A Bay Street sign, the main street in the financial district is seen in Toronto, January 28, 2013.Mark Blinch / Reuters
The black sheep of Canada's mortgage industry is starting to see support from the flock.
Even as Home Capital Group Inc. issues warnings about the company's ability to stay in business, a growing number of financial firms, brokers and money managers are backing the company. It now remains to be seen if the support will be enough for the mortgage lender to survive without a backstop from the country's biggest banks.
"Home Capital does have a very loyal following," said Gary Mauris, president of Dominion Lending Centres, Canada's largest mortgage brokerage and the biggest provider of clients for Home Capital. "Most people in the industry want to continue to support Home, as long as they don't see it as a liability and potential exposure."
Though management warned of Home Capital's ability to continue as a going concern in last week's first-quarter earnings report, some Bay Street stakeholders key to the firm's survival are less worried than they were just a few weeks ago. CIBC Asset Management more than tripled its stake in Home Capital in April and mortgage financing firm MCAP Corp. agreed to manage and service $1.5-billion in mortgages and renewals, working with institutional investors that agreed to buy the loans.
"We've been cautious over the last few weeks, there's no question, but we're encouraged by the board commitments that they've made and we're encouraged by the $1.5 billion that MCAP stepped up to support commitments and its renewal portfolio," Mr. Mauris said.
New Board
Home Capital's board changes helped rally some of this support. Alan Hibben, a former managing director in Royal Bank of Canada's mergers business, joined the board on May 5 to replace founder Gerald Soloway. Three days later, Home Capital named three more Bay Street heavyweights to its board: Claude Lamoureux, Paul Haggis and Sharon Sallows, all with experience at some of Canada's biggest pension funds. The company added lawyer James Lisson to the board Thursday. More changes are coming, including replacements for interim Chief Executive Officer Bonita Then and interim Chief Financial Officer Robert Blowes.
"Now that we understand that CIBC and MCAP have come in, it doesn't alleviate the concern fully, but it definitely does offer us a little bit more security when we are looking at Home Trust now as a potential funding source for our clients' mortgages," said Shubha Dasgupta, owner of Capital Lending Centre, a Toronto-based mortgage brokerage.
Dan Eisner, chief executive officer at True North Mortgage, is back with Home Capital after he stopped sending any deals to the lender as of May 3.
"Given the recent management changes and the new ability of Home Capital to sell mortgages in bulk has given us confidence in recommending Home Trust to the appropriate clients again," wrote Eisner in an emailed statement.
Deposit Runs
Home Capital needs brokers like Capital Lending and True North to send them customers and bring in new mortgage business after a plunge in balances raised doubts about the firm's viability. Home Capital lost about $3.5-billion in high-interest deposits and guaranteed investments certificates, or GICS, over the past six weeks after it was accused of misleading investors about fraudulent mortgage applications. About half the fixed-term GICs are scheduled to mature in the next 12 months.
"Home Capital's ability to continue as a going concern remains dependent on its ability to fund through broker GICs," GMP Capital Inc. analysts Stephen Boland and Mark Kearns wrote.
Higher Rates
Home Capital has boosted its GIC rates well above rivals to win back customers. In a front-page advertisement in the Globe and Mail Thursday, the bank's Oaken Financial offers a one-year rate of 2.35 per cent. That compares with 1.3 per cent at Tangerine, a unit of Bank of Nova Scotia, and 1.7 per cent at Equitable Bank, based on rates posted on ratehub.ca.
Broker support and the revamped board have helped Home Capital shares recover some losses. The stock rose 0.7 per cent to $8.77 at 10:22 a.m. in Toronto and has risen 11 per cent this month, paring the plunge this year to 72 per cent. The number of shares being shorted has declined to about 24 per cent of the float as of May 17, from 60 per cent last month, according to Markit data.
Still, broker and money manager support may not be enough. Mr. Hibben said on a conference call last week that the pace of new deposits has dropped, forcing the lender to consider new funding options, including unloading more mortgages to third parties like MCAP, or trying to securitize more assets for sale to investors. The market for Home Capital's uninsured, non-prime mortgage-backed securities is almost non-existent in Canada.
MCAP is willing to take on more Home Capital mortgages.
"Whenever we enter into a relationship like this, should the need be there and should the investor demand be there, we'd be happy to be there to grow the number," said Don Ross, senior vice president at MCAP, noting that there are no current constraints on demand from its investor clients.
HOOPP Line
More pressing is the need to replace the one-year C$2 billion credit line from the Healthcare of Ontario Pension Plan, which is costing the company about 22.5 per cent on the first half of the loan. The company is seeking a longer term and lower rates, Mr. Hibben said
That's where the banks or other institutional investors may come in. Mr. Hibben said he's in talks with banks and other lenders to replace the credit line, and would hope to have a deal in 45 days or so.
The Big Six banks, which were quick to come to the aid of Home Capital's competitor, Equitable Group Inc., have so far been reluctant to extend credit lifelines to the liquidity-constrained lender, although the Globe and Mail reported on the weekend that the banks were close to a deal with Home Capital just as the HOOPP deal was being finalized.
"I haven't seen the Street be really bad to us, if you will. This is a broker by broker thing," said Mr. Hibben in a telephone interview. "But our banks have been as supportive as they can be, given the situation that we're in."