That seems low, and perhaps I'm missing something obvious, and it's just a ballpark back of the envelope sort of thing. But a few points for anyone who wants to refine the equation, aside from the fact that homeowner equity is taking the first hit.
- Home's LTV on newly originated non-insured residential mortgages seems to be closer to 70% than 75%. And for the entire non-insured residential book (where there is a range established mortgages), the LTV is close to 60%. There might be some skew in defaults to higher LTVs or regional, but probably nothing that moves our ballpark needle significantly?
- That default rate of 20% is probably very pessimistic. I found some US numbers where "serious delinquency" rates on mortgages written in 2006 (probably the peak of crap underwriting) hit 20% of still-active mortgages after 5 years, although I'm not sure how to read this definition into what Home might see in a crunch. And perhaps Home's short-term, alt/subprime customers approach the US 2006 profile. But I'd guess that most scenarios would have this number quite a bit lower.
- 50% house-price drop would need a lot of defending as well. The US overall peak-to-trough in prices was I think -30% from 2006-2011. That's a figure CMHC has used for national price drops in some of their stress tests. Only certain specific markets like Phoenix or Las Vegas or south Florida topped the 50% drop. It is possible that Home's client base skews to places like Toronto that would be proportionally harder hit by a downturn, but assuming their total client base would reflect the worst drops in the country would take some demonstration.
- What triggers these massive drops in the first place? Sure, there might be some bubble in current pricing. But In the US, part of the bubble was some of the crazy things like option-ARMS, negative amortization, delayed balloon payments, etc., that many borrowers couldn't handle even while still employed. They relied on increasing (not even flat) home prices and short-term refinancing. I don't know exactly how much this contributed to the US bubble and bust, but there is certainly little or none of that in Home's sector of the market. Even the liar loan sort of problems that might have had a parallel in Home's underwriting/verification failures don't seem to be anywhere near comparable.
And as far as historical trend lines, it may be that Toronto and Vancouver have become global cities like Sydney and San Francisco, and have bent upwards the level a correction might bottom out at.