was nominated to the board on November 2015, while those transactions were recorded from September - October 2015. Let's see what the company says.

 

You may be right on the related party transaction (RPT) disclosure, provided there were no further transactions with Re-Charge after adding Walker to the board on Nov 4, 2015. I just looked it up online and found this from the OSC: "a RPT is a transaction between the issuer and a related party of the issuer at the time the transaction is agreed to..."

[KCLarkin]

Seems like good work.

 

But a seekingalpha article quoting a zerohedge article using "average" MLS prices isn't very credible. Both Zerohedge and The Friendly Bear know that the "average" Vancouver house price didn't fall 20%. They are both lying -- using statistics.

 

If Zerohedge told you that the "average" price of cars sold at your local Toyota dealership fell 20% in one month, you'd probably guess that they sold more Corolla's relative to their most expensive models. You wouldn't assume that Toyota dropped their prices in 20% a single month.

[fishca]

I want to chime in here. The fact that the transactions occurred in June-Sept 2015 and William Walker didn't get appointed until Nov 2015 doesn't matter. Under IFRS, all related party transactions that occurred during the fiscal year (which in this case was Jan-Dec 2015) must be disclosed. If something happened before the director was appointed, I'm quite sure the auditors would not sign off unless it is completely disclosed. HCG could theoretically argue that he wasn't a related party until he was technically appointed, but that is grasping at straws.

 

There are three potential reasons these transactions were not disclosed:

1) Human error, meaning that someone mistakenly did not include this in the FS.

2) Total value of these transactions was not deemed material to the users of the financial statements

3) HCG management knowingly excluded these from the FS disclosure, and did not inform the auditors

 

Given the history of weaknesses in internal controls at HCG, I suspect the reason for this is options 1 or 3, but something definitely doesn't smell right.

 

I don't short stocks and I have no vested interest in HCG, but I live in the GTA and given the bubbly attitude towards housing, I would not be surprised if HCG is dumping non-performing loans to some kind of off balance sheet entity.