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It’s easy to stoke fear of a crisis when there’s already a purported crisis.
Towering housing valuations in Canada’s internationally renowned cities have prompted bubble-talk for years. Housing bears are constantly speculating on what it’s going to take to “pop” it.
Well, now we have a pin, some say: Home Capital’s scandalous potential failure.
But we don’t see it that way. Despite being Canada’s (former) biggest subprime lender, Home is too small a player overall. More importantly, the reasons behind its undoing are in no way representative of the mortgage industry as a whole.
Home Capital’s disgrace will let some air out of the balloon, absolutely. But it’s not going to pop it.
That said, this crisis will leave a mark, make no mistake. So here is what you actually can expect to happen…
- More headlines will ominously speculate on Home’s demise and market vulnerabilities
- The only way to diffuse them is for Home to be bought out, or align with deep-pocketed reputable partner(s), and quickly.
- Non-prime deposit-taking lenders will pay you more
- Equitable Bank is a good example. It raised its high interest savings rate half a percent on Thursday.
- People will keep moving money from non-prime lenders
- Savers will pull more money out of the non-prime market, at least until Home Capital’s fate is known and enough weeks pass for Joe Public to forget this mess.
- There won’t be debilitating “runs on the bank” at other lenders
- That is, unless a similar scandal is uncovered elsewhere. Our sense in talking with mortgage execs is that no other regulated lenders (at least the ones that matter) have similarly threatening skeletons in their closets.
- Non-prime lenders will pay more for the money they lend out
- This is because of the lenders’ implied credit risk, not the risk of the mortgages they underwrite. But this won’t last forever.
- Non-prime mortgage rates will jump slightly
- The more lenders pay, the more they charge. Home had some of the lowest funding costs in the non-prime universe. If it cuts back on lending, and we wouldn’t be surprised if it did (soon), that will remove choices for:
- self-employed borrowers who can’t prove income in the traditional manner
- folks with bad-credit, and
- new immigrants to Canada, among others.
- The more lenders pay, the more they charge. Home had some of the lowest funding costs in the non-prime universe. If it cuts back on lending, and we wouldn’t be surprised if it did (soon), that will remove choices for:
- Smaller non-prime lenders will snatch up volume from Home Capital
- The little guys (e.g., second-tier names like IC Savings and Community Trust) will eat some of Home’s lunch.
- Regulated non-prime lenders will tighten their lending criteria and oversight…but only somewhat
- Why only somewhat? Because they’re already sufficiently vigilant given the risk they take (remember, most of their borrowers are putting down 25% or more). That said, lenders will be increasingly hesitant to lose public or investor confidence—as Home did—by making underwriting oversights.
- Big banks will handle more of their own non-prime financing
- Home’s debacle will make banks more nervous about referring their turn-downs (customers who don’t meet prime lending standards) to a third-party. Coincidentally, I heard a few weeks ago that two big banks are piloting their own non-prime mortgage origination capabilities.
- A little froth will come off housing activity
- This is more of a psychology thing. There may not be as many multiple offer situations in red-hot markets, at least until the public understands how deep this quagmire runs. Fast forward some months down the road, however, and most folks will forget this ugly blotch ever existed on Canada’s mortgage complexion.
10 Comments
From all of the blogs I’ve seen trying to explain what will/might/should/won’t happen with mortgage interest rates in the future, your explanations consistently seem the most pragmatic.
As a side note, your mortgage calculators are also great. Simple to use, while providing the right info to compare rates.
The OSC’s pursuit of a frivolous technicality of when information was released started this mess.
This lead to news cycle of fear mongering and an illogical run on funds(even though they’re insured up to 100k) and Home has bigger cap rates than the majors.
This was the equivalent of yelling fire in a crowded theatre.
If Home stabilizes, which I bet and hope they will. They should sue everything that moves to recoup the 100’s millions this panic has caused them. This includes the news outlets that ran misleading stories, the public shorts that straight up lied for their own self-interest and any other entity that fed into the panic. Besides financial compensation this is one way to get their rep back. The last CEO didn’t seem willing to pursue litigation, that lead to the manipulators to pile on the company that would just turn the other cheek, that didn’t work well… Time to hit back with an iron fist.
No big deal! Just bundle all the bad loans together, stamp an AAA rating on it and sell it to a pension fund. Then repeat cycle. Everyone knows there’s mortgage fraud going on for years. Everyone looks the other way because that’s how the world works. + I’m sure cmhc is on the hook for most of it.
> This was the equivalent of yelling fire in a crowded theatre.
That is on fire. Here’s my bet: you have shares in HCG, you don’t do your research into your investments, you lost a lot and you want it all back.
This is all well and good, but I feel from the lack of warning sirens up to this point, ratespy would have written exactly the same thing about how the world was all peachy, *including* HCG!
So am I going to rest easy on the assurance the rest of the market *really truly* is fine? Nope.
Ben, We never said the market is “fine.” What we’re conveying is that Home Capital’s deeds were company-specific. For that reason, liquidity will bounce back once the fear and confusion subside.
Are we Ollie the Oracle with all the answers? No. But here’s what I can tell you with 100% certainty. Home will not be the last lender to fail. Companies make big mistakes and companies go under. Regulators continuously stress test for failures far bigger than Home Capital. It’s sometimes scary when it happens, yes, but as far as housing is concerned, until the mortgages themselves stop performing (and they won’t), the market should feel only short-term pain.
Mortgage fraud is out of control in Canada and everyone knows it. Canada is in a housing bubble thats worse than the US. Debt to income ratios are higher in Canada then the US at the tip top of their housing bubble. Price to incomes are all the charts as income has no relation to prices. How is that possible? Fraud which allows people to claim higher incomes anss thus this is mortgage fraud on a grand scale.
It’d be amazing if you’d humour folks with even an atom of data about mortgage fraud, Tony. Estimates from Equifax and other reputable sources simply do not corroborate your claims.
The housing bears are all over this one, which is laughable.
Home’s mortgage book represents less than 1% of the market.
Remember, hyperbole sells.
Tony, you can’t get 100%LTV mortgages in Canada.