Why trouble at alternative lender Home Capital could reduce your mortgage options

A real estate sold sign hangs in front of a west-end Toronto property Friday, Nov. 4, 2016.
A real estate sold sign hangs in front of a west-end Toronto property Friday, Nov. 4, 2016. Graeme Roy/The Canadian Press

Alternative mortgage lender Home Capital Group is in hot water. Its stock has plunged and customers pulled $762 million in savings from some of its deposit accounts on Wednesday and Thursday alone.

READ MORE: Home Capital stock rebounds after mortgage lender secures $2B credit line

The company’s woes are affecting other alternative lenders, which could have significant consequences for a number of Canadians looking to get a new mortgage or renew their existing loans.

Back-up: What does Home Capital do and why is it struggling?

Home Capital is a Toronto-based lender that offers so-called alternative mortgages, among other financial products, through its principal subsidiary, Home Trust Company. Home Trust provides uninsured mortgages to clients who generally can’t borrow from traditional banks to buy a house, usually because they have bad credit, little credit history or are self-employed. Alternative mortgages normally carry interest rates that are much higher than what you’d get at one of the big banks, because of the elevated risks involved in lending to this subset of borrowers.

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The trouble for Home Capital, which is one of Canada’s largest alternative mortgage lenders, started last week, when the Ontario Securities Commission (OSC) alleged that the company broke securities law by making misleading disclosure after the company believed it discovered some brokers had falsified loan applications. The company has said the allegations are without merit and vowed to defend itself.

READ MORE: Home Capital’s probe into alleged fraud by mortgage brokers widens

Although the events OSC referred to happened in 2015, many of the company’s customers reacted to the news by withdrawing deposits, which triggered a liquidity crisis. Home Capital said Thursday it had secured a $2-billion line of credit as a funding backstop, but, according to some, its future remains uncertain.

READ MORE: Home Capital suspends 45 brokers for false mortgage applications

Home Capital’s problems are affecting other alternative mortgage lenders, whose stocks have also suffered.

“Home Capital contagion has spread to the entire mortgage market, in particular, alternative mortgage lenders,” National Bank of Canada analysts Jaeme Gloyn and Victor Dri form wrote Thursday.

Does this affect you?

It depends. Canadians who can get a regular mortgage likely have nothing to worry about. But if you’re looking to buy a house with little credit history or bruised credit, this could affect you. Self-employed Canadians who’ve been turned down by the banks might see the biggest impact.

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The Home Capital crisis, in fact, could result in higher rates for alternative mortgages, according to Mike Rizvanovic at Veritas Investment Research.

Bad press on Home Capital has raised worries about companies that operate with a similar business model, he added.

READ MORE: Why homebuyers should stay away from this popular financing strategy

“It’s not fair, in a sense, because Home Capital’s problem is not something that you see with these other lenders,” Rizvanovic told Global News.

But psychological as the reaction of savers and investors might be, it has very real consequences.

Some of Home Capital’s competitors could also face liquidity issues. They would then have to offer higher interest rates to attract the deposits they need to help fund their mortgages and have to pass on some of those costs to customers by raising mortgage rates, Rizvanovic said.

The end game could be even higher mortgage rates for Canadians who can’t access traditional mortgages.

Entrepreneurs and self-employed people are especially vulnerable because they are the ones most likely to not only get alternative mortgages but to renew their loan with an alternative lender at the end of the term, Rizvanovic noted.

READ MORE: Why Canada wins, but many Torontonians lose, from Ontario’s new housing measures

Homeowners who got alternative mortgages because of little or poor credit history are often able to renew with an A-lender at a cheaper rate because they’ve been able to build up or repair their credit over the course of their previous mortgage term, he added.

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Self-employed Canadians who don’t have enough proof of income to qualify for a plain vanilla mortgage, on the other hand, often have no choice but to stick to alternative mortgages, Rizvanovic said.

WATCH: Larger down payments now needed from first-time buyers of homes over $500,000

Click to play video: 'Larger down payments now needed from first-time buyers of homes over $500,000' Larger down payments now needed from first-time buyers of homes over $500,000
Larger down payments now needed from first-time buyers of homes over $500,000 – Feb 15, 2016

Is this the beginning of a U.S.-style subprime mortgage crisis?

That’s unlikely.

Home Capital has said in the past that the mortgage market they compete in — uninsured, just-below-prime mortgages — is about 20 per cent of Canada’s overall mortgage market, which now stands at $1.4 trillion, Rizvanovic said. (By comparison, about a third of U.S. mortgages were subprime in 2007.)

READ MORE: Canadian housing price trend ‘very similar’ to U.S. just before the crash: National Bank

However, according to Rizvanovic, Home Capital’s portfolio accounts for a small portion of that 20 per cent.

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Although Home Capital is one of the largest alternative mortgage lenders in Canada, it operates in a very fragmented market, Rizvanovic noted.

In other words, Home Capital is one the larger of a bunch of small fish in a small pond.

The company “is nowhere near being a systemically important financial institution in Canada,” said Rizvanovic.

With files from the Canadian Press

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