HCG.to - Home Capital Group

[no_free_lunch]

There is no doubt in my mind that canadian real estate is overvalued but i am not sure hcg blowing up will burst the bubble. As uccmal stated banks have been tighyening standards for years and yet prices have gone up. So i am not sure the market is so sensitive that this tips it. 

 

I am sure prices will moderate in TO and van but too early to call a nation wide bust. On that note why does canada get a free pass on these protectionist measures? 

 

I will play this by avoiding the canadian banks unless i see real estate prices actually start to crash. In the GFC prices crashed and then a year plus later it worked thru to the stock market.

[alpha]

Anyone know how much Marc Cohodes made off his short? (he has been calling it for a while now)

[bbarberayr]

Maybe this thread is more followed than we think. big 5 started sliding around 3PM eastern. CIBC went down the most 2.2%

 

Not a surprise - CIBC always seems to blow up worst when there is a problem:

 

https://www.thestar.com/business/2016/12/01/cibcs-exposure-to-real-estate-correction-is-highest-among-canadas-banks.html

 

[Liberty]

I wonder how many indices might be forced sellers of HCG for various technical reasons. For example, some can't hold a stock under $5, some only have dividend stocks (so if they cut it..), so have market cap limitations like this:

 

https://twitter.com/Keubiko/status/857400696806678529

[mcliu]

I wonder how many indices might be forced sellers of HCG for various technical reasons. For example, some can't hold a stock under $5, some only have dividend stocks (so if they cut it..), so have market cap limitations like this:

 

https://twitter.com/Keubiko/status/857400696806678529

 

But at least their lending is sound and delinquencies are low right?  ;D  ::)

[Matson125]

I wonder how many indices might be forced sellers of HCG for various technical reasons. For example, some can't hold a stock under $5, some only have dividend stocks (so if they cut it..), so have market cap limitations like this:

 

https://twitter.com/Keubiko/status/857400696806678529

 

I agree with you.  I suspect the dividend wasn't cut for this very reason.

[rb]

I wonder how many indices might be forced sellers of HCG for various technical reasons. For example, some can't hold a stock under $5, some only have dividend stocks (so if they cut it..), so have market cap limitations like this:

 

https://twitter.com/Keubiko/status/857400696806678529

 

I agree with you.  I suspect the dividend wasn't cut for this very reason.

They'll have to cut the dividend. Financing the dividend @22% has to be pretty close to the definition of insanity.

[Uccmal]

If they cant securitize their mortgages, they cant keep the money flowing, and then cant pay their labour and/or broker channels.  Bad scene.  The collateral damage will be anyone who bought bonds that contain bad mortgages.  Small slice of what happened in the US.  Even if nearly all the mortgages perform HCG could still be toast just from a cash crunch.  Reputation is everything in the securitization business.  I have never shorted a stock, yet....

 

To be clear, the issue isn't securitized loans. That business model is pretty much extinct for uninsured loans in Canada. The core loan portfolio is funded by brokered deposits (typically CDIC-eligible GICs). So the collateral damage would be the CDIC or anyone with deposits that aren't CDIC-eligible.

 

Also, note that Scotia has added HCG back on their list of eligible GICs, with a cap of $100,000 per account (which would be CDIC-eligible). So it is seems like the run on the bank might be deferred. As long as HCG has the CDIC backstop, it might survive. But funding costs are definitely going up.

 

I was using the term loosely.  FN issues the mortgages, packages them, and sells the majority to institutions looking for income at rates somewhat better than they would get from treasuries.  Then FN, collects fees to administer the mortgages.  And they keep some on board for their own book. 

 

Thanks for the details KC.

 

To follow on to this.  The CMHC has securitization programs for insured mortgages. 

 

First National Securitizes its mortgages with the National Housing Agency - MBS program.  The also securitize via the CMHC Mortgage Bonds program. 

 

The big difference between FN and HCG is that 95% of FNs mortgages are prime. 

 

The other differences are the way they make their money.  FN is a mortgage company that doesn't do any traditional banking. 

 

Their money is made from:

1) Fees for mortgage origination and servicing the mortgages

2) Securitizing the mortgages and selling them but continuing to service the mortages on a fee basis

3) Being the mortgage provider for mortgages in transition, which is a continual process. 

 

First National acts as the face of their mortgages that they orginate, and interact directly with the customer even though they have sold the mortgage.  The exception I beleive is the agreement they have with TD where TD originates the mortgage under their own banner and FN services them as a back office type function. 

 

They do no traditional banking, no Helocs, carry no customer deposits, and dont lend any money outside if mortgage orgination.  All of their mortgages are either CMHC insured or low ratio mortages.

 

Obviously, I cant know how they will behave in a housing bust but I can speculate:  Earnings will be lower due to smaller/fewer mortages being issued but the impact will be lagged.  They wont lose more than a tiny amount from mortgage defaults.  However, if their underwriting turns out to be weak they may lose customers on the securitization side.  They indicate in their reports that they audit their mortgage agents, their customers (security buyers) audit First Nationals processes and samplings of the mortgages they write. 

 

They use a 1 billion revolving line of credit for financing purposes and it is in place with a syndicate of banks until 2022.  So they are unlikely to get caught having to suddenly borrow 2 billion to finance operations. 

 

I probably should have put this all in a separate thread. 

 

In general I have dealt with TD, and FN around borrowing and they are pretty stringent.  Of course they will suffer in a housing collapse but not neary as much as the likes of HCG.  As to HCG being a cause of a house price collapse I find it difficult to see how.  HCG would be a victim, but not the cause.  They just seem to be poorly run with poor controls in place. 

[wisdom]

I posit that Canadian lending is not as conservative or good as most here believe. Bank staff and brokers have undermined the system. Connect the dots with what the bank staff have been saying with this and I would not touch any Canadian FI this early in the game.

 

Just go speak to your local banker or broker who helps commit fraud and you will learn a lot about how bad things are.

[rb]

In general I have dealt with TD, and FN around borrowing and they are pretty stringent.  Of course they will suffer in a housing collapse but not neary as much as the likes of HCG.  As to HCG being a cause of a house price collapse I find it difficult to see how.  HCG would be a victim, but not the cause.  They just seem to be poorly run with poor controls in place.

I always enjoy reading Al's analyses'. I'll paraphrase him in a more vulgar but direct way: these nitwit mouth breathers at HCG couldn't make money in the biggest housing bull market the country has ever seen.

[rb]

I posit that the Canadian lending is not as conservative or good as most here believe. Bank staff and brokers have undermined the system. Connect the dots with what the bank staff have been saying with this and I would not touch any Canadian FI this early in the game.

 

Just go speak to your local banker or broker who helps commit fraud and you will learn a lot about how bad things are.

Wisdom, I fully agree with you that underwriting isn't all that tight in Canada. But the question is where does the risk actually lie? That's where I get lost, and I don't think that anyone knows that. My feeling is that it's mostly bottled up in the mortgage insurers.

[wisdom]

It was interesting that Watsa seemed to use Ireland as an example when he was asked about Canadian real estate. He briefly talked about how their banking system ended up. I thought it was interesting.

[SharperDingaan]

Its highly likely that a lot more of the mortgages were insured, that most people think. A wise shop would also have lent the mortgagee additional cash to pay the insurance premium; boosting the loan, & reducing their risk.

 

Its also highly likely that at present there's little real risk of contagion; mortgagees are not defaulting, & if there are forced sales - the additional supply will actually be beneficial to the overheated housing market, & stabilizing.

 

It is much more likely that existing mortgage insurance is at risk of being revoked as it was obtained fraudulently; with the buyers of those mortgages putting them back on HCG in return for cash. HCG could either dump the dogsh1te for whatever it can get; or pay a much higher insurance premium to get them re-insured, & then resell the now 'guaranteed' mortgage for cash. They essentially have a liquidity problem, hence the new LOC.

 

The run could be eliminated overnight, were the insurers to simply re-insure the fraudulent mortgages in place during the grace period - for an upfront & large differential premium. End the put-backs, end the run - & immediately. Given the linkages in the industry, it would be a OSFI/BoC backstopped decision.

 

If we're right, we may do very well.

 

SD

 

 

   

 

       

 

[rb]

SD,

 

I think the problem is that their paper is well below what would be considered acceptable as BoC collateral. So BoC effectively can't do anything unless it uses some special case, emergency measure, etc, etc. But I don't think that HCG is systemic or important enough for BoC to take these measures. OSFI may step in to wind it down - but in that case it's not worth much.

[dyow]

That is one optimistic scenario, considering it just fell 60% yesterday. 

 

A chicken farmer with twitter fingers basically took down the company...and he barely said anything of substance...most of his tweets were trollish rants, and zingers on twitter. 

 

This ranting chicken farmer basically forced this company to take out a 2 billion dollar loan at 15-20%.....their business model is broken and the housing market hasn't even corrected yet!!!!  at least US financials started going down with housing. 

 

This stock should go to zilch. 

[SharperDingaan]

SD,

 

I think the problem is that their paper is well below what would be considered acceptable as BoC collateral. So BoC effectively can't do anything unless it uses some special case, emergency measure, etc, etc. But I don't think that HCG is systemic or important enough for BoC to take these measures. OSFI may step in to wind it down - but in that case it's not worth much.

 

Think of the CDO mortgage tower.

To make the paper acceptable for resale you 1) need to insure the upper to middle layers against progressively higher levels of default loss, & 2) need someone to take the toxic lower layers. You also need only enough of this expensive kind of insurance to get the 'bulk' paper up to BoC acceptability; after which you can switch to much cheaper 'bulk' CMHC insurance. HCG will of course end up with the toxic layers; but the tower doesn't collapse, and it rolls off rapidly as these things mature (assuming it's mostly on-demand HELOC balances). That expensive insurance is also fairly cheap (versus what it could be) as the underlying mortgages aren't defaulting in quantity (Canada is not the US). 'Bulk' insurance simply means CMHC insuring a portfolio of the uglies (at a handsome premium), versus the individual uglies themselves. It's a messy, but straightforward fix - that the BoC is extremely good at.

 

Of course HCG itself is toast, but it doesn't BK - it gets either broken up & distributed, or shotgunned into one of the Big-5. But first they would be made an example of; as an object lesson to everyone else - and as a tool by which to stabilize the housing market (cut off the money flow). Stabilize first, then policy.

 

Long term, it isn't good - but short-term? we're pretty sure that it has been severely oversold.

Similar to DB, & it's recent debacle.

 

Welcome to banking!

 

SD

 

 

 

 

[wisdom]

What are the possible second order effects of HCG:

- I believe that private money may be priced higher if EQB goes the same way. That would take out a fair bit of alternative funds in the housing market.

- these funds are often used to close quick deals when bank financing is taking time or funds are needed for deposit for an offer or in some cases for downpayments.

 

How this unravels will decide the degree to which this impacts the market out there.

[jeffmori7]

Baskin sold also: http://plus.lapresse.ca/screens/a0187e56-5655-44c5-a90b-c53bd3b8710a%7C_0.html

[petec]

I'm intrigued that the provider of the credit facility still hasn't been named.  If the deal came with a fat stack of warrants I'd be wondering if it was Fairfax ;)

 

(Not a serious post!)

[Uccmal]

I posit that the Canadian lending is not as conservative or good as most here believe. Bank staff and brokers have undermined the system. Connect the dots with what the bank staff have been saying with this and I would not touch any Canadian FI this early in the game.

 

Just go speak to your local banker or broker who helps commit fraud and you will learn a lot about how bad things are.

Wisdom, I fully agree with you that underwriting isn't all that tight in Canada. But the question is where does the risk actually lie? That's where I get lost, and I don't think that anyone knows that. My feeling is that it's mostly bottled up in the mortgage insurers.

 

Wisdom, I certainly dont disagree with you in a general sense.  We know certain lenders and probably some parts of the big banks have become sloppy.  FN reported a slight decline in originations due to the new, tighter mortgage rules, and projected further slowing of originations with the new rules in Ontario.  I have a medium size holding in RY, that I bought during the downturn in the oil patch.  I have been selling it off on dribs and drabs along the way.  I will likely keep what I hold. 

 

These big banks are diversified far beyond just housing.  Will they show lower profits in a housing crash.  Absolutely.  But most of the mortgages they have issued are sound, and on the books at much lower prices than the present market value of homes. 

 

The housing runup in Canada, is in no way the same as what happened in the US. 

 

The differences:

1) There has not been a huge overbuild.  There has really been very little construction outside condos which are lower value anyway.

2) Governments here are intervening.  The words I recall hearing from Ben Bernanke and others in early 2008 was that everything was contained.  They did nothing to cool the markets anywhere preferring to stick their heads in the sand. 

3) Securitization is simply not the same in Canada.  It is restricted to CMHC, or Genworth insured mortgages.  We dont have the proliferation of security acronyms. 

4) I am not seeing evidence of people using their homes as ATMs or the banks allowing it.  As I said, 2 years ago I was getting a Heloc with TD, and we had to just about sell out first bron and they would only loan up to 80% of a conservative valuation of the house (an assessor came out) after accounting for the mortgage with FN.  If you see such evidence of a huge credit expansion built on housing please post it.  I am not seeing or hearing of it.

5) Mortgage insurance.  This is unlikely to get overwhelmed in Canada.  Unlike the US it has an implicit government backstop at the federal level.  We just dont have the likes of MGIC et al. here. 

 

Similarities:

1) There has been a proliferation of bad lending by smaller entities.  "Car paid in full or part... we will loan you the value of your car" type of things.  Similar with low brow mortgage lenders. 

2) As it appears with HCG there has been some channel stuffing with crappy lending. 

 

I think housing prices could come down close to 40% without causing the big banks more than a quarter of two of pain.  That would bring the highest prices back to where they were 3 years ago.  It could actually lead to relief rallies once it happens. 

 

 

[cwericb]

I might add to Uccmal’s points the following ...

 

Mortgage interest is not tax deductible in Canada as it is in the US, removing a temptation to re-mortgage to buy expensive toys.

 

Canadian mortgages in general are not non-recourse, so you can’t simply toss the keys to your lender and walk away.

 

While the US is discouraging immigration, Canada encourages it and our demand for housing will continue as our population grows.

 

The discussion about over-priced Canadian housing primarily concerns two cities - not the whole country.

 

Here is another point people seem to forget. The vast majority of mortgages in Canada were taken out several years ago when home prices were lower than today. Additionally they have had to put down a down payment of 20% or more (or are insured) and they have also paid down a portion of the principle in the meantime.

 

In my part of Canada we are a seeing a rapid influx of people who understand this is a large country and a lot of Vancouverites and Torontonians are realizing that they do not necessarily have to live in those two cities.

[Liberty]

Home Capital Group Inc. hired bankers for a possible sale after the Canadian mortgage lender secured a C$2 billion ($1.5 billion) loan from Healthcare of Ontario Pension Plan to stem a run on deposits following a regulatory probe

 

Also says the loan is from HOOPP pension fund..

 

https://www.bloomberg.com/news/articles/2017-04-27/home-capital-secures-loan-and-hires-rbc-bmo-for-strategic-plan

[Liberty]

Mindblowing:

 

HOOPP is a Toronto-based pension plan which represents more than 321,000 health-care workers in Ontario, with assets of about C$70 billion.

 

HOOPP President and Chief Executive Officer Jim Keohane sits on Home Capital’s board and is a shareholder of the mortgage lender. Home Capital’s external spokesman Boyd Erman declined to comment. Representatives for HOOPP and Keohane didn’t return calls seeking comment.

 

Richard Leblanc, a law professor at York University, said the loan appears to represent a conflict for Keohane given his two roles.

 

“It’s a conflict, absolutely,” Leblanc said from Toronto. “An independent director should not have any commercial relationship with the entity at all. I mean he can loan the money but he should resign from the board.”

[petec]

Bloody hell!  That's extraordinary.

[TBW]

But me on record that Big 5 will run into problems. Not hcg issues perhaps but down a lot in stock price. While they dont have much direct mortgage exposure there is plenty of other ways they get hurt ie Heloc, unsecd, credit cards. Canada is not different from US in most ways. Our crisis will be similar.

 

Very early innings on this thesis. House prices havent dropped (yet). But when they do this will get ugly.