Is the Mortgage market collapsing in Canada? This is the question on everyone’s mind this week. If you have been following our blogs you will know that in Early October of 2016 I ran a blog called The Day After . In that blog post, I looked at the major implications that would be caused by the federal government’s changes to the mortgage rules. That blog post was then followed by another post that described the systematic collapse of the Monoline lenders in Canada. You can find the second blog post here.
Last week during my mortgage market update on CJAD I talked about how Bank of Montreal was creating triple A rated MBS (Mortgage Backed Securities). I advised listeners that when I got the news of the MBSs creations, my stomach started to turn and it brought me back to pre-2008. The following morning we were greeted with more news that lenders like RBC were also going to start creating MBSs as well and these were to be AAA and BB rated by Moody’s. For those of you who don’t know, Moody’s is who was responsible for rating all the “AAA” CDOs (Collateralize Debt obligations) in the United States that collapsed the entire U.S. housing market. Even when all evidence pointed to the fact that the CDOs were garbage, the rating agencies continued to give them AAA ratings.
This week, everything we have been talking about over the last number of months started to fall in place and regrettably, my predictions about the future of the Mortgage Market in Canada started to come true. Yesterday April 26th, Home Capital Group stock price plummeted by over 60%. The stock price fell due, in part, to the fact that the company is facing a major liquidity issue and cannot meet financial targets. Further to this, it was discovered that close to a billion dollars of their loans was considered fraudulent and should have never been approved. These are now being called liar loans and riddle the books of Home Capital. When the news of this became known, Home Capital then lost over 600 million dollars of deposits from investors which caused a major liquidity issue. To help the company meet its financial obligations, it arranged a $2 Billion credit line. The credit line has an interest rate of 22.5% on the first Billion and then declines to 10-15% on the second Billion used by the company. Based on the numbers and based on the desperation that we are seeing to secure such a high rate on this type of credit line, I predict that the company’s liquidity is more than likely to get worse over the next few months. After all, it does not take a genius to figure out that if you are borrowing at 22% and you are lending at 6% then you will have problems!
The unfortunate news is that Home Capital was not the only one affected by this week’s news. Investors and fund managers are scrambling to pull investments out of other Canadian mortgage lenders which lead to a sharp drop in stock prices all across the board.
Today DBRS, another rating agency, downgraded Home Capital’s debt to be rated BBB. They stated that the $2Billion loan is too expensive to handle and it will lead to collapse. That same debt that was today downgraded to BBB was only last week going to be put into the AA MBS that the banks were creating.
I believe that in the next few months we will see Home Capital lose more and more investors and see a major decline in its deposit taking. The company will be forced to liquidate its portfolio of what are being called “liar loans”. This will systematically lead to a market collapse, bringing down with it more mono-line lenders in Canada.
We are staring down the cliff looking at what some analysts are calling the worst market collapse of the century. It is important in these times to remember that liquidity is king. Everyday, I meet with people and I advise them to take cash and liquid positions in investments. Keep your toxic debt low and remember to never follow the crowd.
As developments arise in the Canadian mortgage market I will be keeping everyone abreast via the blog posts.
Thank you for taking the time to read this as always I am available for comment or for questions.
Tel: (514) 680-4674