Industry executives argue that the embattled lender is less of an instigator and more of a victim
Amid the intensifying troubles surrounding Home Capital, a duo of industry executives argued that decisive intervention by Finance Minister Bill Morneau will pave the path towards an effective solution to the beleaguered lender’s woes.
In an open letter published by the Financial Post, Jordan Hymowitz (managing partner of U.S. hedge fund Philadelphia Financial Management) and David Taylor (president, chief investment officer, and portfolio manager at Toronto-based firm Taylor Asset Management) argued that Home Capital should be considered the casualty—rather than the instigator—of current market realities.
“Funds that we manage own shares in Home Capital Group Inc., the majority of which were purchased after the major sell-off last month,” Hymowitz and Taylor wrote. “We are writing to ask Finance Minister Bill Morneau to act to save the company, which we believe is the victim of aggressive U.S. investment bears who are drawing unwarranted comparisons with the 2008 U.S. housing crisis.”
The duo explained the systemic factors that led to the current crisis, and why the situation differed markedly from the conditions that preceded the 2008-09 crisis.
“Canada Mortgage and Housing Corporation (CHMC’s) delinquent loans in 2016 were only 32 basis points of the total loan book. Fannie Mae, the U.S. counterpart, had serious delinquent loans of 112 basis points — or 3.5x-times greater — in 2016. Home Capital’s ‘alternative mortgages’ — a category the bears often falsely associate with subprime — had only 24 basis points of delinquent mortgages in the first quarter of 2017 and one basis point of annualized net charges. This means Canada’s ‘alternative’ mortgages are today performing nearly 75 per cent better than fully underwritten conventional mortgages in the United States.”
Hymowitz and Taylor stated that while the housing bears were correct in assuming that Home Capital represented a risky stock, they were right for the wrong reasons.
“Home Capital, we believe, was a victim. It was third-party brokers who are alleged to have fraudulently altered mortgage applications. That operational issue became a disclosure issue when the provincial securities commission alleged that the mortgage concerns were not disclosed in a timely manner,” the duo said.
“To be clear, we believe there is no excuse for the failure to report the fraudulent broker activity in a timely manner. We support the recommendations to punish management by the OSC. However, the key bear narrative, that current management is covering up massive asset quality issues at Home Capital, does not fit the data set.”
The executives closed their letter with a plea for a more circumspect approach to what has proven to be a multi-layered problem.
“Home has an impressive track record in the Canadian housing market serving a niche of hard-working first-generation Canadians. Shareholders, borrowers and depositors don’t deserve to be taken down by a combination of a disclosure dispute with a provincial regulator and U.S. short-sellers,” the duo concluded.
“Asset quality is not an issue in Canada, nor is the strength of the larger banking sector, but a failure by the Canadian government to act on the Home Capital funding issue could lead to The Big Short 2 — Canadian edition.”
Related stories:
Observers cite increased anxiety amid Home Capital’s troubles
No signs of ‘contagion’ from Home Bank so far - BoC chief
In an open letter published by the Financial Post, Jordan Hymowitz (managing partner of U.S. hedge fund Philadelphia Financial Management) and David Taylor (president, chief investment officer, and portfolio manager at Toronto-based firm Taylor Asset Management) argued that Home Capital should be considered the casualty—rather than the instigator—of current market realities.
“Funds that we manage own shares in Home Capital Group Inc., the majority of which were purchased after the major sell-off last month,” Hymowitz and Taylor wrote. “We are writing to ask Finance Minister Bill Morneau to act to save the company, which we believe is the victim of aggressive U.S. investment bears who are drawing unwarranted comparisons with the 2008 U.S. housing crisis.”
The duo explained the systemic factors that led to the current crisis, and why the situation differed markedly from the conditions that preceded the 2008-09 crisis.
“Canada Mortgage and Housing Corporation (CHMC’s) delinquent loans in 2016 were only 32 basis points of the total loan book. Fannie Mae, the U.S. counterpart, had serious delinquent loans of 112 basis points — or 3.5x-times greater — in 2016. Home Capital’s ‘alternative mortgages’ — a category the bears often falsely associate with subprime — had only 24 basis points of delinquent mortgages in the first quarter of 2017 and one basis point of annualized net charges. This means Canada’s ‘alternative’ mortgages are today performing nearly 75 per cent better than fully underwritten conventional mortgages in the United States.”
Hymowitz and Taylor stated that while the housing bears were correct in assuming that Home Capital represented a risky stock, they were right for the wrong reasons.
“Home Capital, we believe, was a victim. It was third-party brokers who are alleged to have fraudulently altered mortgage applications. That operational issue became a disclosure issue when the provincial securities commission alleged that the mortgage concerns were not disclosed in a timely manner,” the duo said.
“To be clear, we believe there is no excuse for the failure to report the fraudulent broker activity in a timely manner. We support the recommendations to punish management by the OSC. However, the key bear narrative, that current management is covering up massive asset quality issues at Home Capital, does not fit the data set.”
The executives closed their letter with a plea for a more circumspect approach to what has proven to be a multi-layered problem.
“Home has an impressive track record in the Canadian housing market serving a niche of hard-working first-generation Canadians. Shareholders, borrowers and depositors don’t deserve to be taken down by a combination of a disclosure dispute with a provincial regulator and U.S. short-sellers,” the duo concluded.
“Asset quality is not an issue in Canada, nor is the strength of the larger banking sector, but a failure by the Canadian government to act on the Home Capital funding issue could lead to The Big Short 2 — Canadian edition.”
Related stories:
Observers cite increased anxiety amid Home Capital’s troubles
No signs of ‘contagion’ from Home Bank so far - BoC chief
