Canada’s Largest Alternative Lender Gets Smoked

Steve Saretsky -

Home Capital Group Stock Plummets 65%

Canadian housing bears are dancing in the street today. Canada’s largest alternative mortgage lender Home Capital Group appears to be on the verge of going bust. Today, the stock plummeted by 65% after the company disclosed that it struck an emergency liquidity injection of $2 billion dollars. Home Capital Group was the company famed American short seller Marc Cohodes has been targeting for over two years, who claims the companies equity is worthless after issuing fraudulent loans.

As investors piled out of Home Capital, the contagion then spread to other alternative lenders including Equitable Group which plummeted more than 30% and First National which plopped by about 10%.

Home Capital Group stock price
Home Capital stock plunges 65%

So what exactly does this all mean for the Canadian housing market?

Canadian housing bears are calling this the Canadian version of the “New Century” moment. New Century was a massive alternative lender in the United States during their housing boom/bust and was the first domino to fall back in 2007.

Although it’s too early to tell how this all shakes up, there are many implications of today’s news. Firstly, for sub prime borrowers who can’t qualify at big banks it will now become even tougher to get financing from Canada’s alternative lenders. Borrowing costs from these alternative lenders will surely rise.

However, perhaps the biggest implications are the potential ripple effects through the Canadian mortgage market. Confidence in the Canadian mortgage market appears to be shaken. Investors who were once eager to snatch up mortgage backed securities (MBS) which help fund the banks ability to create and dish out new mortgages could seize up. If investors lose their appetite for Mortgage Back Securities this dries up a much needed revenue source for the banks, which ultimately means mortgages or “money” will be harder to come by.

Good thing the Real Estate bull says it’s time to sell.

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