Home Capital Is Burning

Some of you that are tuned into the markets may have already heard that the beleaguered non-bank lender, Home Capital Group has had to take on some very expensive debt to the tune of 2 Billion dollars to fulfil their mortgage commitments. Please note that Home Capital’s issues are not an indicator of the Toronto Real Estate market. Homeowners aren’t defaulting here…their lender’s money has dried up and they’ve found a way to stay alive.

You’ll wake up tomorrow to a ton of stories with clickbait titles referring to the tanking of Canada’s largest non bank lender as the pin that popped the non existent Toronto Real Estate bubble. Please don’t let them spin you!

The Real Story Of Home Capital Group

Due to some questionable lending practices, Home Capital has had some issues with various regulatory bodies, investors and board members. They were forced to sever relationships with 45 mortgage brokers who got them into this mess and took steps to “clean house”.

Unfortunately Home Capital’s board of directors terminated their CEO back in March which further unsettled investors. This was the straw that broke the camels back. Investors got spooked and started pulling their money out of Home Trust’s high interest savings account (which it used to fund mortgages) leaving nearly a 2 billion dollar shortage.

Home Capital had to take out a very expensive line of credit. They took the LOC at 15% for the first billion and 10% for the second. PLUS a $100 Million commitment fee. That’s one of the most expensive loans the industry has ever seen.

The Real Issue At Home Capital Group

The real issue here is not one of Mortgagors (homeowners) defaulting. It’s the opposite. The Mortgagee (Home Capiral aka the Lender) was unable to fund the mortgages they had committed to. This is the fundamental difference. You’re going to hear stories comparing this to the US crash of 2008. The banks defaulted then because homeowners were literally walking away from mortgages. That was a big problem.

This is a case where the Lender couldn’t fund mortgages but they fixed it. They secured a line of credit for $2 Billion.

The expensive debt, the problems with the Feds and terminating their CEO created the perfect storm which tanked Home Capital stock nearly 65% yesterday.

How Does This Affect You?

It doesn’t. Home Capital has likely been preparing all year for this and has fixed the issue in the short term. This ins’t a “sign of things to come” This is a company that made some bad decisions and is paying for them now. They’ll still be able to fund mortgages and pay back their debts.

The market has already slowed as folks anticipate the announcement of the Provincial budget April 27th. That, combined with some Buyer fatigue have cooled some parts of Toronto especially the $1.1-$1.6 range.

This will affect infill developers though as Home Capital is a major funder of infill here in Toronto. Again, it won’t affect the market in general. Well, unless folks get confused by the inevitable “spin job” we’re likely¬†about to witness.

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