Home Capital Mortgage “Contagion” Could Spread

Shades of the 2008 Financial Crisis

The growing concern surrounding Canadian mortgage lender Home Capital Group could spread throughout the economy, some analysts warn.

As reported by Bloomberg, Home Capital’s shares have plunged after the company was accused “of misleading investors over fraudulent mortgages.”

The news sparked a good old fashioned bank run, which led Home Capital to tap into an emergency credit line. The interest rate of the credit line was over 20%, and that led investors to worry about the viability of the company.

As a result of those fears, Home Capital’s shares plunged 60% on Wednesday of last week, while growing concern also caused overall Canadian bank stocks to decline as well.

Disturbingly, Home Capital was trading at a lower level than during the 2008 Financial Crisis.

A bailout by the Healthcare of Ontario Pension Plan also imposed tough terms, which only served to further the crisis of confidence.

The problem started to spread, with the shares of Home Capital rival Equitable Group dropping by nearly 33%.

Cascade of fear

In a highly connected financial system, fear can cascade rapidly throughout the market – with devastating consequences. As a result, the banks have attempted to step in to stem the rising worry. As Bloomberg notes, “the commercial banks — including Toronto-Dominion Bank and Bank of Nova Scotia — agreed to a C$2 billion loan for Equitable at a rate of about 1.6 percent to 1.7 percent.”

Bank shares kept going down, though Equitable shares recovered.

Canada not immune to crisis

After the 2008 Financial Crisis, many Canadian elites started to feel Canada was immune to such an event happening here. But for some, that attitude is changing.

Uncertainty still rules the day, as Aubrey Basdeo – head of Canadian fixed income at BlackRock Inc. told Bloomberg:

“This could be just an isolated situation and that’s the higher-probability outcome at this point, but you cannot ignore the risk that this can get messy. The focus now is on the potential for a systemic issue across the economy and it would be folly just to ignore that.”

While this may not be the catalyst for a severe crisis, Canada’s unstable housing market – combined with our fragile economy – is certainly vulnerable to an unexpected event that leads to severe problems. Home Capital shows that Canada’s financial institutions and mortgage lenders do not have any sort of magic quality that makes us immune to what we saw on Wall Street.

Spencer Fernando

Note: There are further issues with Home Capital – including concerning questions surrounding their initial bailout. I’ll have more on that soon.