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May 12, 2017


After investigating the recent events of Home Capital Group Inc. Terence Corcoran gives a very candid idea of his take on the situation.

By now most people are aware of the plunge Home Capital Group Inc. took from April 19 with the stocks going from $22 before hitting $6 a few days later wiping out more than $1 billion off the value of one of Canada’s most successful non-bank mortgage lending enterprises.

The aftermath has made Home Capital be perceived from an alleged corporate scandal to the beginning of a major meltdown in the Canadian mortgage market and in one instance compared to the Lehman Brothers fiasco in the U.S. which instigated a recession.

This claim may seem plausible to anyone who has not followed the factual background to the Home Capital meltdown. Home Capital is not Lehman and there is no mortgage lending crisis in Canada.
There also wasn’t a real scandal at the company which until April 20 had $28 billion or so in assets and a solid profit outlook.
So who was standing on the edge of the cliff when the company began its unexpected plunge in value? The Ontario Securities Commission.

On April 19, OSC staff released a “ statement of allegations” against the company and its three top executives. According to OSC Home Capital allegedly failed to adequately disclose certain “material” developments in its mortgage lending operations. They had also issued “ materially misleading” information and ‘falsely certified “ an annual report.

In the wake of the OSC allegations:

  • The three executives have resigned
  • The OSC has turned a minor and legally debatable issue of corporate disclosure into the potentially catastrophic destruction of a 30 year Canadian corporate success

Because Home Capital is dependent on depositors to provide funds for mortgage investments then the OSC should have known what would happen next – depositors fled and the company was forced to line up a$2 billion loan at 22.5 per cent interest rate.

The allegations date back to 2014 and early 2015 and have long been resolved. The issue involved a small number of the 4000 brokers (about 45) who had been providing “fraudulent employment income documentation” on some of the home buyers.

James Baillie, a former OSC chair and Home board member ran an internal investigation. Home terminated 4 underwriters, two brokerages and 30 brokers for exaggerating income levels of borrowers.

The OSC claims that the termination of the brokers should have been reported in public statements on the grounds that it was “material information” that could have an impact on new mortgage business and shareholder value. Home Capital, presumably advised by the top accounting and legal firms, did not disclose the broker issue until July, 2015. OSC alleges the 2015 disclosures were not sufficient. This is 2017. Home capital has publicly dealt with the broker issue on numerous occasions. The broker fraud passed with little impact . The mortgages held by the borrowers whose brokers falsified income have been performing well.

In late 2016, Home reported that after a review of all the customer files there were no unusual credit issues on these mortgages. Since the mortgages covered by the broker issue were CMHC insured the profit margins were low to start with , amounting to a fraction of Home’s income being put at risk. So the alleged material mortgage change turned out to be not particularly material. Early in 2017 Home reported 2016 income of $247 million on gross assets of $29 billion. 

For what are now clearly insignificant developments in the company’s affairs three years ago, the OSC has thrown the whole company and 30 years of success over a cliff.
Why? If it was trying to set a precedent or teach the market a lesson, it picked the wrong company.
Did it really need to risk the destruction of a successful financial player to score a dubious regulatory point?

Here is full article from Financial Post: