HCG.to - Home Capital Group

[Guest roark33]

 

Investing by Sunny in Philly brought to you by Picasso. 

[KCLarkin]

I'm on the record saying that I don't trust management. But there is a possible explanation for these transfers:

 

In Canada, we don't have 30 year mortgages. You need to renew after a short period (1-5 years). If you got your mortgage with forged docs, you might not be able to renew.

 

Home Capital has been unable to confirm documentation with about seven per cent of the mortgage holders examined so far. "We will have a circle around those loans where we could not get full documentation," Soloway said. "So far, they are all paying and we will deal with this group on renewal time."

 

Too lazy to search the transcripts, but I believe they said they would help these borrowers find new lenders. So maybe they are dumping no-doc loans via re-charge rather than hiding defaults.

 

--

That wouldn't explain the "related party" disclosure, but HCG has been so sloppy with their Investor Relations that it is safer to assume incompetence rather than malice.

[Peregrine]

I'm on the record saying that I don't trust management. But there is a possible explanation for these transfers:

 

In Canada, we don't have 30 year mortgages. You need to renew after a short period (1-5 years). If you got your mortgage with forged docs, you might not be able to renew.

 

Home Capital has been unable to confirm documentation with about seven per cent of the mortgage holders examined so far. "We will have a circle around those loans where we could not get full documentation," Soloway said. "So far, they are all paying and we will deal with this group on renewal time."

 

Too lazy to search the transcripts, but I believe they said they would help these borrowers find new lenders. So maybe they are dumping no-doc loans via re-charge rather than hiding defaults.

 

--

That wouldn't explain the "related party" disclosure, but HCG has been so sloppy with their Investor Relations that it is safer to assume incompetence rather than malice.

 

Was thinking about this too. Does transfer of charge even mean sale of mortgage? It could just mean that a new entity took title to the loans on the same property. In which case this would not be considered a transaction.

 

Edit: Transfer of charge can also mean that the property was sold to a buyer with a different mortgage. In any event it seems that it just means that it's an assignment of a new mortgage on the property.

[SharperDingaan]

You might want to consider that these mortgage transfers were to remove mortgages that are starting to miss payments - but which haven't yet reached default status; a good number of them may also be those 'ringed' mortgages where documentation is skimpy. Furthermore, the recipient may well also be a private entity - where these things can go through their 'work-outs' in peace.

 

You might also want to keep in mind that the recipient entity may well be 'controlled' by HCG, and that they have < 50% ownership of the common (ie: convertible prefs that convert into a 'control' stake) . The transfer would be disclosed, but the related party disclosure can be a judgement call. It is what accounting/legal/audit do.

 

We all know that HCG internal controls need work, and that they are exposed to both the Vancouver housing market tax - and any similar taxes that may be imposed elsewhere They are the logical short leg to a long-short trade on Canadian mortgages, and there are very few other candidates. It would seem that management is just being smart.

 

The bitching is because if this is the case, & there is an incident - the short will not work. The defaults would be taking place in the private entity, and the losses will not be consolidated on the HCG books. There will not be a 'smoking gun' to support the likely directional rhetoric.

 

SD

 

 

 

 

 

[TBW]

Looking at the form it does appear that it is a sale of mortgages https://files.ontario.ca/transfer_of_charge_under_section_101_of_the_land_titles_act.pdf

 

I have also read this form described as 'an assignment of mortgage' which also means sale of mortgage.  So it seems pretty clear, to me anyways, that these mortgages were sold to Re-Charge Corp as the SA article described.

 

A couple remaining questions would be, why not stay in Ontario and search other days in the database?  Why not search for more records about Re-Charge?  A big question to me is did Re-Charge then sell off these mortgages, and to whom?

 

I wasn't far from the offices they described in their article so I went there yesterday.  It was the one pictured.  It was a strange place where it looked almost like an apt more than an office, it was locked so I couldn't go in or talk to anyone.  There wasn't any signs or anything that I could see that said "Re-Charge Corp" or anything like that.  So I can confirm that part of their story.

[Peregrine]

Looking at the form it does appear that it is a sale of mortgages https://files.ontario.ca/transfer_of_charge_under_section_101_of_the_land_titles_act.pdf

 

I have also read this form described as 'an assignment of mortgage' which also means sale of mortgage.  So it seems pretty clear, to me anyways, that these mortgages were sold to Re-Charge Corp as the SA article described.

 

A couple remaining questions would be, why not stay in Ontario and search other days in the database?  Why not search for more records about Re-Charge?  A big question to me is did Re-Charge then sell off these mortgages, and to whom?

 

 

There are many different ways in which title to the loan on a property can change hands, including:

 

1) Sale of existing mortgage to another lender

2) Mortgage on property renewed with a different lender

3) Property is sold to a buyer with a new mortgage

 

I can imagine in each one of these cases that there must be a transfer of charge on the property. So I don't think that definition can be so narrow to only include sales.

 

As for what happened to those mortgages, the alternative mortgage market is huge in Canada. I believe companies like HCG and EQB hold a less than 10% market share of it. Plenty of individual investors/consortiums own mortgages.

 

[Peregrine]

Home Capital's response:

 

http://www.newswire.ca/news-releases/home-capital-statement-on-loan-sales-practices-591161561.html

 

 

[permabear]

Looking at the form it does appear that it is a sale of mortgages https://files.ontario.ca/transfer_of_charge_under_section_101_of_the_land_titles_act.pdf

 

I have also read this form described as 'an assignment of mortgage' which also means sale of mortgage.  So it seems pretty clear, to me anyways, that these mortgages were sold to Re-Charge Corp as the SA article described.

 

A couple remaining questions would be, why not stay in Ontario and search other days in the database?  Why not search for more records about Re-Charge?  A big question to me is did Re-Charge then sell off these mortgages, and to whom?

 

 

There are many different ways in which title to the loan on a property can change hands, including:

 

1) Sale of existing mortgage to another lender

2) Mortgage on property renewed with a different lender

3) Property is sold to a buyer with a new mortgage

 

I can imagine in each one of these cases that there must be a transfer of charge on the property. So I don't think that definition can be so narrow to only include sales.

 

As for what happened to those mortgages, the alternative mortgage market is huge in Canada. I believe companies like HCG and EQB hold a less than 10% market share of it. Plenty of individual investors/consortiums own mortgages.

 

I don't think your scenarios 2 and 3 would include a transfer of charge. Rather, the new lender would provide the financing to 'take-out' the old mortgage, and add their own, new charge on the property.

 

HCG came out with a response this morning, in which they say HCG "sells loans to third parties, when loans require work-outs or restructurings."

[Peregrine]

Looking at the form it does appear that it is a sale of mortgages https://files.ontario.ca/transfer_of_charge_under_section_101_of_the_land_titles_act.pdf

 

I have also read this form described as 'an assignment of mortgage' which also means sale of mortgage.  So it seems pretty clear, to me anyways, that these mortgages were sold to Re-Charge Corp as the SA article described.

 

A couple remaining questions would be, why not stay in Ontario and search other days in the database?  Why not search for more records about Re-Charge?  A big question to me is did Re-Charge then sell off these mortgages, and to whom?

 

 

There are many different ways in which title to the loan on a property can change hands, including:

 

1) Sale of existing mortgage to another lender

2) Mortgage on property renewed with a different lender

3) Property is sold to a buyer with a new mortgage

 

I can imagine in each one of these cases that there must be a transfer of charge on the property. So I don't think that definition can be so narrow to only include sales.

 

As for what happened to those mortgages, the alternative mortgage market is huge in Canada. I believe companies like HCG and EQB hold a less than 10% market share of it. Plenty of individual investors/consortiums own mortgages.

 

I don't think your scenarios 2 and 3 would include a transfer of charge. Rather, the new lender would provide the financing to 'take-out' the old mortgage, and add their own, new charge on the property.

 

HCG came out with a response this morning, in which they say HCG "sells loans to third parties, when loans require work-outs or restructurings."

 

You're right. I didn't realize transfer of charge is synonymous with "assignment of mortgage" which means sale of the 1st mortgage to a different party.

[TBW]

While I don't think this report is a smoking gun, something still doesn't seem right to me here.  Please help me understand this.

 

So looking at 2015 supplemental report, net impaired loans went from 50.7mil 4th q 2014 to 47.6mil 4th q 2015 and then we know 12mil of these other loans were sold.  So together the loans and the sold mortgages resulted in net write-offs in single family mortgages of 5.3mil.  If for simplicity we assume the recovery on net impaired loans was 0 (ie. 50.7 minus 47.6 resulting in 3.1mil of losses), means that HCG took 2.2mil loss on 12mil mortgages sold (18% loss), with Ontario average LTV of 73% means house was sold at ~55% of face value of initial assessment.  If we assume 50% recovery on net impaired loan difference (loss of 1.5mil) means that they would have lost 3.8mil on 12mil loans sold, 31% loss or sold at ~42% face.  Please correct me if I have this confused.

 

If they were taking such losses on homes from the Brampton area it does call into questions assertions that these loans were performing better than the average.  It also I think would require more disclosure from the company, ignoring the whole selling to a directors company issue. Also if I am right in the above, how were losses so high in this housing bull market?  The loans generated by the brokers that have been accused of fraud in total were 1.7bil, while not all would have been fraud, given losses calculated above, whatever the actual level of fraud it may be material given equity of 1.5bil.

 

I realize numbers here are very small in context of their book of business, but it continues to paint a bad picture on disclosure and honesty issues with management imo if I am looking at this right.

[TBW]

Anyone have access to the Grants presentation that Cohodes gave?  Apparently 90 bearish pages.

 

He says he is also short EQB, which I have been for a while now too.  Both shorts make a tonne of sense.  Broker sourced mortgages (so adverse selection, poorly aligned incentives etc), funded by GIC's, overly levered, focused on non-prime borrowers and little to no provisions. 

 

Depends on your view of Cad housing, obv I think the bubble is bursting.

[TBW]

Interesting report from SA ahead of tomorrow's earnings.

 

http://seekingalpha.com/article/4043774-hcg-2017-preview-funding-stress-exec-departures-ofsi-staging

[Liberty]

Down to $25 on CEO being fired. Marc Cohodes (who's short HCG and has been for a while) talked about it here:

 

http://www.bnn.ca/home-capital-shares-fall-after-ceo-martin-reid-fired-1.707687

[KCLarkin]

OSC on HCG (h/t Liberty):

http://www.osc.gov.on.ca/documents/en/Proceedings-SOA/soa_20170419_home-capital.pdf

 

Good summary here:

http://business.financialpost.com/news/fp-street/osc-accuses-home-capital-of-misleading-disclosure-after-uncovering-fraud-in-mortgage-broker-channel

 

I'm really surprised that some smart people (Turtle Creek and Mawer) seem to be sticking by this company. It's been clear for two years that they are dishonest.

[KCLarkin]

These jerks just can't stop lying:

http://www.newswire.ca/news-releases/home-capital-group-makes-statement-on-osc-administrative-proceeding-against-the-company-and-three-individuals-619908473.html

 

Home Capital Group has always carefully considered its disclosure obligations.  The Company believes that its disclosure satisfied applicable disclosure requirements, and the allegations are without merit.

 

From the OSC:

Further, in an email dated February 9, 2015, two days before filing the 2014 Annual Filing, the CFO Morton stated that the additional disclosure related to Project Trillium was “...buried pretty deep within existing wording on cyber risk. I would be impressed if someone even asked about it.”

 

These bastards have intentionally lied to shareholders brazenly and repeatedly.

 

 

[TBW]

Big questions in my mind is can they retain access to GIC funding?  If they go below BBB- why should I as a taxpayer subsidize their funding of (fraudulent) mortgages?

 

It is Canada so perhaps they can but if they can't...

[Liberty]

Marc Cohodes will be on BNN at 10 AM today with Amber Kanwar, talking about HCG (and probably EQB).

 

Update: Here it is:

 

http://www.bnn.ca/video/short-seller-cohodes-home-capital-is-a-hornet-s-nest-of-trouble~1105061

[Liberty]

Down 13% at open, hitting 7-year lows.

 

Update: Now down 20% at noon...

[KCLarkin]

Big questions in my mind is can they retain access to GIC funding?  If they go below BBB- why should I as a taxpayer subsidize their funding of (fraudulent) mortgages?

 

The other question is whether the insured mortgages will be put-back to HCG in the event of default. It is now clear that not only were the income documents fraudulent, but HCG employees were complicit (by claiming that income had been verified when it wasn't).

[TBW]

They should be putback to hcg. Why should taxpayers cover this mess. Immediately they shouldnt have access to mortgage insurance given history and should not get cdic insurance for gic holders. I think this is a 0 EQB too.

 

 

[rb]

They should be putback to hcg. Why should taxpayers cover this mess. Immediately they shouldnt have access to mortgage insurance given history and should not get cdic insurance for gic holders. I think this is a 0 EQB too.

Unfortunately CMHC insurance cannot put back to HCG. About a year ago OSFI was talking about passing a rule that would make that possible. But all the FIs fiercely opposed that. Shocker!

 

CDIC may be able to do something. But I don't think that the feds are very enthusiastic about taking out a sub-prime lender at this point. I agree that without CDIC this is an automatic zero.

[wisdom]

If I am not wrong CMHC can put back mortgages where fraud was committed. On the other real estate thread, I have argued that bank employees have been doing the same as one can see from recent articles.

 

The lenders have trained their customers on how to beat the weak controls in Camada.

 

The bank management's could be in for a surprise but they would have already collected their huge bonuses or retired by then.

[Liberty]

Response from HCG, with pre-announcing their Q1:

 

http://www.homecapital.com/press_releases/2017/Pre-results%20Chair%20Letter%20final.pdf

 

Home Capital expects to report earnings of $0.90 on a diluted earnings per share basis, and $1.02 on an adjusted diluted earnings per share basis. This compares to $0.92 and $0.96 a year ago.

 

Letter doesn't really add much factually, basically just a "we know... but trust us" message.

[TBW]

After reading the OSC letter it's hard for me to see what they can possibly 'vigorously' defend.  From the doc it seems like the OSC has some really strong evidence in terms of emails, internal memo's etc.  I guess they could argue immateriality of 10% of your mortgages having some fraud element to them...

 

I wonder if their defiance, in the face of strong evidence, results in harsher treatment from regulators?

[TBW]

http://www.theglobeandmail.com/report-on-business/chair-of-embattled-home-capital-confident-about-company-future/article34771194/

 

Uh oh.  It's official Scotia not offering HCG GIC's on their platform.  Too much reputational risk for these banks to offer their GIC's last bank offering will look terrible to their clients.  If other banks follow Scotia this company is done.