Panic Bank Run Leaves Canada's Largest Alternative Mortgage Lender On Edge Of Collapse

Tyler Durden's picture

After two years of recurring warnings (both on this website and elsewhere) that Canada's largest alternative (i.e., non-bank) mortgage lender is fundamentally insolvent, kept alive only courtesy of the Canadian housing bubble which until last week had managed to lift all boats, Home Capital Group suffered a spectacular spectacular implosion last week when its stock price crashed by the most on record after HCG revealed that it had taken out an emergency $2 billion line of credit from an unnamed counterparty with an effective rate as high as 22.5%, indicative of a business model on the verge of collapse .

Or, as we put it, Canada just experienced its very own "New Century" moment.

One day later, it emerged that the lender behind HCG's (pre-petition) rescue loan was none other than the Healthcare of Ontario Pension Plan (HOOPP). As Bloomberg reported, the Toronto-based pension plan - which represented more than 321,000 healthcare workers in Ontario - gave the struggling Canadian mortgage lender the loan to shore up liquidity as it faces a run on deposits amid a probe by the provincial securities regulator. Home Capital had also retained RBC Capital Markets and BMO Capital Markets to advise on “strategic options” after it secured the loan.

Why did HOOPP put itself, or rather its constituents in the precarious position of funding what is a very rapidly melting ice cube? The answer to that emerged when we learned that HOOPP President and CEO Jim Keohane also sits on Home Capital’s board and is also a shareholder. But how did regulators allow such a glaring conflict of interest? According to the Canadian press, Keohane had been a director of Home Capital until Thursday, but said he stepped away from the boardroom on Tuesday to remove the conflict of interest when it became clear HOOPP might step in as a lender.

Keohane further clarified on Friday that he doesn’t view the Home Capital investment as risky because the pension plan will be provided with $2 worth of mortgages as collateral for every $1 it lends to Home Capital.

“We take comfort from the underlying asset portfolio, so we are not looking at Home Capital as a credit,” said Mr. Keohane in an interview with Business News Network television. He added that a correction in the housing market is not of great concern, since the values of homes would need to plummet by more than 65 per cent for the fund to make no return beyond the value of its principal commitment.

Furthermore, it appears that Canada's pensioners are priming all other company lenders: Keohane also said that the funding syndicate would rank above Home Capital’s other lenders.

“We have security interest in the collateral we’ve received, so we have the right to sell that collateral if we don’t get paid. And then the balance that’s left over would go to recovery for other creditors.”

The implication is that as long as HCG's mortgages dont suffer greater than 50% losses, HOOPP's pensioners should be money good. Of course, if this is indeed Canada's "subprime moment", any outcome is possible. As for other lenders, or the prepetition (because there will be a petition here, the only question is when and in what form) equity, that's some $4 billion in assets that was just stripped from existing collateral.

"The Best Price May Come From Breaking Up The Company"

In any case, the company's frenzied, emergency measures to stabilize the near-insolvent mortgage lender were not nearly enough, and despite HCG stock posting a modest rebound on Friday between hopes of a rumored sale and a short squeeze, those hopes may be dashed soon because as the Globe and Mail reports, the depositor bank run that gripped Home Capital Group in the past week, only got worse after the company revealed just how precarious its funding situation had become.

First, any hope the company, or rather its investors may have held of a sale, appear dashed. Investment banking sources cited by the G&M said "the best possible price may come from breaking up the company and selling portions of its mortgage portfolio to regional financial institutions." Which also implies that aside from a few select assets, there is no equity value left, or in other words, any potential buyer is now motivated to wait until HCG liquidates, and then picks off the various assets in bankruptcy court.

There are structural limitations as well: Home Capital currently holds $18-billion in home loans outstanding, "a portfolio that would be difficult to swallow for rivals in the alternative mortgage sector, such as credit unions, small mortgage lenders, Montreal-based Laurentian Bank and Edmonton-based Canadian Western Bank." These institutions, along with private equity firms, could still bid for pieces of Home Capital, the G&M admits. The only question is why they would do so before a bankruptcy filing.

While one prominent name features on the list of potential buyers, that of PE giant J.C. Flowers whose CEO J. Christopher Flowers earlier this year said he expected to expand the company’s Canadian real estate lending business, Canada’s six big banks are notable for their absence on a list of bidders. The reason is that Home Capital lends money to home buyers who have been turned down by the major banks and none of these institutions is expected to enter the alternative mortgage sector by acquiring the company.

National Bank of Canada proactively called the equity analysts who follow the company this week to say it would not bid on Home Capital after being asked if it was a potential buyer. Needless to say, the big banks would be quite delighted if one of their "bottom picking" competitors would suddenly go bankrupt.

"When you have a bank run people get spooked"

Which brings us to the most imminent risk facing Home Capital Group, and its subsidiary, Home Trust.

Recall, that on Thursday we observed that as concerns about HCG's viability mounted, depositors were quietly pulling their funding from from savings accounts at subsidiary Home Trust. By Wednesday, when Home Capital revealed it was seeking a $2-billion loan to backstop its sinking savings deposits, shareholders ran for the exits, driving down the company’s share price by 65 per cent on Wednesday alone, and heightening the sense of panic.

On Friday, the company revealed that high-interest savings account balances fell another 36% to $521-million by Friday morning, down by a whopping $293 million from $814-million Thursday and more than $2-billion a month ago.

In other words, had it not been for the emergency HOOPP loan, the company would likely be insolvent as of this moment following what may be the biggest bank run in recent Canadian history; which also explains why the interest rate on the loan is above 20%.

“When you have a run on the bank, people get spooked and they sell and ask questions later,” said a Bay Street investment banker. “It’s investor psychology that takes over.”

As is usually the case, regulator appeared on the scene.... just one day too late.

Canada’s banking industry regulator, the Office of the Superintendent of Financial Institutions (OSFI), has gathered data from other financial institutions this week, both to monitor for signs of a broader depositor panic and to track where funds are moving as they leave Home Trust.


OSFI sent an urgent request Wednesday to several smaller and mid-sized financial institutions and credit unions to provide the regulator with up-to-date information about their savings accounts, according to a source. Specifically, OSFI wanted to know the institutions’ most recent account totals for high-interest savings accounts, as well as data on recent redemptions and current levels of high-quality liquid assets.

The request, which the OFSI said had to be fulfilled "as soon as institutions are able", is seen as an attempt to take the pulse of the market by tracking where deposits flowing out of Home Capital may be going, and to gauge whether there is any contagion among other institutions. In recent days, some smaller and mid-sized institutions have also struck up early-stage discussions about whether multiple institutions could join together to explore a deal to buy some of Home Capital’s assets.

As for Canada's big banks, they have already decided that HCG won't survive. Several months ago, Canaccord Genuity Group Inc. told its financial advisers they could no longer steer investors to high-interest savings accounts at Home Capital or rival alternative mortgage lender Equitable Bank. Client money already placed with either bank had to be moved within 60 days.

Then, after Home Capital revealed in March it was under investigation by the Ontario Securities Commission over its disclosure practices, Canadian Imperial Bank of Commerce introduced a cap of $100,000 per client for purchases of Home Capital guaranteed investment certificates (GICs), which is the maximum level covered by Canada’s deposit insurer.

A spokesperson from Royal Bank of Canada said that, “several weeks ago” the bank introduced a $100,000 cap on Home Capital GICs bought through a full-service broker, although there were no limits for purchases through the firm’s discount brokerage. On Thursday, RBC also released the following entertaining price target scenario: it still has a price target of $8 but fear not, even if RBC is wrong, it promises at least $4/share in residual value. We are not quite as optimistic.

Additionally, late last week, Bank of Nova Scotia said it would stop selling all GICs sold by Home Trust, but said Monday that policy was amended to a limit of $100,000. Bank of Montreal’s brokerage unit also confirmed it has a $100,000 limit on Home Trust GICs but would not say when it went into force.

As G&M adds, the OSC news shook investors, but the panic was heightened as news of the banks' moves to cap investor deposits slowly seeped through Bay Street in subsequent days, raising concerns that major financial institutions were pulling away from Home Capital.

"We Are Out Of The Position"

When asked if Home Capital could survive this run on its deposits, Keohane - formerly at HOOPP, and the company's last remaining source of funding - said it was possible. “I think it’s a viable business,” he said. “Their cost of funding is going to go up, which may impact earnings… it’s always a possibility that some other institution may have an interest in taking the entity over. If you can have access to a lower funding cost, I mean, it’s quite an attractive purchase.”

Most disagree, and it is safe to assume that the depositor run won't stop until every last dollar held at HCG has been withdrawn.

Meanwhile, late on Friday, Home Capital’s second biggest shareholder, Calgary-based QV Investors disclosed that it liquidated its position, selling 8.4 million shares. QV Investors previously held a 12.8% stake in Home Capital. Toronto-based Turtle Creek Asset Management is Home Capital’s biggest shareholder with 13.6% stake.

On Saturday another prominent investor bailed, when Calgary-based Mawer Investment Management sold 2.75 million shares of the alternative lender, CIO Jim Hall said told Bloomberg in a phone interview. “We are out of the position,” Hall said.  Mawer also has reduced holdings in Canadian alternative- lender Equitable Group.

All these investors will now be forced to explain to their LPs how they missed a ticking timebomb which so many, this website included, had warned about for year.

Home Without The Capital Group

As for Home Capital Group, or more aptly Home Without The Capital Group, the future is bleak, and a bankruptcy liquidation appears the most likely outcome. What impact such an event will have on the broader Canadian housing market remains to be seen. Last week, shortly after HCG's rescue loan announcement stunned the otherwise sleep Toronto tape, the Canadian housing regulator warned of "strong evidence of housing-market problems." Looking back in a few months, that may prove to be a vast understatement.

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Archive_file's picture

What a farce.

Corruption hiding in plain site.

D Nyle's picture

Didn't the Canucks say they were smarter than Americans on home loans, HaHaHaHa, bullshit 

silverer's picture

Yes, and they've got immigration nailed, as long as they don't have to deal with it.

espirit's picture


Pensioners on the hook for sub-prime loans.


Boy, this is going to hurt.


(next greater fool, or should that be ‘tool’?)


Houses Depreciate's picture

Our subprime mess is going to dwarf Canada's.

knukles's picture

Eh wait an minute dere, yuh.  Didnsum Ontario Health Care workers or sumptin like dat, just buy da ting an think day save da day, eh?  I men like doctor heal theyself, eh?

Blankone's picture

And I believe the CEO of the pension fund also sits on this banks board. Slight conflict of interest. Will be interesting what happens if the pension fund gets stiffed.

blueberry100's picture

yea, it was loke 321,000 health? workers bailed the IN... tha't all i know

No_More's picture

I kind of thought that had already happened circa 2007-8

That said you know there some asshat 'investors' here holding derivatives/bets that Canadian sub-prime lenders would be solvent forever.

Isn't it fun being globally interconnected financially?

JRobby's picture

2:1 collateral. It can't all be bad......................

No_More's picture

So Grandma/Grandpa Pensioner will be moving in with random sub-prime Canadian borrowers, right?

That's a very different approach to housing the elderly.

Maybe the debtors can get mortgage-free by caregiving their creditor elders...

Ink Pusher's picture

There are a few institutions here that are indeed overexposed, Nothing in comparison to the US however. Shorting Canadian banks is a popular bloodsport in the US among hardcore traders. not like you.

Truther's picture

Bank run eh?

Who's next ?

Praetorian Guard's picture

Everyone!!!! Hahahahaha... anyone with a significant amount of cash in the bank is begging for it...


Come join us for free at ALL are welcome!! Financials, survival, much more. Start your own blog for free.

silverer's picture

Hey. Site looks like fun. I'll spend some time perusing.

CheapBastard's picture

I like it also. I am very much still on the learning curve myself despite reading ZH for years.

Daily Bail's picture



silverer's picture

Hey! 22.5%! Sounds like US banks with credit cards! lol

Arnold's picture

How much is that in Beer, eh?

Luc X. Ifer's picture

I'll always fight any anti-jewish posting on this portal or anywhere else, but you know, YHVH is not greater for the very simple reason that YHVH is just a story, doesn't exists, exactly like all his 5000+ other peers which all where created by clever guys to take advantage of the ignorant ones, practically just another flavor of the same con ...

TheReplacement's picture

Lucifer fights for (((them))).  Speaks volumes.

Luc X. Ifer's picture

R u terrified that I'm coming after your /*imaginary*/ soul :) ?! 

Terminus C's picture

Lucifer and YHWH are different names for the same god.

They are both names for Saturn.

That is right religious hedgies, every major religion and just about every minor one worship Saturn as the creator.

Who knew you were all pagans?

Luc X. Ifer's picture

I am not :), I'm my own unique realization of the Cosmos :) ... no need for others here :) ...

Terminus C's picture

Well, you, who are not Lucifer, are correct, you are your own unique realization of the cosmos.  Lucifer, however, is a representation of Saturn when Saturn was forced from its place over the celestial north pole as our original sun.

Now Saturn is a barely recognized spec in the heavens (hardly fit for the supreme place it holds in every human mythological schema), thus, fallen.

God Star, Dwardu Cardona

Saturn Myth, David Talbott.

Read them, then give me your pithy comments.  The evidence is overwhelming.

KFBR392's picture

pretty sure i dont believe saturn is God. neither is uranus. jennifer lawrences ass is maybe wirth bowing to though just for the record lol

CharlesBronson's picture

=====  ^ ===========================

CK right here, send him packing

Lumberjack's picture

You really should see this:

It breaks open the how and why's of the Cartel Banks and DOJ's failure to indict. Mind blowing shit here.

chunga's picture

Bookmark for later. John Titus (aka ZH'er Cheyenne) is very, very good.

Lumberjack's picture

He fucking nails why they all got away with it. It even gers worse with how london controlled the DOJ and the Immunity they got above and beyond any sitting president would have. They are fucking untouchable according to all laws. Fuck BIS too on that note. Cheyenne has many thousands of hours of top notch investigation into this god damn fiasco and deserves a nobel prize for his unpaid work. What he has uncovered is an act of war against humanity itself and our own leaders are complicit with said war crimes and treason...

chunga's picture

I'm gonna watch every minute of it later, I need a beer.

// edit // I'd like to sew every member of congress eyes open and loop it over and over while they starve to death. Jeff Sessions too, he's another swamp fraud.

Bay of Pigs's picture

Cheers bro. It's guys like you and people like Titus that keep me around here at the Hedge.

Cheyenne's picture

Thanks, fellas! It's greatly appreciated...

Deathrips's picture

Well done Cheynne!


Hang the bankers after we publically torture them..and their enabling government employees!



GUS100CORRINA's picture

Canadians must be in a PANIC ... America needs to take notice.

No one's pension or savings are safe when this whole thing implodes worldwide.

The banksters know what they have done and now it is time to find scapegoats.

Toronto Kid's picture

No one is in a panic up here. They should be in a panic, but they ain't.

They've got to get Timmy to soccer practice, the new episode on tv is on tonight, Suzie needs a new phone, the boss is demanding Jeff go in this weekend to finish up the big project, they're just too busy to worry about some bank going under. And so what if that bank holds their mortgage; it isn't like anyone is going to rock the boat and make them pay up or sell. That could, like, crash the bank and no one wants that. Besides, they don't have any money right now anyway. And it's different here, so everything will be fine.

Until it isn't fine. And the bank demands their mortgage money back, and wants the credit cards and heloc paid off (and then closed). And then these clowns will want anyone who saved for a rainy day to pony up the funds to keep them solvent.

Meanwhile I'm pondering breaking out every last dime in my RRSP and sending the money south of the border.

how_this_stuff_works's picture

Be very careful if you transport it by boat. I understand many people are having boating accidents.

Anteater's picture

Welcome to Trumponomics. Look at the chart. You'll go to bed with that young concubine some night, secure in your wealth and prowess, then next morning she's gone with your wallet and your i-Phone, when you get to the office, CNN will have Trump on Twitter saying how you have to remain calm, he knows how to make a deal, he has great people, the best. Your investments are 100% liquid, they're just temporarily frozen for a national bank holiday while they 'look at all options on the table'.

[Cue FX, GWBush looking under table ,'No options here, haww,haww']

Give Trump a little time, lol. Give him a lotta time!

pslater's picture

Shocking!  A mortage lender going under?  I thought all these problems were fixed after 2008...

PrometeyBezkrilov's picture

Corruption? No way. Media claims that corruption exists only in China and Russia

Buck Johnson's picture

"the pension plan will be provided with $2 worth of mortgages as collateral for every $1 it lends to Home Capital."  

That is if those assets are able to get sold and recoup any of the money.  This is BS, if those assets where worth anything they wouldn't have given them twice the assets for that loan.  They only agreed to this to get the money and cash out.



christiangustafson's picture

HA ha.  Eat it, hosers!

christiangustafson's picture

Yessir, thanks.

A trip to Vancouver is enough to open your eyes to the madness up there.  We just drove up over the past Easter weekend.

Saw about a dozen high-end exotics on the road, Ferraris, Lamborghinis, a couple of Audi R8s, etc.

The new-ish Nordstrom on Robson has insanely high-end labels like Oscar de la Renta KIDS and many others that are not even carried in their flagship store in Seattle.  Clearly a play for the loose credit money out of China.

So many of the high-rises are dark at night.  The organic city is dead and gone -- these are assets on a spreadsheet somewhere.

Burn it all down!

Sonny Brakes's picture

The irony is that Canada turns a blind eye to laundered money coming in from outside Canada, but would not hesitate to make an example of a Canadian trying to survive growing weed in his basement.