Home is where the house is, in a manor of speaking. 😀 Real estate is a popular topic, especially when a large player in the subprime lending market is under fire. Home Capital Group Inc. recently disclosed it has secured a large $2 billion loan, but is effectively paying 15% to 22% interest on it. One explanation is that Home Capital is facing a liquidity crisis, and is desperate for funding. “Basically they blew up the income statement in order to save the balance sheet,” says David Baskin of Baskin Wealth Management. This is not a good place for any company to be in. Home Capital went from a $1.9 billion company a few months ago, to a market cap of just under $700 million today. 🙁
Surprisingly Home Capital (TSE:HCG) was still considered investment grade a few months ago. But in light of this new event, I wouldn’t be surprised if it gets downgraded soon to CCC or some other junk status by credit rating agencies.
Home Capital Group Inc.’s shares plunged about 70% last month after disclosing its financial situation. On the plus side, Home Capital stock is currently paying a juicy 13% dividend yield. 🙂 But with promising returns like that, there must be a substantial amount of risk. I think its dividend will be cut within the next quarter or so. I certainly don’t want to invest in HCG at this time.
But it’s important to separate the company from the assets it holds. Home Capital’s downfall is not related to its loan book. The company is in trouble for improper disclosure and possibly committing fraud. But the delinquency rate on Home Capital’s loans is only 0.25%, which is even “lower than the major Canadian banks,” noticed Marcus Tzaferis, a Toronto-based mortgage broker with MorCan Direct.
Worries about the general subprime lending market caused competitor Equitable Group (TSE:EQB) to fall 47% in April. This is a worrying trend. My public mortgage investment corporations (MICs) decreased in value as well, although by a much smaller amount of 5% last month. Furthermore, large Canadian banks are down about 3%. But I think this is temporary. Both MICs and the big 5 banks should bounce back by next month because I don’t see any real problems in the lending market itself.
At the end of the day here are some things to take away from this story.
- Credit rating agencies are still as unreliable as they were in 2008. Don’t count on them to warn us of the next major market downturn.
- Don’t concentrate too much on one asset class. If putting money into the mortgage industry, choose a wide range of banks, MICs, and other financial companies. Not just one type.
- Mortgage lending companies may be in trouble, but relatively low delinquencies across various interest rate ranges suggest Canadians can still afford to borrow money for real estate and pay their debts on time. 🙂
- Just because a dividend yield is attractive, doesn’t mean it is sustainable.
- If you have a mortgage, consider paying it down as slowly as possible. This increases savings so you can speed up investing. This Reddit discussion goes into more detail. It looks like more and more people are starting to realize what I’ve been saying for years; when interest rates are low, invest, don’t pay down debt. And if we take this concept one step further then it turns into taking on more debt to invest, which is also known as leverage. 🙂
Random Useless Fact:
Online ads are getting smarter.