Home Capital Was Hours Away From Collapse: Report

There was no end in sight to the crisis at subprime lender Home Capital this week, with the bank warning the run on its deposits casts doubt on its ability to continue operating.

Home Capital has seen 94 per cent of the deposits in its savings accounts disappear in recent weeks, as depositors fled the bank following allegations from the Ontario Securities Commission that management misled investors about mortgage fraud within its broker network.

The situation is bringing unwanted negative attention to Canada’s financial system from abroad. Bets against the loonie and against Canadian banks are at elevated levels. Ratings agency Moody’s this week downgraded Canada’s Big Six banks, warning that consumer debt levels are too high.

Here are the latest developments in the Home Capital saga:

Morneau won’t rule out federal bailout

Finance Minister Bill Morneau did not rule out a taxpayer-funded bailout of Home Capital in an interview this week, but said he is looking for the private sector to find a solution.

“It’s unlikely to be a situation we’re going to face,” he told the Globe and Mail on the sidelines of the G7 ministers’ meeting in Bari, Italy, this week.

Morneau suggested that the decision about a bailout should be made by the Office of the Superintendent of Financial Institutions (OSFI), Canada’s federal banking regulator.

Home Capital warns of “knock-on effects”

A collapse of Home Capital could damage Canada’s broader mortgage market, a company director told analysts and reporters on an earnings call Friday.

The company shutting down would “have significant knock-on effects, particularly to new Canadians and others who this company services,” Alan Hibben said, as quoted at Bloomberg.

Home Capital is among Canada’s subprime lenders, who provide mortgages to borrowers the large banks won’t do business with. These are often immigrants with limited credit history or small business owners, Hibben said.

Lender was hours away from collapse

Home Capital almost didn’t open its doors for business on Monday, May 1, as it struggled to find the cash it needed to keep operating, according to an investigation by the Globe and Mail.

In the early hours of Monday morning, OSFI was on standby, ready to take control of the lender at opening on Monday, as Home Capital struggled to get financing from the Healthcare of Ontario Pension Plan, which had agreed to give the lender a $2-billion line of credit, albeit with 10 per cent interest and high fees.

Lawyers were arguing over the details of the first $1-billion drawdown of the funding. A deal was finally reached around 7 a.m. Monday morning -- just a few hours before regulators would have seized Home Capital.

Read the whole Globe and Mail story here.

A boost from CIBC, MCAP

Faced with concerns over the health of Canada’s financial system, some of Home Capital’s competitors have lined up to shore up the company’s finances.

CIBC announced it has tripled its holdings in Home Capital, and now owns 15 per cent of the company.

Additionally, mortgage lender MCAP agreed to buy $1.5 billion of mortgages and commitments to new mortgages from Home Capital, giving the struggling lender some financial breathing room to continue doing business.

Follow HuffPost Canada on Facebook, Twitter, and Instagram

Coming Soon: The Home Stretch
Our weekly newsletter delivers the news and analysis you need on Canada's housing market. Sign up below and don't miss the first issue.

Also on HuffPost

6 Possible Outcomes From Canada's New Mortgage Rules

Reduced housing correction risk(01 of06)

Finance Minister Bill Morneau's new mortgage rules, enacted in October, 2016, could "reduce the risk of a knock-on to the Canadian economy" from any possible corrections in Toronto or Vancouver, BMO economist Sal Guatieri told The Financial Post.

The Bank of Canada has long warned that interest rates could go up again — and Canadians should ensure they can still afford to pay.

Now they have to prove it to lenders. (credit:Sean Kilpatrick/CP)

First-time homebuyers could find things difficult(02 of06)

First-time homebuyers tend to be the "primary users of mortgage insurance," according to Royal Bank of Canada.

So the "stress test" could make it difficult for them to borrow as much as they'd like to. In a way that's a good thing. It means they can only borrow what they can afford. But it also means they won't have as much purchasing power in a hot market.

That said, the new rules are probably protecting them from a debt burden they can't handle. (credit:Jeng_Niamwhan/Getty Images)

A drop in home sales and prices(03 of06)

Home sales could fall as much as eight per cent in the first year after the new mortgage rules come into effect, Bloomberg reported.

Of course, that depends on what buyers do. They may decide not to buy homes at all, they could also opt to buy cheaper properties, or dig into their savings just to afford their purchases, finance department spokesman Jack Aubry told the news agency.

Meanwhile, the Bank of Canada says home sales could fall by as much as 10 per cent, while prices could drop by five per cent. (credit:Peterspiro/Getty Images)

Shadow-banking(04 of06)

Stricter mortgage rules could mean that borrowers start turning to "shadow-banking," according to Canaccord Genuity.

"Shadow-banking" refers to activities that happen outside traditional financial institutions. While bigger banks lend money using cash from deposits, shadow banks use money from groups of investors and aren't subject to the same scrutiny as major financial firms.

They could therefore be more likely to hand out bad loans. (credit:Nash Photos/Getty Images)

Residential investment could fall as a share of the economy(05 of06)

Canada's economy as a whole grew by $4.2 billion from the fourth quarter of 2014 to the second quarter of 2016, according to Macquarie Research.

But residential investment increased by 3.5 times that amount ($14.7 billion) in the same time frame as housing activity skyrocketed in Vancouver and Toronto.

Watch for residential investment to decline. (credit:Alex_533/Getty Images)

Squeezing alternative lenders(06 of06)

There are concerns that the new rules don't create an even playing-field for mortgage lenders outside the big banks, The Globe and Mail reported.

Alternative lenders such as Home Capital Group, which generally target riskier borrowers with lower credit scores, may find themselves scrambling for business now that mortgage clients have to qualify for loans at higher interest rates. (credit:Dennis Flaherty/Getty Images)

business business video canadian banks downgraded cibc Home Capital

Home Capital Was Hours Away From Collapse: Report

Coming Soon: The Home Stretch

Related

From Our Partner