Canada's Housing Bubble Explodes As Its Biggest Alternative Mortgage Lender Crashes Most In History

Tyler Durden's picture

Call it Canada's "New Century" moment.

We first introduced readers to the company we said was the "tip of the iceberg in Canada's magnificent housing bubble" nearly two years ago, in July 2015 when we exposed a major problem that we predicted would haunt Home Capital Group, Canada's largest non-bank mortgage lender: liar loans in particular, and a generally overzealous lending business model with little regard for fundamentals. In the interim period, many other voices - most prominently noted short-seller Marc Cohodes - would constantly remind traders and investors about the threat posed by HCG.

Today, all those warnings came true, when the stock of Home Capital Group cratered by over 60%, its biggest drop on record, after the company disclosed that it struck an emergency liquidity arrangement for a C$2 billion ($1.5 billion) credit line to counter evaporating deposits at terms that will leave the alternative mortgage lender unable to meet financial targets, and worse, may leave it insolvent in very short notice.

As part of this inevitable outcome, one which presages the company's eventual disintegration and likely liquidation, Bloomberg reports that the non-binding rescue loan with an unnamed counterparty will be secured by a portfolio of mortgage loans originated by Home Trust, the Toronto-based firm said in a statement Wednesday. Home Capital shares dropped by 61% in Toronto to the lowest since 2003, dragging down other home lenders. Equitable Group Inc. fell 17 percent, Street Capital Group Inc. fell 13 percent, while First National Financial Corp. declined 7.6 percent. In short, the Canadian mortgage bubble has finally burst.

Some more details on HCG's emergency source of funding: Home Capital will pay 10% interest on outstanding balances and a non-refundable commitment fee of C$100 million, while standby fee on undrawn funds is 2.5%. The initial draw must be C$1 billion. The loan has an effective - and very much distressed - interest rate of 22.5% on the first C$1 billion, declining to 15% if fully utilized, according to a note from Jaeme Gloyn, an analyst at National Bank of Canada.

Home Capital said the credit line is intended to “mitigate” a sharp drop in Home Trust’s high-interest savings account balances, which sank by $591 million from March 28 to April 24, at which point the total balance was $1.4 billion. Home Capital warned on Wednesday that further outflows are anticipated.

Translated: what until last night was a depositor bank jog just became a sprint.

The loan will provide Home Capital with more than C$3.5 billion in total funding, more than twice the C$1.5 billion in liquid assets it held as at April 24. It also has C$200 million in securities available for sale, and high interest savings account balances fell about 25% to C$1.4 billion over the past month. Home Capital relies on deposits to fund their mortgage loans; following today's announcement the company's liquidity is certain to get even worse as all non-distressed sources of cash are pulled.

Cited by Bloomberg, Andrew Torres, founding partner and chief investment officer at Toronto-based Lawrence Park Asset Management said that "The company is facing a bit of a liquidity crunch and they felt they needed to resolve it quickly." He said the "steep" commitment fee and the interest rate on the loan "are surprising numbers for a company that was ostensibly investment-grade."

Well, it was only investment grade because as usual the rating agencies never did their homework. For a real hint into the company's rating, look at the 22.5% interest rate, suggesting the company's days outside of bankruptcy are numbered.

Home Capital Group's sudden collapse was actually visible from a distance. While in the summer of 2015, the termination of HCG was still debate, in recent months the company’s woes stemmed from allegations by the Ontario Securities Commission that Home Capital misled investors and broke securities laws.

In other words engaged in those "liar loans" which we first warned about back in the summer of 2015.

Meanwhile, founder Gerald Soloway will step down from the board when a replacement is named and Robert Blowes will assume the role of interim chief financial officer, the company said Monday.

"The company anticipates that further declines will occur, and that the credit line would also mitigate the impact of those," Home Capital said.

Amusingly, it was just two months ago when the company set new performance goals after reporting quarterly results, targeting revenue growth of 5% or greater, diluted earnings-per-share of 7% or greater and a return on equity of 15 percent or more over the long term, according to Bloomberg. It should add one more "performance goal" - stay out of bankruptcy for at least 3 months.

"They did what appears to be to us a very expensive deal," said David Baskin, president and founder of Baskin Wealth Management in Toronto, a former investor in Home Capital stock. "Basically they blew up the income statement in order to save the balance sheet, which I guess if you’re facing an existential crisis is what you have to do."

The Office of the Superintendent of Financial Institutions (OSFI) told Canada's BNN it does not comment on specific institutions it supervises, but that it maintains ongoing relationships with those institutions and is monitoring the Home Capital situation "closely."

Canada's entire mortgage lending market is tumbling.

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Soul Glow's picture

Well they don't call their currency the "Loonie" for nothing.

alt right dude's picture

Now they can go full Bernie and also give free housing to go with that free money they plan to give to plebs. And maybe a pair of migrants too, just in case ICE will send too many of them North.

Ghost of Porky's picture

Beauty way to go, hosers. Take off, eh.

D Nyle's picture

It's no problem, all those wealthy Refugees will save the day. / sarc

Haus-Targaryen's picture

If they go down (and it looks like they will) will other lenders have the liquidity necessary to step into the vaccum in order to sustain housing prices there?  

If not, they're going to experience 2008 housing crisis in Canada.

BullyBearish's picture

death, taxes, bust following boom...

Haus-Targaryen's picture

Sure are a shitton of Canadian mortgage backed bonds listed on Luxembourg Bourse:

Each one of those is approx. CAD 5 billion. 


BurningFuld's picture

Ontario just implemented their 15% non-resident tax. People are pulling their money out of these mortgage companies as a result. Government strikes again. Not like I give a shit. I fucking hope home prices collapse.

Never One Roach's picture

Mozillo is orange with jealously.

Daily Bail's picture

A new Clinton scandal...



Haus-Targaryen's picture

A 60% crash in housing prices makes me almost giddy. 

Never One Roach's picture

LA folks invaded my previous neighborhood and my old house shot up form $280 to $720. It's hanging in at about $680k now on Zillow.


I built the thing I can tell you, it ain't worth that. So a 60% correction of that area would be nice to see since most local folks cannot compete with retired Cali firemen, lifeguards, etc who still get penions in the hundreds of thousands.

a Smudge by any other name's picture

That will probably be the most selfless thing I will hear today. Or this week. Probably next month.

You are made of better stuff than most of us.

zuuma's picture

Maybe the Loonies can't handle real estate, but they sure did show the evil USA how to protect their dairy farmers.
Fortunately, Canadians can now pay double to comb their hair with buttered toast. An expensive look, but worth it!

Luc X. Ifer's picture

I said it uesterday that the softwood tariff will trigger housing ponzi collapse in Cacanada

Is-Be's picture

Thanks for the Ah Ha moment.

An unintended consequence of globalism and large pools of money sloshing around the globe, is to favour certain asset classes due to herd mentality, meanwhile causing a deficite of money in more worthy causes.

Where's my AI?

PrometeyBezkrilov's picture

They protected organized dairy syndicates, not dairy farmers.

poeg's picture

Corporate farms. A couple decades ago ALL BUTTER came from Quebec. It was illegal to sell home made butter at a farmer's market.

AssN9's picture

and that arrangement was rolled out in several Commonwealth countries which are also listed as corporations at the SEC

Lore's picture

Long ago, a friend who ran a really good old pizza joint once told me how he was approached by some dudes one evening shortly after he opened the place.  They came in, sat down, drank some coffee, waited until he was clear, and then commented how he was purchasing his cheese from the wrong people:  "You will purchase your cheese from us from now on, or you will be out of business."  And to quote Forrest Gump, "That's all I have to say about that." 

Freddie's picture

Is this in Calif?  Most of those Cali big pension scumbags leave the state.  They want to scam working Calif people then escape that tax hell hole when they retire.   Scum Cali should tax those pensioner scum who flee to other states.  30% tax.  They deserve it those evil fux.

Ghost of PartysOver's picture

I am thinking a waterfront lot in the big lakes region.  Beautiful place to go fishing in the summer.

CNONC's picture

The Canadian side of the Lakes, especially Superior, is a mosquito infested, stunted tree, tundra.  The UP side is much nicer, mosquito infested fir forest.  But I do love that place.  It is, however, just about the only place in America where I can't make a living.  Not enough industry to keep me paid, and the difficulty of traveling out of there in the winter means I can't reliably get to emergency service calls elsewhere. 

Scuba Steve's picture

Trade from home ... I heard all you have to do is BTFD.

Carl Spackler's picture

Now that is disappointing.

Thanks Gordon Lightfoot for the insight!

Remember, you still have fish to eat and plenty of fresh water.

Venison is available.

Could still mine nickel in Sudbury or copper in da U.P.

MrYukonC's picture

Now all we need is to get some of that 60% house price decline action down here in the U.S.

Don't let anyone tell you that Housing Bubble 2.0 isn't in full effect.  Because it is, and it's far worse than 2008 was.

The only real difference this time, is it's the gov't pushing all of the BS loans via FHA, VA, and USDA.

You know what that means?  We will all pay for it...again.

Antifaschistische's picture

"Housing Bubble" is an illusion.  

There are only debt bubbles.  

and debt bubbles only exist in a Central Bank Induced Money Counterfeiting out-of thin air operations with no risk/reward driven investor behind it's magic journal entries.

Lore's picture

Yep, that's a pretty good summary. Bad people create bubbles with phony money.

robertocarlos's picture

Whatever they touch turns to shit. They will still pay the $2500 a month rent of some welfare Queens in Toronto.

sagramore's picture

Uh, you get something like $600 a month on welfare. Has been like that for 20 years now. They cracked down around the same time Clinton did in the US.

Robert_Bichen's picture

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alt right dude <<< CHRONIC SPAMMER (spawn of XYTHRAS)
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Bunga Bunga's picture

This was just the trigger. You can't un-shoot a gun by turning back a trigger.

PT's picture

But who would borrow money if they did not think they could pay it back?*
And surely no idiot would lend money to someone if they thought* the borrower could not pay it back!

It all falls down when we stop questioning the most basic of assumptions.

Must ... borrow ... munny!!!  Must keep up illusion that I am not falling behind ... even if it is obvious that everyone else is also keeping up illusions to pretend they are not falling behind either.

I blame the herd instinct.  Whether it is the home-buyer trying to keep up with other home-buyers or the banksters trying to get as big bonuses as the other banksters.  "FORWARD!  Over the cliff.  Phew!  At least I'm still with the herd!"



*My mistake.  I thought some thinking was involved.

new game's picture


ok, we get it. but some dry powder AT THE BOTTOM IS A GOOD PLAN, IMO...

East Indian's picture

print, print, print

sorry, I forgot we are digital now.


log in > open the account > raise the limit

repeat as many times as necessary.

Jack&#039;s Raging Bile Duct's picture

Corporations are people without the capacity to think or active natively. They rely on CEO who have no direct risk if the corporation fails. Their only incentive is to go for it, no matter how unrealistic. At the minimum, they can take on the debt for stock buy backs to justify their resignation bonus. Good work, if you can get it.

PT's picture

But who would borrow money if they did not think they could pay it back?*
And surely no idiot would lend money to someone if they thought* the borrower could not pay it back!

It all falls down when we stop questioning the most basic of assumptions.

Must ... borrow ... munny!!!  Must keep up illusion that I am not falling behind ... even if it is obvious that everyone else is also keeping up illusions to pretend they are not falling behind either.

I blame the herd instinct.  Whether it is the home-buyer trying to keep up with other home-buyers or the banksters trying to get as big bonuses as the other banksters.  "FORWARD!  Over the cliff.  Phew!  At least I'm still with the herd!"



*My mistake.  I thought some thinking was involved.

Never One Roach's picture

As long as the Big Welfare Gubmint guarantees these mortgages, the bad loans will continue to be written by the thousands as lenders take their commissions and fees and move on and dump all the bad loans on the taxpayers.

ATM's picture

Heads I win, tails I win.

Good Gawd how great it would be if I were a banker!


doomchild's picture

I bet you a hundred joobux that the canadian central bank will take a page from the US Fed's book of cons and start buying up these "assets" once their economy hits the shitter. 

asteroids's picture

As I've said before and will say again. Either real estate corrects or the Loonie goes down to 50cents. The greedy banks and the BOC have spoken. They refuse to take a loss, so... the Loonie goes down.

mtl4's picture

Agree totally, you can see the downward trend quite easly if you bother to look carefully.......even with the USD down somewhat, it's still be a great place to park funds.

freedogger's picture

I live in Canada. V-little of my funds are in CAN. Mostly USD, BTC and the shiny stuff. 

Freddie's picture

Canadian shiny stuff is good stuff.  Also Mike Myers and John Candy (RIP).

I have recently purchased Canadian 4x8 plywood. Good stuff too.

Stuart's picture

Not the Cdn mortgage mkt, just the Toronto mortgage mkt.    

auricle's picture

AAA rating. Get your MBS's.

jcaz's picture

22.5%?   This is gonna make 2008 look like a blip.....

Mark Carney's picture

Can we make a movie about this too? Call it the "Big Putine"

GUS100CORRINA's picture

Title: Canada's Housing Bubble Explodes As Its Biggest Mortgage Lender Crashes Most In History

My response: Looks like divine judgment to me. Canada has lost its way and housing crisis maybe a foreshadowing event of what could possibly happen in America once again.