Who (Almost) Killed Home Capital Group?
Featured Posts, Investments, 02 April 2021
I am still coming to terms with the collapse in shares of Home Capital. It wasn’t supposed to play out this way. The Canadian alternative mortgage lender saw its shares fall from an all-time high of $54.86 in August of 2014 to a low of $5.85 in May of 2017. At the time, I was working as an analyst at one of Canada’s largest asset managers. I spent 2014 and 2015 following only the Canadian banking sector. I saw the events at Home Capital up close.
The company was in the crosshairs of short sellers for years prior to its 2017 crisis. As an alternative lender in Canada’s frothy housing market, many shorts saw parallels between Home Capital and some of the worst-performing American subprime lenders. Steve Eisman, made famous in Michael Lewis’ The Big Short for his success betting against the US subprime bubble, was one of the first to come out publicly as a bear on Home Capital in 2013. And from there the criticisms continued for years.
The problem is that Home Capital was not the sequel to the US subprime debacle. Canadian house prices were still rising. Every alternative mortgage at Home had an equity cushion of at least 20%. Home had significant reserves of capital to absorb any loan losses, and there weren’t any loan losses, even from fraudulent mortgages discovered at the company in 2014. And yet, the lender was brought to the brink of failure by a run on deposits in late April of 2017.
