Home Capital Group (Symbol-HCG)

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NorthernRaven
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Re: Home Capital Group (Symbol-HCG)

Post by NorthernRaven » 21 Jun 2017 17:50

So for a ballpark equation, try some pessimistic (or worse) numbers for Home's non-insured residential book. Say 75% LTV ratio, and a drop in resale housing prices of 50%. Assume a default rate of 20%. So on 20% of mortgages, Home has to foreclose and sell the property; on the rest payments continue and principal is eventually recovered. On the foreclosures, the new LTV is 125%, and Home loses 25% of its principal. But that's only on 20%, so the total loss is 5% of the book's principal value (-25% * 20%).

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.

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Re: Home Capital Group (Symbol-HCG)

Post by randomwalker » 21 Jun 2017 19:07

randomwalker wrote:
21 Jun 2017 14:07
SQRT wrote:
21 Jun 2017 08:20
randomwalker wrote:
20 Jun 2017 18:52


Neither depositors no investors believe HCG's story about who they are lending to hence the collapse in the stock price. I think HOOP had it right when they seemed to be valuing the mortgage portfolio at about fifty cents on the dollar. I should think the likes of Brookfield and Catalyst will come up with a similar valuation if they show any real interest. I think such smart sophisticated investors would agree with Prem Watsa (Fairfax Financial) who is apparently not interested in HCG in thinking that residential real estate values are "stretched" (and I'm being kind) and would thus have to price in a collapse in house prices into any bid. That being said fifty cents on the dollar sounds about right. A Dutch auction for the mortgage book would be fun to watch.
There has been virtually no news that suggests their mortgage portfolio is significantly impaired. Their problems relate to a lack of confidence of depositors. 50% haicut? That's quite a stretch. . Any way to spin this as a "bail out"?
I only have a minute. I'm not sure why people find a decline in residential real estate by 50% from current price levels so inconceivable given the recent year over year over year increases in house prices. A 50% decline in prices takes them back to where they were five maybe six years ago, still well above long term trend lines. I'll deal with "the bailout" later :D
Thursday May the 5th Finance Minister Bill Morneau said he would consider a government bailout of Home Capital Group if required but hoped it wouldn't come to that, he also hoped it could be handled privately and said he would support Jeremy Rudin and OSFI. On Sunday the 7th of May a bank syndicate made up of TD,CIBC, National Bank and later the Bank of Nova Scotia had agreed to extend a 2 Billion dollar secured loan to Equitable Group. Now it would seem a similar arrangement is being set up for Home Capital involving RBC, TD and BMO. From where I stand it seems that as small at Equitable and HCG are they are apparently "too big to fail." Secondly I can't understand the motivation for the big banks to get involved let alone lend money to Equitable and HCG secured by the very mortgages they weren't interested in writing in the first place. I can't help but think the phone lines between the finance minister, OFSI and the heads of the big bank were busy that first week in May and again in early June.

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Re: Home Capital Group (Symbol-HCG)

Post by randomwalker » 21 Jun 2017 19:43

NorthernRaven wrote:
21 Jun 2017 17:50
So for a ballpark equation, try some pessimistic (or worse) numbers for Home's non-insured residential book. Say 75% LTV ratio, and a drop in resale housing prices of 50%. Assume a default rate of 20%. So on 20% of mortgages, Home has to foreclose and sell the property; on the rest payments continue and principal is eventually recovered. On the foreclosures, the new LTV is 125%, and Home loses 25% of its principal. But that's only on 20%, so the total loss is 5% of the book's principal value (-25% * 20%).

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.
I don't know who said it and I can only paraphrase them in saying that, "finance and economics are not science but the closest thing they have to a law is that of reversion to the mean." Again not scientific but something I believe in. If a given asset class has a long term historical rate of return on investment from which it deviates too far either positive or negative then as an investor I see opportunity in the inevitable return to normality. It seems to me that until relatively recently, over the very long haul, the price of houses has more or less matched the rate of inflation and there was a similar relationship between salaries and house prices. From where I stand those relationships are now broken and need to be fixed. To fix these relationships either inflation has take off and salaries have increase or house prices must come down, that is to say, revert to the long term historical mean. Perhaps I am wrong and "this time really is different." But if I'm right and I believe that I am the result is the same, varying degrees of bad no matter which variables are assumed or which numbers are plugged into the formulas. I'm afraid we didn't avoid the the " collapse" of 2008-09 it's just been slow in making it's way here, the dominoes have been falling globally and they are about to reach Canada.

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Re: Home Capital Group (Symbol-HCG)

Post by Shakespeare » 22 Jun 2017 01:23

Buffett’s Berkshire Hathaway invests $400-million in bid to solve Home Capital’s woes - The Globe and Mail
Once both transactions are completed, Berkshire would own a total stake of almost 39 per cent in Home Capital at an average price of $10 per share.

Berkshire is also lending Home Capital $2-billion to repay its all amounts outstanding on its existing credit facility. The new credit agreement is also expected to be effective June 29, the news release said.
“A wise man should be prepared to abandon his baggage at any time.” -- R.A. Heinlein, The Door Into Summer.

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Re: Home Capital Group (Symbol-HCG)

Post by randomwalker » 22 Jun 2017 06:15

Shakespeare wrote:
22 Jun 2017 01:23
Buffett’s Berkshire Hathaway invests $400-million in bid to solve Home Capital’s woes - The Globe and Mail
Once both transactions are completed, Berkshire would own a total stake of almost 39 per cent in Home Capital at an average price of $10 per share.

Berkshire is also lending Home Capital $2-billion to repay its all amounts outstanding on its existing credit facility. The new credit agreement is also expected to be effective June 29, the news release said.
Syndicate of big Canadian banks must have said no. I wonder what the terms of the line of credit are? Article only says better than that of HOOP's. I imagine the shares should open at about what Buffet thinks they're worth so dilution and a 36% haircut all before breakfast.

Full disclosure I own some Berkshire, the B shares that is :D

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Re: Home Capital Group (Symbol-HCG)

Post by rharvey199 » 22 Jun 2017 07:44

randomwalker wrote:
22 Jun 2017 06:15
Shakespeare wrote:
22 Jun 2017 01:23
Buffett’s Berkshire Hathaway invests $400-million in bid to solve Home Capital’s woes - The Globe and Mail
Once both transactions are completed, Berkshire would own a total stake of almost 39 per cent in Home Capital at an average price of $10 per share.

Berkshire is also lending Home Capital $2-billion to repay its all amounts outstanding on its existing credit facility. The new credit agreement is also expected to be effective June 29, the news release said.
Syndicate of big Canadian banks must have said no. I wonder what the terms of the line of credit are? Article only says better than that of HOOP's. I imagine the shares should open at about what Buffet thinks they're worth so dilution and a 36% haircut all before breakfast.

Full disclosure I own some Berkshire, the B shares that is :D
let's see as HCG has pretty much solved it's funding issue so maybe all the shorts cover and the stock goes up? interesting ride for sure

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Re: Home Capital Group (Symbol-HCG)

Post by ig17 » 22 Jun 2017 08:04

randomwalker wrote:
22 Jun 2017 06:15
Syndicate of big Canadian banks must have said no. I wonder what the terms of the line of credit are? Article only says better than that of HOOP's.
You expressed some very strong opinions about HCG, but you can't be bothered to read company press release?? Shaking my head here.

http://www.newswire.ca/news-releases/ho ... 38203.html
Replacement of Existing Credit Agreement

The Company has caused Home Trust Company, as borrower, to agree to enter into a new C$2 billion loan facility (the "New Credit Agreement") with a wholly-owned subsidiary of Berkshire, as the agent and initial lender, to be secured against a portfolio of mortgages originated by Home Trust Company. The New Credit Agreement will replace the C$2 billion loan facility made as of May 1, 2017 between Home Trust Company, as borrower, and a major institutional investor (the "Existing Credit Agreement"), and is expected to be effective on June 29, 2017.

The New Credit Agreement is on substantially the same terms as the Existing Credit Agreement, except as follows:
  • the interest rate on outstanding balances will be decreased to 9.5% (from the current 10%) until completion of the Initial Investment, at which time it will be further decreased to 9%
  • the standby fee on undrawn funds will be decreased to 1.75% (from the current 2.5%) until completion of the Initial Investment, at which time it will be further decreased to 1%
  • there will be no upfront commitment fee
  • funds drawn on the facility will continue to be pre-payable at any time
  • the facility will mature in one year from the initial funding and may not be terminated for one year
  • all other terms of the New Credit Agreement are substantially similar or identical to the Existing Credit Agreement
The Company will draw on the New Credit Agreement to repay all amounts outstanding under the Existing Credit Agreement and the Existing Credit Agreement will be terminated.

The Company does not currently intend to draw further on the New Credit Agreement, except to the extent that alternative sources of liquidity on better terms are unavailable to the Company. The Company expects to have sufficient liquidity over the coming months to repay all amounts outstanding under the New Credit Agreement through other sources of liquidity currently under consideration. However, there can be no assurance that such other sources of liquidity will materialize or when, and therefore the Company may be required to draw on the New Credit Agreement in greater amounts and for longer periods than currently anticipated.

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Re: Home Capital Group (Symbol-HCG)

Post by DavidR » 22 Jun 2017 15:31

rharvey199 wrote:
22 Jun 2017 07:44
let's see as HCG has pretty much solved it's funding issue so maybe all the shorts cover and the stock goes up? interesting ride for sure
Volume much higher than last 30 days. Over 8 million shares traded out of a float of 64 million (am I reading that right?) Must be some short-covering in there.

Some journalist mentioned that book value was about $25 per share (before the new of BRK investment - which will be 40 million shares at average $10). After BRK, projected book value will be a little over $19 per share? Getting close today.

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Re: Home Capital Group (Symbol-HCG)

Post by newin96 » 23 Jun 2017 15:45

I don't understand HCG's revised business model. How do they make a profit on mortgages when it's 'variable' cost of borrowing is 9+%?
What rates are they charging for mortgages?

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Re: Home Capital Group (Symbol-HCG)

Post by NorthernRaven » 23 Jun 2017 15:55

newin96 wrote:
23 Jun 2017 15:45
I don't understand HCG's revised business model. How do they make a profit on mortgages when it's 'variable' cost of borrowing is 9+%?
What rates are they charging for mortgages?
They are only paying that high rate on a maximum of $2 billion (currently $1.65 billion) from the credit facility, which is replacing the fled HISA deposits. The bulk of their funding is still in locked-in GICs at much lower rates. The cost of paying the interest and origination fee on that facility will take a good chunk of what would have been their operating profit this year, but it doesn't mean that all their funding is at 9%!

They hope to pay off much or all of that high-cost funding this summer from asset sales and other measures.

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Re: Home Capital Group (Symbol-HCG)

Post by naps069 » 29 Jun 2017 11:11

This was just posted to the HCG Investor Webcast Today.

https://sites.google.com/site/goladyjustice/

What are your thoughts with regards to this?
"If it doesn't make dollars, it doesn't make sense"-Cant remember

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Re: Home Capital Group (Symbol-HCG)

Post by ig17 » 29 Jun 2017 21:44

naps069 wrote:
29 Jun 2017 11:11
This was just posted to the HCG Investor Webcast Today.

https://sites.google.com/site/goladyjustice/

What are your thoughts with regards to this?
She has already had her day in court... and lost.

http://www.bnn.ca/time-for-the-adults-t ... p-1.708248
BNN Editor wrote: Editor's note: Rhonda Starkman is a Toronto woman who sued Home Trust in 2015 in a failed attempt to try to stop her home from being repossessed. Home Trust held a $348,575 mortgage on the property as well as a second mortgage $118,207 that secured a Visa credit card.

Starkman disputed the “accuracy of certain adjustments to the total amount due under both mortgages.” A judge conceded Starkman had brought up “serious question… regarding the total amount due under the mortgages.” However, he refused to stop the repossession since Starkman did not dispute the validity of the security held by Home Trust and had not made a single payment on either mortgage for four years.

Starkman’s motion was denied and she was ordered to pay Home Trust legal costs of $5,500.

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Re: Home Capital Group (Symbol-HCG)

Post by randomwalker » 26 Aug 2017 15:24

Why this investor plans to vote 'no' to me Capital's plan to issue more shares to Berkshire Hathaway
by Barry Critchley, the National Post, August 22, 2017

Rick Durst is a veteran investor and a strong believer in shareholders’ rights, and who has, at times, turned activist. He has also been a shareholder of Home Capital Group Inc. for more than two decades...“It’s highly dilutive, will significantly reduce return on equity and will significantly extend the time for existing shareholders to recover their lost hard-earned equity...noting that Home Capital’s directors and executive own 90,221 common shares, a collective stake worth less than $1.2 million."

http://business.financialpost.com/news/ ... e-hathaway

"As with many other shareholders, Durst wonders why Home Capital’s share price has been on a steady slide since the Berkshire announcement was made"

Perhaps they are "on a steady slide" because Buffett and co. say they're only willing to pay $10 a share on average.

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Re: Home Capital Group (Symbol-HCG)

Post by hboy43 » 28 Aug 2017 09:58

Voted my shares "no" today.

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