Home Capital Group (Symbol-HCG) [Delisted 31-Aug-2023]

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Re: Home Capital Group (Symbol-HCG) [Delisted 31-Aug-2023]

Post by Taggart »

After the debacle of Home Capital Group, I'm quite sure there's a lot of backroom wheeling and dealing now going on behind the scenes with the major banks and quite possibly government as well. I've already seen it with Equitable last week. Watching the film "The Big Short" yesterday about the U.S. housing crisis a few year ago has only reinforced my position. No sign of a housing slowdown so far, at least not in my area where houses seem to sell within a few days of the For Sale sign going up.

For those who didn't read it, Ian McGugan had a good article a few days ago related to HCG.

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Re: Home Capital Group (Symbol-HCG) [Delisted 31-Aug-2023]

Post by Shakespeare »

Home Capital bleeding deposits, sink below $200-million - The Globe and Mail
it has drawn down $1.4-billion of its $2-billion credit line and has suspended its dividend as deposits sink further.
Added: I'm surprised the regulator hasn't forced a sale.
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Re: Home Capital Group (Symbol-HCG) [Delisted 31-Aug-2023]

Post by NorthernRaven »

Setting aside the onerous cost of the $2 billion facility, all it is doing is replacing the demand deposits (HISA/ISA accounts) they previously had (now mostly fled). If they could magically keep their GICs somewhat stable, they could go along for some time and avoid a crisis/firesale scenario. The facility will replace most of their $2.5B in demand deposits (end of 2016 Q4).

Interestingly, it seems that only about 10% (< $200M) of their ISA/brokerage channel demand deposits remain, but "only" 50% of the Oaken savings account balances ($340M -> $174M) have fled so far.
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Re: Home Capital Group (Symbol-HCG) [Delisted 31-Aug-2023]

Post by Taggart »

Home Capital says unnamed party plans to buy $1.10 billion in mortgages

Also,

The company also said it plans to tighten lending criteria and reduce some of its broker incentive programs.

------------------------------------------------------------------

Perhaps if management had thought about doing this much earlier, maybe they wouldn't be in the mess they're in now.
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Re: Home Capital Group (Symbol-HCG) [Delisted 31-Aug-2023]

Post by randomwalker »

Taggart wrote: 09 May 2017 12:23 Home Capital says unnamed party plans to buy $1.10 billion in mortgages

Also,

The company also said it plans to tighten lending criteria and reduce some of its broker incentive programs.

I'm reading it as Home Capital "hopes" to sell mortgages to unnamed buyer. The question of course is how many cents on the dollar is the mystery buyer offering. Stock up 25% without those questions answered?



Home Capital sells up to $1.5-billion in mortgages; shares surge

by Niall McGee, the Globe and Mail, 9 May 2017

"The mystery buyer has “indicated its non-binding intention” to buy...Home Capital didn’t announce the price that it will receive for the mortgages..."

http://www.theglobeandmail.com/report-o ... e34929147/
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Perhaps if management had thought about doing this much earlier, maybe they wouldn't be in the mess they're in now.
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Re: Home Capital Group (Symbol-HCG) [Delisted 31-Aug-2023]

Post by Shakespeare »

Behind the G&M paywall, which still allows you to read a few sentences:

Investigation: Home Capital mortgage lender was mere hours away from collapse - The Globe and Mail

Apparently HCG would not have opened on May 2 without the $2B loan.
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Re: Home Capital Group (Symbol-HCG) [Delisted 31-Aug-2023]

Post by AltaRed »

It stands to reason when liquidity disappears due to the flood of HISA redemptions. A bank just cannot just say....'wait 24 hours until I have the funds to fund your withdrawal'. That is always the issue with banks. Once a run starts, it explodes.

There is a lesson to be learned here for FIs who rely a fair bit on demand deposits.... the true definition of 'demand'.
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Re: Home Capital Group (Symbol-HCG) [Delisted 31-Aug-2023]

Post by kcowan »

Here is an interview with a "short" trader in California by our landlord rescue gal:

Why HCG got into trouble

A little long but lots of nuggets.
For the fun of it...Keith
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Re: Home Capital Group (Symbol-HCG) [Delisted 31-Aug-2023]

Post by randomwalker »

Dear Mr. Morneau: It’s time to step in and save Home Capital
by Jordan Hymowitz and David Taylor, Special to Financial Post | May 26, 2017

"Funds that we manage own shares in Home Capital Group Inc., the majority of which were purchased after the major sell-off last month. We are writing to ask Finance Minister Bill Morneau to act to save the company, which we believe is the victim of aggressive U.S. investment bears who are drawing unwarranted comparisons with the 2008 U.S. housing crisis."

http://business.financialpost.com/fp-co ... me-capital

Jordan Hymowitz is Managing Partner of Philadelphia Financial Management, a U..S. hedge fund with more than $500-million in assets. David Taylor is President, Chief Investment Officer and Portfolio Manager at Taylor Asset Management, a Toronto firm with $1-billion in assets.
===============================================================================================================================

To which I add,

"Capitalism without failure is like religion without sin. Bankruptcies and losses concentrate the mind on prudent behavior."
Allan H. Meltzer
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Re: Home Capital Group (Symbol-HCG) [Delisted 31-Aug-2023]

Post by CROCKD »

" A verbal contract isn't worth the paper it is written on " Samuel Goldwyn
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Re: Home Capital Group (Symbol-HCG) [Delisted 31-Aug-2023]

Post by randomwalker »

KingSett, smart real estate money, sharks skimming off the cream from a motivated (forced) seller. Cash added to HCG's balance sheet but "quality" of mortgage portfolio decreased by the loss everything King Sett just bought.
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Re: Home Capital Group (Symbol-HCG) [Delisted 31-Aug-2023]

Post by DanH »

KingSett is indeed a very savvy institutional real estate investor. They can be aggressive at times - when warranted - but they don't mess around with low quality or distressed loan assets. If they've purchased assets I would assume the quality is very good. But a very fair concern re: what's left.
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Re: Home Capital Group (Symbol-HCG) [Delisted 31-Aug-2023]

Post by AltaRed »

Given HCG's track record is for lower loan losses than even the big banks, you have to think they know what they are doing and have good quality mortgages. From what I've read, their subprime mortgages mostly means lack of sufficient credit history to qualify under standard terms, rather than incapacity to meet obligations.
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Re: Home Capital Group (Symbol-HCG) [Delisted 31-Aug-2023]

Post by randomwalker »

AltaRed wrote: 20 Jun 2017 16:14 Given HCG's track record is for lower loan losses than even the big banks, you have to think they know what they are doing and have good quality mortgages. From what I've read, their subprime mortgages mostly means lack of sufficient credit history to qualify under standard terms, rather than incapacity to meet obligations.
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.
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Re: Home Capital Group (Symbol-HCG) [Delisted 31-Aug-2023]

Post by DanH »

But this deal does not involve residential mortgages. It appears to be all commercial mortgages - which is more in line with KingSett's focus. KingSett has taken advantage of various forms of motivated selling in the past - e.g., KingSett/AIMCo close ING Summit deal; KingSett/AIMCo buy half of Scotia Plaza - and they have been involved on the lending side for quite some time (which is a natural extension to the real estate equity investing they've been doing for years).
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Re: Home Capital Group (Symbol-HCG) [Delisted 31-Aug-2023]

Post by SQRT »

randomwalker wrote: 20 Jun 2017 18:52
AltaRed wrote: 20 Jun 2017 16:14 Given HCG's track record is for lower loan losses than even the big banks, you have to think they know what they are doing and have good quality mortgages. From what I've read, their subprime mortgages mostly means lack of sufficient credit history to qualify under standard terms, rather than incapacity to meet obligations.
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"?
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Re: Home Capital Group (Symbol-HCG) [Delisted 31-Aug-2023]

Post by DanH »

SQRT wrote: 21 Jun 2017 08:20There 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"?
It's not 'news' per se but if the stream of Twitter posts from Marc Cohodes constitutes news then... :wink:
He clearly has made some good insights given the OSC settlement. But his allegations extend as far down the line as suggesting that the largest shareholder - Turtle Creek - is a fraud. When he goes to that extent it smells more of simply talking his book; not of sharing any sort of insight.

But one signal I'd look to are the terms of the KingSett deal. The purchase price is >99% of the outstanding loan balance with initial proceeds of 97% of the loan balances (in two payments during Q3). If KingSett had any basis for believing that the loan book was impaired, they'd have not agreed to these terms. And I have to believe that KingSett did a lot of due diligence. So while I don't know anything really about Home Trust and its underwriting, a 50% haircut doesn't seem justifiable at this point.
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Re: Home Capital Group (Symbol-HCG) [Delisted 31-Aug-2023]

Post by NorthernRaven »

DanH wrote: 21 Jun 2017 10:08
SQRT wrote: 21 Jun 2017 08:20There 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"?
It's not 'news' per se but if the stream of Twitter posts from Marc Cohodes constitutes news then... :wink:
He clearly has made some good insights given the OSC settlement. But his allegations extend as far down the line as suggesting that the largest shareholder - Turtle Creek - is a fraud. When he goes to that extent it smells more of simply talking his book; not of sharing any sort of insight.

But one signal I'd look to are the terms of the KingSett deal. The purchase price is >99% of the outstanding loan balance with initial proceeds of 97% of the loan balances (in two payments during Q3). If KingSett had any basis for believing that the loan book was impaired, they'd have not agreed to these terms. And I have to believe that KingSett did a lot of due diligence. So while I don't know anything really about Home Trust and its underwriting, a 50% haircut doesn't seem justifiable at this point.
That 50% bit is merely a random drive-by unsupported Trumptweet; pure nonsense. HOOPP wasn't valuing the book to purchase, it was extorting the best possible consideration for its loan. Home's commercial book (that KingSett is apparently buying) doesn't necessarily reflect Home's residential book, but still.

Absent default by the borrower, the mortgages return their principal plus interest. Borrower default does not seem to have been an issue historically. Home's underwriting/broker issues were initially reported against their CMHC-insured product, so CMHC is there as a buffer against default on those. Also, since CMHC was involved, any Home cleanup would have had CMHC breathing down their necks about the mortgages they had guaranteed. Also, most of those 2014/15 era mortgages will likely have rolled off the books or been renewed with proper oversight by now.

Even for non-CMHC product, some sort of housing correction/crash doesn't mean borrowers stop paying. If many do because of associated economic downturns, there's still the remaining foreclosure value and LTV ratios to help protect principal. Short of Mrs. O'Leary's cow burning down vast swaths of Toronto housing, a "50%" honest valuation is probably best described as "ridiculous". There's certainly various sorts of unknown unknowns that might come about with a drop in housing prices, but random internet FUD isn't going to provide insight on them.
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Re: Home Capital Group (Symbol-HCG) [Delisted 31-Aug-2023]

Post by randomwalker »

[quote=SQRT post_id=598073 time=1498047646 user_id=8607]
[quote=randomwalker post_id=598045 time=1497999156 user_id=324]

see below
Last edited by randomwalker on 21 Jun 2017 14:11, edited 2 times in total.
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Re: Home Capital Group (Symbol-HCG) [Delisted 31-Aug-2023]

Post by randomwalker »

SQRT wrote: 21 Jun 2017 08:20
randomwalker wrote: 20 Jun 2017 18:52
AltaRed wrote: 20 Jun 2017 16:14 Given HCG's track record is for lower loan losses than even the big banks, you have to think they know what they are doing and have good quality mortgages. From what I've read, their subprime mortgages mostly means lack of sufficient credit history to qualify under standard terms, rather than incapacity to meet obligations.
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
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Re: Home Capital Group (Symbol-HCG) [Delisted 31-Aug-2023]

Post by DavidR »

randomwalker wrote: 21 Jun 2017 14:07 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
So let's say 50% decline in residential real estate is possible. Why does that mean the mortgages are only worth 50 cents on the dollar today? On the uninsured mortgages, the borrowers likely had 25% or more down payment, and if the loan is a year or two old then the loan to current value ratio might not be much above 50%. So if the market drops your 50%, the borrower may not even be underwater, or not by much. Some portion of them may default, but many/most will stop paying their credit card bills or their income tax instalments before they'll default on a mortgage....
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Re: Home Capital Group (Symbol-HCG) [Delisted 31-Aug-2023]

Post by SQRT »

DavidR wrote: 21 Jun 2017 14:38
randomwalker wrote: 21 Jun 2017 14:07 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
So let's say 50% decline in residential real estate is possible. Why does that mean the mortgages are only worth 50 cents on the dollar today?
Agree. But Mr RW seems to be pretty negative on the financial services industry.
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Re: Home Capital Group (Symbol-HCG) [Delisted 31-Aug-2023]

Post by NorthernRaven »

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
You are positing a 50% haircut on the value of Home's non-insured residential mortgage book, which is not the same thing as a 50% decline in housing prices. If a borrower buys a $100K house, with $30K downpayment, that's an initial LTV value of 70%. If the housing price immediately collapses, and the house now only brings $50K (50% drop), then the homeowner is underwater. But unless they also stop making payments (quite possible if drop is accompanied by major recession), this doesn't affect Home. If they do stop making payments, and Home has to foreclose and sell at $50K, then Home is out only the $20K difference, not $50K. And this is only for whatever fraction of mortgages where payments cease and foreclosure ensues, not ones that remain paying. So on many (most) mortgages, Home recovers its principal and earns its interest. The net loss almost certainly couldn't approach 50% of principal.

You'd need to set up a ballpark equation, filling in your expected default rate, estimated house price drop, LTV values, etc. I suspect even if you use historic bad values from bad US cities like Phoenix, or Dublin in the Irish crash, running down the Home non-guaranteed book would be very substantially above 50 cents on the dollar! Not to mention that in valuing the book that way, you are also valuing Equitable in similar straits, and some pretty bogus balance sheets even at CMHC, the prime-mortgage banks, etc. Or special tinfoil in the hat where Home is somehow massively, overwhelmingly rotten somehow while its peers aren't.
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Re: Home Capital Group (Symbol-HCG) [Delisted 31-Aug-2023]

Post by DanH »

NorthernRaven wrote: 21 Jun 2017 15:00You [randomwalker] are positing a 50% haircut on the value of Home's non-insured residential mortgage book, which is not the same thing as a 50% decline in housing prices.
Bingo. Definitely a risk since Home seems to be heavily exposed to the 905 area code but not the equivalent of the loan book being worth half of the aggregate loan balance. Home is taking a haircut on the commercial loan book that it's selling to KingSett but not a huge one - and not the kind of discount that reflects big concerns about the quality of the book or about collateral being cut in half.
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