May 12, 2017

What Mortgage Borrowers Should Know About Home Capital Group

There’s been a lot of recent news about alternative mortgage provider Home Capital Group after the Ontario Securities Commission (OSC) accused the company and three of its current and former executives of breaching securities laws. As a result of the allegations, depositors have withdrawn a substantial portion of their money from the company.

Here are some frequently asked questions about the alternative mortgage lender and how it might affect your money, and potentially the overall housing market:

Top FAQs About Home Capital Group

What’s Home Capital Group?

Home Capital Group operates through its principal subsidiary, Home Trust—a federally regulated trust company that offers residential and non-residential mortgages, credit cards, and consumer loans. Home Trust also offers guaranteed investment certificates (GICs) and high-interest savings accounts through its consumer brand, Oaken Financial.

What’s the OSC and what does it do?

The OSC is the provincial securities regulator. It works to protect investors by making rules to prevent misconduct and monitoring market participants for compliance with Ontario securities law.

What are some important recent events?

Feb. 10, 2017: Home Capital announced it received an OSC enforcement notice related to the company’s disclosure in 2014 and 2015 regarding the income information submitted on “some loan applications had been falsified, and the subsequent remedial steps taken by the company, including the suspension of mortgage brokers and brokerages.”

March 14: The company said several current and former directors received enforcement notices related to that disclosure and, in some instances, trades in the company’s shares.

March 27: Home Capital fired president and CEO Martin Reid.

April 19: The OSC alleged that the company, former CEOs Martin Reid and Gerald Soloway, and chief financial officer Robert Morton breached provincial securities laws.

Home Capital Group responded by saying the allegations against the company “are without merit” and they’ll “be vigorously defended.”

April 24: Home Capital announced Gerald Soloway would step down from the board once a replacement is found and its former CFO Robert Blowes would return to his old role on an interim basis in May. The current CFO, Robert Morton, would then be moved into a role outside the financial reporting group.

April 26: The company reached an agreement in principle for a $2-billion line of credit from a major institutional investor to help mitigate a drop in Home Trust’s high-interest savings account (HISA) balances. Between March 28 and April 24, depositors withdrew about $591 million from Home Trust and the total HISA balance fell to $1.4 billion. The company emphasized that its HISA deposits and GICs are eligible for Canada Deposit Insurance Corporation (CDIC) coverage.

April 27: Home Capital revealed the line of credit was from the Healthcare of Ontario Pension Plan (HOOPP), a plan with more than $70 billion in assets. HOOPP president and CEO Jim Keohane resigned from Home Capital’s board due to “potential conflicts.” Home Capital also hired RBC Capital Markets and BMO Capital Markets to help advise on further financing and strategic options.

 April 28: Depositors continued to withdraw money from Home Capital. There were $472 million in withdrawals on April 26 and $290 million on April 27.

 May 1: Home Capital withdrew $1 billion from its $2 billion credit line and the balance of its HISA deposits were expected to be about $391 million.

May 2: The company delayed its first-quarter earnings results.

May 5: Former RBC executive Alan Hibben was appointed to the board, replacing Gerald Soloway.

May 8: Home Capital added three new members to its board of directors: Claude Lamoreux, former CEO of Ontario Teachers’ Pension Plan; Paul Haggis, former CEO of the Ontario Municipal Employees Retirement System (OMERS); and Sharon Sallows, a former BMO executive. Brenda Aprile, an independent director and former PwC executive, became Home Capital’s new chairperson. The company also announced its HISA deposit balances were expected to drop to $192 million.

May 9: Home Capital said it entered into an arrangement with an independent third party that wishes to purchase funded mortgages or accept mortgage commitments and renewals up to a total of $1.5 billion. Several media outlets reported that the buyer is MCAP, a mortgage financing company. Home Capital also said its HISA deposit balances are expected to drop to about $146 million. 

Why are investors worried?

Depositors have withdrawn a significant amount of money from their high-interest savings accounts. On May 9, the balances were about $146 million, down from about $2 billion in late March. Home Capital uses that money to fund its mortgage lending. Although the company does have a $2-billion credit line, the interest rate on outstanding balances is a very unfavourable rate of 10%.

Shares of Home Capital Group have dropped about 65% this year.

What does CDIC insurance cover?

Eligible deposits at member financial institutions are protected by CDIC insurance up to a maximum of $100,000 (principal and interest). You don’t need to apply for it as coverage is automatically included. Savings accounts, chequing accounts, and GICs with original terms to maturity of five years or less are eligible deposits. GICs with a term of more than five years and foreign currency deposits (such as U.S. dollar accounts) aren’t eligible deposits.

Is Home Trust a CDIC member?

Yes, Home Trust is a member of CDIC. Its GICs and high-interest savings accounts are insured up to $100,000.

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