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Home Capital troubles may translate to higher interest rates for some borrowers

TORONTO — Troubles at Home Capital Group may translate to higher mortgage rates for less creditworthy borrowers if concerns about the sector increase funding costs for other subprime lenders, experts say.

"Inevitably this will likely effect all lenders in the alternative space as it puts the spotlight on the risk, and questions the integrity of some of the mortgages they are lending on," said Steve Pipkey co-founder of Vancouver-based Spin Mortgage.

Home Capital (TSX:HCG) has seen its stock price tumble following allegations from Ontario's securities watchdog that it misled investors. The Toronto-based company has said the allegations are without merit and pledged to defend itself.

The subprime lender — which provides loans to borrowers who don't meet the more stringent criteria of one of the big banks — has also had to secure a $2-billion credit line after depositors suddenly withdrew hundreds of millions of dollars from its high-interest savings accounts.

Marcus Tzaferis, a Toronto-based mortgage broker with MorCan Direct, says the news about Home Capital could lead to a "crisis of confidence" that could affect other non-bank mortgage lenders who use the GIC market to raise cash.

That could make it tougher for non-bank lenders to access funds — and that will likely trickle down to subprime borrowers via higher mortgage rates, experts say.

"There's no question that the cost of funds may go up for non-prime lenders," said Rob McLister, founder of RateSpy.com.

A spokesman for Home Capital said in an email that the company will not "speculate" on the matter.

Home Capital's main competitor in the space is Toronto-based Equitable Group Inc. (TSX:EQB). The lender did not immediately respond to a request for comment on how Home Capital's woes may impact its business.

If borrowing rates in the subprime mortgage market do rise, McLister said the increase is not likely to be long term, especially if Home Capital manages to secure a buyer rather than having to face liquidation.

Before the Home Capital situation came to light, investor interest in the subprime mortgage sector was on the upswing, said McLister.

"What happened with Home Capital definitely put a damper on investor enthusiasm for backing non-prime mortgage-backed securities. But once all of this shakes out — give it three, four quarters or so — I think we'll see a resumption in liquidity in the non-prime market. People have short-term memories."

On the other hand, if Home Capital is liquidated and the crisis spills over to other similar lenders, borrowers may find themselves turning to other sources of funding.

"There are still going to be many options and there are still quite a few suppliers in the market," said Matthew McKillen, a mortgage agent with Mortgage Architects.

For example, mortgage investment corporations — private lending companies which pool cash from investors to loan out for mortgages — could pick up some of the slack.

But mortgage investment corporations typically charge higher interest rates than institutional lenders such as Home Capital and Equitable Bank, said Tzaferis.

He noted that Home Capital's downfall is unrelated to the strength of the lender's loan book.

The company is under fire because of allegations that it didn't meet its disclosure obligations with regards to how it handled the dismissal of 45 brokers who had allegedly committed fraud, Tzaferis said. But the strength of the its mortgage book is not being called into question, he added.

"If you look at the delinquencies on Home Capital's book, it's a quarter of one per cent, which is lower than the Canadian banks," Tzaferis said. 

"This is an alternative mortgage lender, yes. This is a lender who has identified falsification of income verification from the broker channel, yes. Both very bad things. But they've managed their book so well that their arrears ratio is incredibly low."

 

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