What are homes & mortgages worth when push comes to shove?
Home Capital Group, Canada’s biggest “alternative” mortgage lender, is not a bank – which today is part of its problem because it cannot create money to lend out; it has to obtain it first by attracting deposits and borrowing money through other channels. Through its subsidiary, Home Trust, it specializes in high-profit mortgages to risky borrowers, with dented credit or unreliable incomes who don’t qualify for mortgage insurance and were turned down by the banks. This includes subprime borrowers.
Since revelations of liar loans – What, liar loans in Canada?! – surfaced in 2015, things have gone to heck. Now it’s experiencing a run on its deposits. Teetering at the abyss, it obtained a $2 billion bailout loan on Thursday. The terms are onerous. And on Friday, the crux of the deal emerged – the amount of mortgages it has to post as collateral. It’s a doozie.
It sheds some light on what insiders think mortgages and the homes that back them are worth when push comes to shove. A bone-chilling wake-up call for the Canadian housing and mortgage market.
This is when the whole construct started falling apart:
On July 15, 2015, Home Capital announced that originations of high-margin uninsured mortgages had plunged 16% and originations of lower-margin insured mortgages had plummeted 55%, and that it had axed an unspecified number of brokers. Shares plunged 25% in two days [Largest “Alternative” Mortgage Lender in Canada Denies “Systemic Problem” in Housing Market].
On July 30, 2015, it disclosed, upon the urging of the Ontario Securities Commission, the results of an investigation that had been going on secretly since September 2014 into “falsification of income information.” Liar loans. It suspended 45 mortgage brokers who’d together originated in 2014 nearly C$1 billion in residential mortgages, or 12.5% of its total [Liar Loans Pop up in Canada’s Magnificent Housing Bubble].
The scandal festered. Short sellers circled in formation.
On April 26, 2017, Home Capital announced that it’s experiencing a run on its deposits. As of the end of March, its subsidiary Home Trust sat on about C$2 billion in high-interest savings accounts (HISA) it is offering to regular savers. But these folks were pulling their money out, it said, and the pace of the run was accelerating.
It also disclosed that it was finalizing a $2 billion bailout loan from the Healthcare of Ontario Pension Plan (HOOPP) which has about $70 billion in assets. The loan would “have a material impact on earnings….” So an expensive loan.
Home Trust would pay a non-refundable commitment fee of $100 million; would be required to make an initial draw of $1 billion at an interest rate of 10%; and would pay a 2.5% standby fee on undrawn funds. So the initial $1 billion for the first 12 months would cost it $225 million in fees and interest, a juicy 22.5%! Once the credit line is fully utilized, the cost of the loan would drop to 15%.
Its shares collapsed by 65%.
On Friday, April 28, it announced that another C$290 million in deposits were yanked out on Thursday, after C$472 had been yanked out on Wednesday. Its HISA deposits were down to C$521 million, having plunged 75% since late March.
Home Trust still has about C$13 billion of Guaranteed Investment Certificates (GIC). They’re covered by deposit insurance up to C$100,000 per account. Since GICs have fixed terms, they’re harder to withdraw and have been stable. But many of them are maturing in the near future, and it will have trouble raising money by selling more GICs to cover those that are maturing.
So how will Home Capital fund new mortgages? That’s the core of its business. Via the $2 billion loan with the onerous terms? Hardly….
Here’s the killer: the value of the collateral.
On April 28, HOOPP CEO Jim Keohane told BNN in an interview that “for every $1 we lend Home Capital, they’re going to provide us with $2 of mortgages as collateral. That’s where we get our protection from.”
So the C$2 billion loan would be backed by C$4 billion in mortgages. In other words, in the eyes of Keohane, these mortgages might be actually worth, when push comes to shove, 50 cents on the dollar.
That’s what it took to make the deal. Keohane told BNN he feels “comfortable with the underlying quality of mortgages, particularly given the protection we have in terms of additional overcollateralization we have.” He said, “The scenario that would have to play out for us to lose money is pretty extreme.”
Keohane was on the board of Home Capital but resigned on Thursday as the deal emerged amid swirling conflicts of interest.
At the end of its rope, Home Capital is now evaluating “strategic options,” as it said. It hired RBC Capital Markets and BMO Capital Markets to look for a buyer or whatever other “options” it might still have. But it’s going to be tough. There will be a slew of lawsuits including class-action lawsuits, and potential buyers might not want to get tangled up in them.
The fact that the price of these “alternative” mortgages has been set at 50 cents on the dollar when push comes to shove – a reflection of the potential prices of the homes backing these mortgages – gives some clues about what insiders think the outcome might be of Canada’s magnificent no-holds-barred housing bubble.
Here I’m dismantling the old saw that “this can’t happen in Canada.” Read… Can US-style Housing Crisis, “Jingle Mail” Hit Canada’s Banks?
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This investment by HOPE OOPS is the only way a pension plan can get back to its fraudulent 8% reported returns to its public pension holders.
No worries, everything is Awesome. We get 8% on our pension funds every year. Don’t worry that the value of your pension funds drops by 50%. Just ask the DFW Fire and Police pension plan how that worked out. 50% drop in their values and the people expecting to get their pensions are bailing out by the hundreds of millions
Maybe Trump can MCGA
No worries, everything is Awesome. We get 8% on our pension funds every year.
Meanwhile, the deranged money-printing by the Keynesian fraudsters at the Fed and central banks is relentlessly debasing the purchasing power of incomes, pensions, and savings for the 99%.
I think HOOPP is the smart money here. Where else can you invest in such a huge amount ($2b) with 15% or higher interest rate and protected at a loan to value of 50%. Even if the underlying houses dropped in value by 50%, the loan will be fine. And the collateral pool is large and diversified. Even US home prices did not drop by 50% during the 2008 crisis.
If anybody reading this (or at HOPP) thinks that 2::1 collateral will protect them, they’re nuts. When the bovine excrement hits the fan, real estate prices drop, and loans are foreclosed, HOOP will end up owning a bunch of vacated (and rapidly deteriorating) houses…with lawns that need watering & mowing, plus overdue property tax bills…and severely reduced cash-flow. And lots of legal bills.
A bank, let alone a naive pension fund, has no ides what to do when they’re forced into real estate ownership. We haven’t even discussed what happens when (whoever) rips the copper pipes & appliances out of the vacant houses. Oh yea, banks don’t sell houses – commission-charging real estate agents do.
Yea, right: HOOP is making 8% a year, and is over-collateralized.
HOOP will end up owning a bunch of vacated (and rapidly deteriorating) houses…with lawns that need watering & mowing, plus overdue property tax bills…
Yes, but I’m sure those 321,000 retirees who entrusted their pension fund to HOPP will gladly do the upkeep on all those vacant properties out of a generosity of spirit and abundance of free time.
Of course. If this loan turns out sour all banks are dead. People questioning the guy sitting on the board of the lender (since stepped down) of this very lucrative loan don’t realize that in the small world of Canadian finance there are only a few hundred people qualified to sit on the board of a major pension fund.
The problem with insisting on no conceivable conflict of interest is that you end up with someone unqualified.
Re: contagion: no one lost a dime in a Canadian bank during the Depression, when several thousand US banks went under taking their deposits with them.
A few years ago a Canadian ‘near bank’ got too close and was forced by regulator to sell to Scotia. In the meeting according to the CEO of the near bank, he said to the CEO of Scotia: You are lucky you are a monopoly’
Mr. Scotia replied: We’re not a monopoly, we’re a cartel.
If you ask a Canuck bank cash machine for a ‘mini statement’ of your account transactions, about a week’s worth, it will charge you 1.50. and spit out a piece of paper with negligible cost.
This is the most profitable legal transaction anywhere- it may be more profitable than a drug deal.
There are only five majors to divvy up the market.
PS: of course there is likely to be big correction in RE, but the banks have unloaded much of the risk to the government i.e the public via mortgage insurer CHC.
If I was under this CEO at Home Capital and he gets us a loan with a 5 percent fee and 15 % interest I would wonder WTF would we get without his connections?
The answer: in these emergency situations getting the loan AT ALL is the problem.
Ask an ex-Lehman.
Even US home prices did not drop by 50% during the 2008 crisis.
The 2008 “financial crisis” was nothing less than true price discovery asserting itself. Had market forces been allowed to flush the toxic waste out of the system and punish the irresponsible lenders and borrowers responsible for causing the crisis, housing prices would likely have dropped far lower. Instead, the Fed stepped in with trillions of dollars in printing-press “stimulus” while Wall Street’s Republicrat duopoly voted for TARP and other taxpayer bailouts of the financial firms that caused the bubble in the first place with their systemic fraud, greed, and recklessness. So the 2008 crisis was not allowed to play out, but rather our financial day of reckoning was deferred by massive central bank money-printing and taxpayer bailouts. Now the Fed and central banks are out of ammunition, and once again true price discovery is looming as a systemic risk to the giant bubbles and grotesque distortions created by the “former” Goldmanites running our monetary policy for the exclusive benefit of their .1% cronies. This could get very, very ugly for the millions who grossly overpaid for their asset bubbles, er, houses, and the lenders who foolishly underwrote those mortgages.
The reason why the 2008 financial crisis began was the implementation of FSAB 157 which demanded banks to split their assets into three tiers and to mark to market the assets in those tiers. Up until then the assets were mark to model. When the third tier, the tier with all the derivatives was marked to market the system collapsed as the real price of those assets were discovered.
What stopped the collapse was the rescinding of FSAB 157 by the BIS. Otherwise the fuse would have reached the powder keg and we would now be in a much different financial climate. The sad part is that because of no banking reform we are in worse shape now than then; its just a matter of time before we do reach the keg.
“Even US home prices did not drop by 50% during the 2008 crisis.”
They would have if the natural correction were allowed to proceed. What we saw in 2006 was demand drying up due to the escalating prices. Once prices began falling, demand began to pick up some but that demand quickly went away in 2009 as the market was interfered with and it’s been stagnant since.
I can’t think of any positive outcome resulting from massively inflated prices. These inflated prices destroy demand, create defaults and are destructive to local markets and economies.
“Even US home prices did not drop by 50% during the 2008 crisis.”
In many places, where the bubble was most extreme, prices DID drop 50%. Especially with foreclosure sales. You should do some Zillow on Sacramento, Stockton, Las Vegas, Phoenix, Miami…
The real question is, where did HOOPP lend, and how much has the Canadian bubble inflated those markets beyond traditional value? I’d bet they’re over-concentrated in the worst areas.
I don’t know about that perspective? Not such a bad idea for a pension fund to have a slimy CEO on another board of a failing mortgage firm, yes? I kind of like that strategy. Maybe Keohane will provide cheap homes that he stole from his other job for his pensioners? He must have borrowed the idea from Bernanke? Just kick out all the home buyers that lost their jobs after raising interest rates, then print up a bunch of useless dollars and buy up the worthless mortgage-backed securities and make the banks liquid and solvent again! Waalaaaa! Never waste a good bubble…
Canada is an archipeligo of special interests glued together by the mantra of “at least we are not Americans”.
Home Capital is just another con job, home-grown in Canada like Sino-Forest, Dome Petroleum, and Bre-X gold.
And the oligopoly of Canadian media will spin whatever their masters tell them to. The land of suckers, just like their southern neighbors.
“It’s different here.” The mantra of bagholders everywhere.
One of the things I learned from doing business in Canada at the turn of the century is that Canadians are just as delusional as Americans when it comes to understanding money, finance, and business ethics.
We used to be better. Then then we all were.
No, we never were. It’s just so darned complex now. Only a few know what’s actually happening. In reality few actually want to know. That’s our optimism gene acting for us, particularly in USA, Canada and Australia.
Sino-Forest was grown in China but should never have been listed on the Toronto exchange. A red flag was the way it got its first listing, by taking over a shell listing. Why is a multi- billion dollar outfit saving a few bucks?
Because it had to answer fewer questions.
The exchange could have detected the Bre-X fraud very easily for at most one percent of the money it kept of the lost billions. The first outside geologist to examine their drill samples told his client Fre-Port to ‘exercise extreme caution’- the gold was obviously placer gold that had been used to salt the samples.
How the exchange avoided a class action law suit is a question.
Fre-Port also kept quiet, but dropped all interest in buying Bre-X
Sino Forest’s shares and debt were sold thru the TSE- 100% Canadian fraud. Where is the Chinese CEO today? Strawman.
Bre-X sold shares for years, long before FrePort took a look. Again, another Canadian fraud.
And the CIBC had 2 extinction events- Dome Petroleum and of course, the Reichman’s.
Everytime I look through the numbers on Canadian public companies, the vast majority have no earnings, no net cash flow and exist only to sell shares and debt to the public.
Canada is not alone in wink-wink, nod-nod by regulators, but Canada sure has had a good PR firm.
Charges were brought in the case of Bre-X but the CEO died. The lead geo- Felderhof went to trial but was acquitted.
The OSC referred the Sino-Forest case to the RCMP but the principals and much of the money are with the supposed forests, in China.
But it’s one heck of a mantra: Starbucks says to US customers: please don’t bring gun to coffee.
Also,we’re not not stuck with a quasi- monarchy where ONE person is a branch of government. We moved on- it’s called evolution.
Forty years ago I had a summer job while attending UBC. A Very Canadian kind of company. Their primary business assets were used mining equipment, a compressor to power the spray guns, and multiple colors of paint. The business model involved purchasing defunct mining claims, putting on a show and tell with mining equipment painted with the company name of the month, bribing the assay agents, and using a cold call bucket room to sell the shares on the very active Vancouver penny stock exchange. The Partners were millionaires many times over back in the days when a million dollars would buy five waterfront houses. None of my customers cared a fig if the claims were legitimate— their only concern was whether the buzz around the stock would continue until until they could unload it at a profit.
“It’s different here” said my co-workers. “The Americans wouldn’t allow something like the Vancouver penny market to exist.”
I remember, in the nineties, Vancouver Sun ran a full-time column dealing with fraud on the Vancouver stock exchange. Then the VSE bought the Calgary stock exchange, and then all merged with the Toronto stock exchange. Fish probably got bigger in a bigger pond.
I don’t think so. Most of the hucksters in the old Vancouver exchange were far from rich. Murray Pezim was the star of stars and yes, everyone devoured what his latest promo was hoping they could suddenly get rich. Most of us, myself included, got poorer instead. But Pezim, as the quintessential representative of the old VSE was more than just a huckster – he was an old style almost vaudevillian actor – forever entertaining – and somehow you didn’t really mind losing money in his crazy ventures. He was just so loveable.
Now today. We have the same individuals, much more sophisticated, not hucksters but slicksters. They might not have greased back hair, but they’re way more oily than Pezim was even at his worst. And what have the Powers that Be done about this oh so obvious market manipulation? – absolutely nothing. With Pezim you knew you were buying into a pump and dump. Today it’s far more sophisticated. Be wary!
“We feel comfortable with the underlying quality of mortgages, particularly given the protection we have in terms of additional overcollateralization we have,” he told BNN. “The scenario that would have to play out for us to lose money is pretty extreme.”
Call me Nostradamus, but methinks “extreme” scenarios are going to be regrettably commonplace going forward. I hope for Keohane’s sake he’s got an offshore hidey-hole he can bolt to, like his oligarch pals are acquiring, before our financial house of cards comes crashing down.
On Friday, April 28, it announced that another C$290 million in deposits were yanked out on Thursday, after C$472 had been yanked out on Wednesday. Its HISA deposits were down to C$521 million, having plunged 75% since late March.
Okay, so I was always better at music than math, but that looks to me like an unsustainable burn rate.
I’m pretty good at sports, it looks like a run :)
Give me a hamburger and I will pay you on Tuesday.
Seems Peter and Paul both have sound fundamentals now.
Wolf, you need to do a post consisting just of Meme’s comments….Absolute gems….
Minor moment of pedantic correction
” I’ll gladly repay you Tuesday for a hamburger today ”
J. Wellington Wimpy
Ahh, the birth of creditism…and JP Morgan.
Thank you Wolf for keeping the Toronto and GTA fab “housing boom” in the news.
I want to share 2 bits of info with the readers from “boots on the ground”.
1) Bids above asking and the RE agents trickery.
2) Savers and depositors looking for high yields.
1) Bids above asking and the RE agents trickery.
My buddy sold his house in April for 50k above asking. (asked 499, sold in 1 week for 549k).
This gives the impression that there were several bids as our hot property RE agents on the local TV (program called hot property on City Pulse 24) would make you believe.
The truth is, there was ONE SINGLE BID.
So you ask – how did this happen?
The RE selling agent informed all buying agents that they will only take bids 1 week after the property is listed. Of course if you are the buyer, your agent tells you that you have to come in much higher than the asking price, cause you know – things are going fast!
The only bidder came in 50k higher.
If he had bid 499k, my buddy would have accepted it because he needed to sell in a hurry. (house is empty with a big mortgage)
This buyer will take 7 years to pay that EXTRA 50k on the mortgage based on the average family salary of 60k in Ontario.
My guess is that this is the gig used everywhere now by RE agents, until the buyers realise what is going on.
2) Savers and depositors looking for high yields.
I know of 3 couples who have borrowed 50k to 70k from their HELOC and invested with “individual investors” who promised 8 to 10% returns. Could it be that these funds are rolled up in companies like Home Capital and other subprime brokers?
I don’t know the answers. But I get the feeling there are many “Bernie Madoffs” out here.
This bust is going to be a doozie!
Spock – just curious, are the mortgage helper suites common in the GTA?
It’s supposed to be super popular in Vancouver – families barely able to buy a home… and as part of the mechanism to afford the home, they rent out part of the home to cover the mortgage from the beginning. I get it, if you’re buying a starter home and you’re say a bachelor in your 20’s, that is a good set up but this should not be a widespread home affordability tool.
This is insane (IMO)
Yes, mortgage helper suites are increasingly common. I know of people personally or friends of friends etc who are either a landlord or tenant.
The Landlords need the cash to make the mortgage or house tax payments.
If there’s an economic downturn and a lot of folks who were renting the mortgage helper suites can no longer afford to live on their own any more….
RE: borrowing against HELOCs, I don’t know if you saw this before, but there was this awesome tweet from a [skeptical] mortgage broker in Toronto:
“In Canada the middle class are relying more on real estate agents for retirement advice than licensed financial consultants.”
Basement apartments are encouraged to help buyers qualify for a bigger mortgage. The mortgage rules changed so that buyers have to qualify at a rate of 4.64% instead of the variable rate of 2.25% – 2.89%.
To get around that, a mortgage broker will state: ‘you should have a basement apartment on your application to help you qualify for more money’, then tell you ‘don’t worry about needing a tenant, enjoy the lower variable rate because rates won’t go up’. A mortgage broker from a major bank told me that while I was at an open house in my area. A new thing in Toronto is to have mortgage brokers on-site at the open house to help prospective buyers learn how they can qualify for a home they can’t afford.
Also in Canada, only 50% of the condo maintenance (HOA) fee is used towards the mortgage affordability calculation even though in Toronto some of those fees can be over $500 a month and the mortgage broker knows that the buyer is single and won’t be splitting the fee with a tenant or spouse.
Interesting info from “ground zero”. Sounds like the wild west over there. Some people are really making a lot of money in this kind of environment that is the breeding ground of scammy and shady business practices. But many more will end up crying when the pyramid collapses.
great response , however just wondering if the buyer of the above mentioned house had obtained an appraisal ? Also using a low interest heloc loan to place in a non insured high interest saving account offer by a non bank is risky.
if i read the narrative correctly the Canadian taxpayers are on the hook for the Guaranteed Investment Certificates and the insured mortgages proffered. No moral hazard there. (sarc)
Thanks WR for the article and summarized analysis , been waiting for this one
Homes in Canada don’t need appraisals right now, I noticed on TV in the US, on home shows after 2009, banks won’t lend money until they send their own appraiser in to make sure the home is worth what the seller really says it is. Nothing like that happens in Toronto. Most buyers don’t even use a home inspector, they waive that clause to get the home with no conditions to look more appealing to the seller. That’s been happening in Canada since 2008.
” In the US … banks won’t lend money until they send their own appraiser ”
Errr … but here’s the dirty little secret nobody wants you to know and reality TV sure as heck isn’t going to show you . That being the majority of appraisers these days are in cahoots with the real estate firms and lenders to make damn sure the home does appraise for the selling price … even if it doesn’t . Just to get the sale thru . And worse .. if the lender is a private equity lender .. guess what .. they are not required to abide by the same rules banks are .
e.g. Buyer beware and either tie in to an extremely conservative bank for your mortgage … or hire yourself an independent appraiser despite the added cost for your own piece of mind
Don’t the banks in Canada require there to be comps based on similar homes? This bidding strategy would only work with all cash sales in the USA.
Or perhaps only money laundering folk make up the majority of Canadian buyers? This bidding strategy wouldn’t make sense for most.
No they don’t, home prices are based on what the seller thinks they are worth.
Our foreclosure rate is still low in Canada because prices have been going up so even if the person can’t afford the home anymore, they can get a line of credit based on the home equity, to put whatever they couldn’t pay this month on the line of credit and pay the minimum 2.5% – 3.5% interest on the account. For example if a house was purchased for $500,000 but now the markets say it’s worth $800,000 the home owner may get a line of credit of $150,000 and only have to pay a maximum of $375 a month to maintain it if it is full (e.g. $150,000 x 3% = $4500/12 months)
Currently lenders only care about what you can afford to pay not what the home is actually worth based on the income level of the people in the neighbourhood.
For example, on the same street, two houses with the exact same layout and square feet may list for two different prices. One is the original owner who wants their retirement money and cash out of their home; another, is a flipper who painted every room, installed hard wood floors on the main floor, upgraded the kitchen, bathrooms and sometimes the basement.
The price difference between the two homes may be as much as $200,000 and $300,000 – even if the upgrades to the home were only worth a difference in price of $50,000.
“Currently lenders only care about what you can afford to pay not what the home is actually worth based on the income level of the people in the neighbourhood.”
Lenders anywhere are always concered about what you can afford to pay. Your neighbor’s income is not an issue.
But they won’t approve your mortgage loan in the US if the home is vastly over-priced compared to comparable homes in the area..
I think you may be getting this wrong.
I live in Toronto, I know this is what is happening, I really did go to an open house where the on site mortgage broker did try to get me to qualify for a house that was listed for $850,000 even though the last house down the street was selling for $769,000 and probably sold for less than asking because they never had a sold over asking sign on lawn.
The person did tell me not to worry about the 2.89% mortgage going up because that won’t happen for a while. And spent another 30 minutes trying to make the calculation work by deducting the basement apartment from the total cost of to get me to qualify even though my income is less than 1/10th of the housing price.
People in Toronto have been greedy and addicted to housing for a while, prices have been going up since the early 1990s and we haven’t had a serious correction since then. Only recently has it started to sink in that something is wrong with our housing market when the rest of the world found out our prices were going up 30% a year and started to question what is going on in Toronto.
Wont matter. There will be a huge bailout of the interested parties to cries of “no one could see this coming”.
Taxpayers are going to have to take one for the team…….. again!
There will be a huge bailout of the interested parties to cries of “no one could see this coming”.
Central banks have already gifted their TBTF banker pals $14 TRILLION in printing press funny money. They might be out of ammunition by the time the next systemic crisis rolls around. Sure, Yellen can print QE-to-Infinity, but that is going to create roaring hyperinflation that might finally rouse the 99% to sufficient fury to rise up against the banksters and their Fed accomplices. Not sure Yellen, Draghi, Carney, or their Goldman Sachs organ grinder want any part of that.
Perhaps we should all buy stock in the company that makes Preparation H…
Thanks for the laugh. I’m watching th Sens lose to the Rangers right now and needed one.
…and how did you make out!
A simple question with a simple answer.
Housing is worth production cost(lot, labor, materials and profit) less depreciation or in the case of the former, roughly $50/square foot.
When I was a realtor in the 80’s, a lot in a subdivision I had listed would be 25K and you would need to spend about 75K to meet the building scheme.
Today the same lot would be 150 and you would need to spend about 150 building. This number leaves the builder a profit as well as wages, etc.
The cost to build has only doubled in 30+ years, the cost of the lot has risen by 600 percent.
It’s all about the land, including the costs of ever- expanding bureaucracy and regulation. Also here in BC, 90 percent of the land is Crown owned and not available. The price of small acreages just across the border in Washington is about a third of those here.
With offices in Toronto, Markham and Quebec City, we perform a fair number of designs and a greater number of construction contracts in Ontario and Montreal and let me assure you…. someone is lying to you. We and our competitors are quite profitable at $50/sq ft.
I live 40 miles south of Toronto and typical lot here now goes for 600-650. My neighbour listed his tiny old knock-down house for 1 mil 100k. As far as construction, builders ask for $250 per square foot. I’m just waiting this one out..
“builders ask $250”
And those that do aren’t in business very long.
I can ask $50k for my 10 year old Chevy pickup but where is the buyer at that price?
So it is with all depreciating assets like houses.
For us in Toronto, greedy developers make more money building condos than a town house or detached house. The Toronto area is not running out of land, we could easily make more towns like Europe connected by trains and highways or build towns in a way that people can work in their home town instead of trying to make Toronto the centre of Canada for jobs and homes.
Canada in general does have a lot of protected green space, that have had unintended consequences in terms of how our cities are built. For example, cities no more than an hour west and northwest of Toronto have more people living in them than the actual city boundaries of Toronto. And when you compare the cities west and northwest of Toronto to cities east and northeast of Toronto they are more compact with homes and subdivisions even though cities in the east have more space to build detached homes.
Compared to a detached home, the width of a condo in downtown Toronto may only take up the equivalent of 6 to 8 detached homes and contain 400 – 900 units. If each unit costs $300,000 to over $1 million dollars, then compared to the 6 – 8 detached homes, the builder could have made a lot more money building condos.
Also, developers build what buyers want, so if buyers line up for a condo, they will keep making condos, if people stopped showing up for a condo, they would probably look into making other types of homes.
We have building codes that need updating, from our last housing crash in the 80s, we changed the rule so that 70% of the development (condos or houses) have to be sold before the builder can start building. However, we never specified if those homes have to be sold to primary homeowners i.e. people who plan to live the home as their main residence.
The latest statistics show that of the 70% or more of the building sold:
* only 43% of the buyers are primary homeowners
* 52% are locals that plan to never live there (flippers and people who think they can rent them out)
* 5% are foreign buyers
When you are highly leveraged, fear of losing all of your money can easily cause panic like we have seen with depositors of Home Capital. If the condo sales dropped by more than half because investors (domestic and foreign) stopped buying property they don’t think will continue to rise in value, developers may start making homes that primary home owners really want such as starter town homes or small detached homes and low rise condos.
Instead, we have these ugly 78 storey buildings that have elevators that break down during a severe thunderstorm. People have to decide if it’s worth it to go downstairs when the elevator is out and you live on the 70th floor or figure out where to let your dog go use the bathroom because maybe you can’t carry them down 70 floors or make sure you have extra food upstairs because you can’t easily carry all of your groceries upstairs, probably just take what will spoil easily with you upstairs and leave what you can in your car or at a friend’s place if you can as well as check on elderly neighbours to see if they need anything because they can’t get down those stairs either.
Besides the deja vu here (thank the Central Banks yet again) I was astonished that Keohane is on the board of Home Capital but is also the CEO of HOOPP. This is also deja vu, reminiscent of 2008 and now (look at our Cabinet) and is quite unbelievable. However, as you said Wolf he probably gets it (wow-50% and look at that interest rate), but as a board member is he not partly responsible for the debacle at Home Capital?
Oh, it gets better. Hamilton, Ontario’s St. Joseph’s Hospital Health System’s CEO, Kevin Smith, is a key figure in the mortgage company that received a massive bailout from the health-care pension fund.
They don’t even *try* to hide it. I know a couple of doctors, good guys, who know Smith. He’s a real piece of work, apparently.
Crony capitalism in its most brazen form, with captured regulators and enforcers not even pretending to uphold the law or look out for the public interest.
Home Capital is not the only lender that relies on high interest saving accounts. Surprisingly or maybe not, such lenders mushroomed because of below real inflation interest rate, and of course the real-estate-never-goes-down mantra. I would not be surprised if they were on the radar of short sellers.
Just a small correction if I may, this deal was so fishy that the lender was not disclosed until day after. Perhaps they thought it would blow over, but forgot that these news should be released on Friday evening, and only when North Korea conducts a missile test.
Just an interesting detail; Home Capital high interest saving accounts and GICs are backed by Canadian Deposit Insurance Corp. up to 100,000 and still the account holders panicked. Not a good sign for the future.
He who panics first, panics best.
The average wait time to get money from the CDIC is 18 to 24 months in which time you receive NO interest on your money. All sane people pulled all their money.
The lender (the pension fund), had their CEO as a director in Home Capital. The pension fund was also a shareholder in Home Capital. Conflict of interest? What conflict of interest…
IMNSHO the problem at its base does not seem to be crooks and criminals but rather excessively “enthusiastic” promoters and entrepreneurs, enabled by the grossly excessive [fantasy] financialization of the “developed” economies, and empowered by the deluge of ersatz capital created by QE in most of the major economies. The lax enforcement of existing regulations, and the failure to recognize the importance of the new shadow or quasi banks by the regulators is a major contributing factor.
Only one real reason for the bubble in Toronto. Mortgage rates of 2.5%. Period
“Mortgage rates of 2.5%. Period”
2.5 % mortgages are a result of 8 years of Central Bank suppression of market clearing interest rates and front-running new cash/credit to their friends in high places. The money has been sloshing around the world and is heading to the graveyard in overpriced real estate.
An investment management firm dumped 12.8% of Home Capital Group shares on Friday.
They used to tell us boldly that Home Capital was a great company and to stop shorting the stock.
It’s been a quiet week in Canada, most of the media have stopped talking about the “hot” housing market – first time in years! Usually they talk about it on TV within the first 15 minutes of the opening segment or the front page of the financial sections of their newspapers.
Even at work, I can finally have a conversation with my coworkers about what happens if prices don’t go up forever; can their bank really give them a loan shark agreement like Home Capital for not having enough cash to pay for all of the condos under construction they bought hoping to flip. What happens in 3 years when the condo is finished being built and they no longer qualify for that variable second mortgage or credit lines they were going to use to pay for the loan outstanding, when lenders do not want to take on so much risk for people who have a high debt to income ratio?
A few realtors still brag about the homes they have sold for over the asking price – but who knows how true that really is, as for sale signs have been going up and coming down without the big ‘Sold’ or ‘Sold over Asking’ sign on the lawn in Toronto for a while now – that’s usually the only way we know a house as been sold in the area. We need better housing data available for the general public.
It looks like the Toronto Real Estate Board won their appeal against the Competition Bureau to not have to share their housing data. On Zillow.com I can find out how many times a homes was listed for sale what was the actual sale price, how many times the price was reduced, who sold it and how much did the homes surrounding it sold for.
In Toronto, I can’t get that data for free, and even if I do hire a realtor to get that data, they don’t always know who eventually sold the home like on Zillow e.g. did the broker who listed the house for sale also have a client who bought the house from their seller? what was the winning bid? did the realtor just keep changing the price and listing and delisting to brag about how the home sold over asking in 3 days when really it was on the market for a month and the price was reduced 20%?
Maybe in the housing correction we will finally get some politicians who care about transparency for buyers and not protecting real estate broker commissions.
Holy Smokes…what a mess. I will send this article on to some friends.
Meanwhile, would any of you folks actually contract for a GIC in Home, regardless of whether or not it is insured? I know I wouldn’t. Won’t. Would never.
Having said this, a buddy of mine had some cash in a Toronto-based RE Trust and was forced to cash it in last year by the terms of the deal. He wanted to let it stay, but…. he was ‘forced’ to take his $100,000 profit.
This situation is nuts. I will never understand ‘bandwagon groupthink’. Yes, ‘it’ can collapse and one day will collapse. Unbelieveable.
I think I’ll logon and check my savings accounts. :-)
Did the deal with the Healthcare Pension Plan happen because when the government eventually has to bail out this mess, it’s easier to say that taxpayers are helping out a pension plan rather than HCG?
Is this the banks, trying to oust the competition? Are they behind this?
Home Capital is originating a lot of mortgages that banks stay away from or cannot do. That’s its niche. Its funding costs are higher, so they have to go after riskier mortgages to make this work.
Sounds like a viable long-term business model.
I’ll gladly pay you Tuesday for some hamburger mortgage helper today
Just three questions.
1. Considering the conflict of interest, will the deal stand?
2. If the deal falls through, will either the Ont. or Fed. govt. bail out this loan shark and, if either does, what will the rationale be for doing that — “TBTF”? …. “systemically important”? …”might burst the bubble in a way ‘we’ don’t want”?
3. If Home Trust actually does instantly go out of existence, what is the series of financial events that must take place with respect to the homeowners and their homes?
1. No, it’s just to give Home Capital time to find a buyer, I think they will probably merge with another non-lender who has better management and higher ethical standards. But no major bank will touch them, the loans they issued were to people who would default if rates when up more than 50 bps as well as there is fear the company will be sued (litigation risk) by shareholders for not providing them enough information to make informed investment decisions.
2. The Ontario government have dissolved financial institutions before, I think Maple Bank was the last one.
3. Even if mortgage rates do not change, when these applicants renew their mortgage and if fraudulent information was used to help them qualify for the loan, the people may not qualify for the mortgage rate renewal at another bank, or if they do qualify, it will be at higher rates because of the added risk. In Canada most mortgages renew at least every 5 years, sometimes sooner such as every 1 to 3 years if people got the mortgage with very low rates e.g. 1.89%. We do have banks that will give you longer fixed term mortgages e.g. 10 to 15 years like the US, but the rates on those are so high over 6% in some banks. The banks make them that high to persuade borrowers to buy variable or fixed rates at terms no greater than 5 years so when rates go up they make money off of you.
This story is getting traction.
I will defer to those who have actual knowledge of the Toronto real estate market,but I can do simple math
The average price of a house in Toronto was $916,000 in Mar 2017 vs 876,000 a month earlier and 688,000 in Mar ,2016
The comparable price for a single family house in the suburbs was 1.24m
Even if a buyer is required to put down only %10,that is currently $91,600 leaving a mortgage of ~$825,000 and a mortgage of 1.12 m in the suburbs
The number of new house listings was 17,051.Now obviously there are other lenders who are originating mortgages,but are there enough banks willing to lend $825,000/house .
By the way $825,000* 17,051= 14 billion
Either a number of other banks will have to originate mortgages.In the future, this could lead to a run at such banks when and if prices ever correct
Houses are going to bought for ALL CASH
The number of sales will crash
I love the math very cut and dry. My money is on All CASH as the fake Chinese economy disintegrates.
The problem is there aren’t any all cash sales. It’s a myth. Besides…. All transactions are cash. Borrowed cash.
Have you ever seen a seller accept a credit card at closing?
Most major banks reduced their exposure to mortgages in Toronto and Vancouver last year as they realized the fundamentals did not justify the price increase we have been seeing.
Non-bank lenders such as Home Capital and private lenders have been giving money to people to buy these homes. If a major banks was to lend money for a mortgage it would be to homeowners who already paid off their home and have moved up or made lateral moves to better neighbourhoods. This allow buyers to purchase a home with mostly equity and very little mortgage debt. Major banks liked these homeowners and these would be the people they lend to as they would probably only need a mortgage of 20% or less of the home price.
We do have a large shadow banking sector that the Bank of Canada started to monitor from 2013 (page 43, http://www.bankofcanada.ca/wp-content/uploads/2013/06/fsr-0613.pdf ) But they probably did not really know the depth of it as did many other Canadians, until this year when people who were not getting the interest payment from the principal they invested from borrowers started to sue ( http://www.cbc.ca/news/canada/toronto/syndicated-mortgages-losses-1.4083261 )
We heard stories for a couple years now, from our friends or coworkers about how they gave $50,000 to some lawyer who would give them 10% back as interest on returns. I think most of us thought they were investment ponzi schemes and not actual mortgages (they are called syndicated mortgages) to people who even a lender like Home Capital would not give money to.
Our financial industry likes to come up with ways to get retail investors to invest money without having to go through the Ontario Securities Commissions (OSC) because they would have to disclose company information to investors frequently and the OSC would probably say no to advertising or taking money from anyone who is not an accredited investor (page 5 and 6, http://www.osc.gov.on.ca/documents/en/Securities-Category4/ni_20170401_45-106_unofficial-consolidation.pdf )
Canada in general, does have a lot of people with cash to just dump on a million dollar home, they are likely just people who beg, borrowed or steal for the loan or have equity in their home and make lateral or small upward moves in the market. Our real estate agents lie, many of the homes they claim are bought by foreigners, are bought by people who wanted to move down the street to a nicer home or buy local people who got loans from non-bank lenders, syndicated mortgages or forms of shadow banking (e.g. companies or people not registered with FSCO) to keep homes vacant because tenants are a pain to deal with in a rising property market, where you make more by flipping than becoming a landlord.
In my last paragraph, I meant:
Canada in general, does NOT have a lot of people with cash to just dump on million dollar homes.
Most of these people barely have savings, retirement accounts or defined benefit plans from an employer.
There are enough banks willing to lend since they do not care; qualified mortgages are insured up to 1M by CHMC, so the risk is dumped on the taxpayer. That’s the beauty of it. However, Home Capital had those mortgages that would not qualify for such insurance, i.e. sub-prime. And we also know that a mortgage can turn quickly from prime to sub-prime when the job disappears. Just look at the similar situation in the US.
While Canada’s financial media are trying to spin this as a one-off misstep by a marginal player of a mortgage lender, judging by reader comments, people think this could very well be the canary in the coal mine.
Linked article above was closed to reader comments after 588 posts. Hmm…maybe a bit too much truthiness was percolating up. CBC mustn’t offend it’s REIC advertisers or spook the herd, oh heavens no!
“would cost it $225 million in fees and interest, a juicy 22.5%!”
SO basically what a consumer would pay for a credit card.
And I’ve got five of them. I’m a genius!
the stock may be a buy , the company had to borrow money for legal capital requirements to replace the lost deposits. But from what i have read ,their mortgages are for the most part performing. depositors yanked their money out after a financial regulator alleged that executives misled investors and broke securities laws. however the bridge loan interest payment to HOOPP will kill their income statement. I think i would have raised capital by selling some mortgages.
Yup. This is exactly the kind of investment opportunity you want:
1) Unethical management, selling to
2) People who’s credit report say they can’t/won’t/don’t pay their bills
3) With regulators actually (for once) warning of illegal company activity
4) Other investors jumping ship (1st rule of “fool and his money are soon parted”: rats don’t swim TOWARD a sinking ship)
What could possibly go wrong?
I looked this up on CBC. The current default rate is very low. Obviously an economic downturn would affect high risk borrowers first, but there is no current problem with cash flow.
That makes sense with all the foreclosure moratoriums in effect.
That’s because all of the cash flow is generated by HELOCs. You really think all of these subprime borrowers make anywhere near remotely enough money to actually pay their mortgages? LOL.
They’re just riding the gravy train which is about to come to a screeching halt.
I never tire of noticing that regulators, with tax payer money at risk, never require salary above a certain threshold (say $150,000) and 100% of bonuses to be paid as junior corporate debt (first to be bailed-in in event of financial trouble) with 1-year vesting.
That won’t solve the problem, but it will make it less lucrative.
Meanwhile, Fannie Mae is cooking up its own “innovative” lending schemes in the U.S. for Millennials.
Millennials already hold $1.1 trillion of the $3.6 trillion in consumer debt, and they’ve shown few qualms about defaulting on their student loans and failing to honor their obligations in general (while demanding that taxpayers bail them out). It’s hard to think of a less credit-worthy bunch, but Fannie Mae appears to have learned nothing from the 2007 financial bubble fiasco.
2017 update: $1.4 trillion ($1,400,000,000,000) in student debt owed by 44 million ex-students. Estimated 70% of new college grads have debt, estimated at $35-40k/ea.
Just wait until some stupid politician sees this and promises free college…oh, wait, that’s already happened.
Studen loans are:
1) $620B more than all US credit card debt (avg credit card debt $4k)
2) $280B more than all US auto loans (avg car loan $30k).
The Germans don’t find anything wrong with free college. I don’t either.
A 50% LTV by hoops assumes a 30% price correction in the market.
The cost of sale on distressed homes in bulk runs about 20% in my experience due to deferred maintenance and the time involved in evicting residents and performing needed repairs.
Secret implied guarantee from the Canadian government anyone ie taxpayers money bailout while conflict of interest and outright fraud is going on.
Wanna try that agin in English – it sorta looked important/interesting.
Funny thing: if you Google “Home Capital Group,” there are only a few links that pop up, none of them more current than April 28th. No mention at all of the related stories on this site, Zero Hedge, etc. Hmm. Almost like this story is being consigned to the Memory Hole. Wolf, if you’d be so kind to comment, are you’re seeing elevated site traffic related to this story?
This story is getting good traffic. No more than normal search traffic.
“Home Capital” are two very common words, so search results can be quirky.
If you Google Home Capital Group, one of the top three results is from “35 min” ago (Bloomberg) and the other two are from yesterday.
Thanks, Wolf. Your Google-Fu must be stronger than mine.
From the Bloomberg article:
“Hall sees the odds of Home Capital’s woes spreading through Canada’s financial system as low, despite a growing chorus of voices speculating such fears in a nation gripped by an overheated housing market and runaway home prices in two of its three biggest real-estate markets: Vancouver and Toronto.
“It’s a pretty hot fire in one little corner of the forest, and it doesn’t look like it’s spreading,” Hall said. “There are firefighters standing around it right now, so if it starts to move, they’ll put it out.”
I bet Mr. Hall is popping Xanax by the handful this weekend.
Home Capital expects high interest savings account (HISA) balance to be $391 million as of May 1, 2017 after settlements of Friday’s transactions, down from the approximate $521 million balance on Friday April 28, 2017.
Total GIC deposits including Oaken and broker GICs dropped to $12.86 billion at April 28, down from $12.97 billion April 26.
They expect to receive the initial $1 billion dollars today (May 1, 2017) of the $2 billion dollar line of credit.
The company in their news release stated that their deposits in the GICs and HISA are eligible for Canada Deposit Insurance Corp. (CDIC) coverage.
Will be telling to see how much money is yanked out this week by depositors.
After an dead-cat bounce on Friday, Home Capital’s stock is sinking like a mob informant in the East River.
This is what a housing market looks like when you have lack of transparency and an unethical real estate and banking industry. We have police as security for the crowd, which means the builder expected this to happen.
There are nearly 800 detached homes and town homes available for sale in this area, yet people would rather knock each other down for a new home that won’t be built for at least a year or two at a higher price and smaller home size than a resale home and probably offered at a higher mortgage rate in the future.
In a normal housing environment, the bank would not lend much more than the appraisal value of the properties in the area which should be in a range comparable to the resale homes. Not in Ontario, in the Toronto area, the banks would just make sure the person can make the payments and not look at the real value of the homes in the area.
Home Capital delaying the release of its earnings. That won’t do anything to allay investor and depositor fears.
the boom is over. note the loonie is slowly depreciating.
the question is, do i want to buy canadian real estate in 2020 or so, or…..is….it…..just……too……far away.
Home Capital is toast.