Home Capital’s Troubles

As you may have heard, Home Capital Group is in a bit of pickle (or jam!) and has had to find a 2 billion dollar line of credit (yes a billion with a big B) to fulfil their mortgage commitments. You may better know Home Capital Group by it’s subsidiary, Home Trust, which is one of the largest lending trust companies in Canada.

To refresh your mind, back in 2015 due to some questionable lending practices, Home Capital ran into issues with the regulatory bodies. As a result, Home Capital suspended relationships with dozens of brokers after an external source tipped the company off that the brokers were falsifying borrower incomes.Their CEO was let go earlier this year too. The company witnessed more problems when the Ontario Securities Commission alleged that several company executives broke securities laws and misled shareholders in their handling of a scandal involving falsified documentation for a bunch of mortgages two years ago. All of these unsettling news has led to investors feeling uneasy and therefore pulling their money out of Home Capital’s high interest savings account which was used to fund mortgages. So Home Capital’s stock took a nose dive.

Let’s be clear. People are not defaulting on their mortgages. The Banking system is not going down. This is not the end of the world in my opinion. What you may hear through the grapevine may  not be all accurate. This issue with Home Capital is a classic case of cause and effect where now a Lender cannot fund mortgages due to insufficient funds caused by the Lender’s alleged malpractices. This matter however is now somewhat fixed by Home Capital borrowing some very expensive money from Healthcare of Ontario Pension Plan.

For the next few months we may see higher interest rates for borrowing money from Trust companies. They may also up their down payment criteria  just to be cautious (or they may not). Will the major Banks tighten their lending criteria? I can’t imagine so but let’s wait and see. I say this will all be history in a few months.