May 012017
 

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. 🙂

 

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Random Useless Fact:

Online ads are getting smarter.

May 162015
 

46% of Canadians credit card holders carry some kind of balance each month, and we all know how high the interest rates can get on those. Over time the free market has come up with solutions to provide more affordable lending to borrowers in many parts of the world. In the U.S. and Europe for example, peer to peer lending has grown significantly in popularity as consumers look for alternative means to finance large purchases and pay down high interest debts.15-05-marketplace-lending-grouplend

Canada has been lagging behind in this segment of the financial market for some time but just last year a new Vancouver based company became the first to offer a legitimate marketplace lending solution. Grouplend plans to give Canadians a fast and convenient platform to borrow money with lower interest rates than credit cards or pay day loan services. I recently had a chance to sit down with its director of business development, Sean, to learn more about possible opportunities in this space for consumers and investors.

Grouplend leverages the power of technology to bring together creditworthy borrowers seeking loans with investors looking to earn a fair return on their money in an online environment that provides personalized services with competitive interest rates. The company claims to have over $50 million of loan applications already. The way it works is pretty straight forward. Large institutions and accredited investors pool money into a fund which is lend out to borrowers. These borrowers can take out a loan up to $30,000. The term of the loan is fixed for 3 years. The interest rates start from 6.3% and goes up depending on the borrower’s income and financial situation.

I can see this benefiting two main groups of people: consumers who want to consolidate their debt or want to borrow money for a short amount of time, and investors who are willing to risk lending their money to fellow Canadians to hopefully make a return.

The borrowing process is simple. Let’s say you have a line of credit at your bank at 9% and want to lower your rate. You may be able to replace this LOC with a Grouplend loan at a lower interest rate. On the main page of its website, use the questionnaire near the bottom to get your no-obligation personalized quote in a couple of minutes. If you like the conditions and interest rate, you may proceed with your loan application. To verify your identity and credit worthiness you will need to email them some documents like scans of your drivers license, 2 most recent pay stubs from work, etc. If the application is approved it takes as little as 24 hours for the loan money to be deposited into your bank account. You can also set up automatic repayments. After 6 months of on-time payments, you may even apply for a second loan. A process that used to take weeks and meetings with a financial representative at a bank has been condensed into a few mouse clicks and keystrokes. 🙂 There is no origination fee, and you can pay back the loan in full at any time without penalty. This is a great opportunity for borrowers to save money on their high interest debts. Paying less interest means becoming debt free sooner, which frees up more money for retirement savings and investing. 🙂

For fixed income investors who are looking for alternative to bonds Grouplend allows individuals to pool their money into funds that consumers can borrow from. On its FAQ page the website encourages investors to reach out by email if they are interested. Due to regulatory and securities issuance in Canada only accredited investors can invest in Grouplend funds. Generally speaking an accredited investor has to either earn a high salary or have a net worth of $1 million. An employee benefit plan or a trust can also be qualified as accredit investors if total assets are in excess of $5 million.

Today’s world is all about going digital and crowd sourcing to become more efficient. 🙂 I find the start ups for marketplace lending to be an interesting development. Since almost half of Canadians with credit cards hold a balance I expect there to be strong consumer demand for a lower cost, convenient, online loan platform moving forward.

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Random Useless Fact:

Use the phrase, “My understanding was…” instead of, “I assumed…” so that other people will merely think you misunderstood something as opposed to being viewed as having hastily jumped to a conclusion based on insufficient evidence.

Nov 262012
 

Yesterday I went to the mortgage forum at the Vancouver Convention Center, put on by Canadian Association of Accredited Mortgage Professionals (CAAMP.) They had an educational seminar followed by a meet-and-greet session with mortgage related companies. The whole event was to promote the mortgage industry and get people interested about starting a career in the vast mortgage market.

What is the mortgage industry? It’s a part of the overall financial industry that deals with loans for real estate.  When someone wants to borrow money to buy a home they generally go through an originator (commonly known as a broker) who then talks with a lender (bank, credit union, private company, etc) to obtain a loan for the buyer. In a high ratio mortgage case (down payment <20%) the lender must go through an insurer 😀  That’s basically how everything works.

As usual, my favorite part about these kinds of events is all the swag companies were giving away. Colorful pamphlets, pens, notepads, Canadian maple syrup, mini first aid kits, eco-friendly shopping bags, food, shoe polish, lent remover. etc… Oh my goodness so much free swag(⌒▽⌒)

branded swag from companies in the mortgage industry

There are many different kinds of jobs in this sector. Even if you’re with a company that has nothing to do with the mortgage industry, you may still find yourself working indirectly in it. D+H (Davis and Henderson) for example, known for printing cheques, had a booth at the event. They told me they have expanded their expertise to provide targeted services to mortgage brokers and lenders.

Jobs directly related to the mortgage industry:

Broker channel: To become licensed within your province to help borrowers find lenders.
Property valuation: This includes appraising the value of homes and keeping up with market trends
Insurers: The 3 big ones here are CMHC (government insurer), Genworth (a spin-off from General Electric’s financing division), and Canada Guaranty (used to be a company under AIG)
Regulators: To license and authorize business, and to set standards in policy and enforce rules.
Lenders:  Must learn how to adjudicate, meaning they must determine if the borrower can pay back the mortgage or not. This is called the underwriting process.