(Adds comment from Equitable Group, union comment on pension
fund, updates shares)
* Home Capital draws down credit line
* Balance in high-interest savings accounts falls
* Home Capital shares fall as much as 29 pct; Equitable
* Equitable Group gets C$2 bln loan, sees gains from rival's
* Canada watchdog says monitoring Home Capital's situation
By John Tilak
TORONTO, May 1 Canadian subprime mortgage
lenders raced to shore up confidence in their model on Monday as
depositors pulled more money out of Home Capital Group Inc's
high-interest savings accounts while another lender
lined up C$2 billion in emergency funding.
Canada's No. 2 listed alternative lender Equitable Group
said it has taken steps to reinforce its liquidity
position on Monday after it experienced a quickened pace of
withdrawals late last week.
Meanwhile, Home Capital, Canada's biggest alternative
lender, said it expected to draw down half of a C$2 billion
($1.46 billion) credit line that it secured last week, as it
seeks to offset the impact of a steep fall in high-interest
savings accounts (HISA) deposits.
Withdrawals from Home Capital's HISA accelerated last week
after its founder joined the ranks of recent executive exits
tied to a securities regulator probe. The regulator has accused
the company of making "materially misleading statements" to
The troubles at Home Capital, which provides subprime
mortgage loans and has seen a 73-percent decline in HISA
deposits since March 30, has raised fears it may be the first
sign of a crack in Canada's red-hot housing market, which some
have called a bubble.
In Toronto alone, house prices surged 33 percent in March
from a year ago, prompting authorities to take a series of
measures, including a 15-percent foreign buyers' tax, last
Equitable said it got the C$2.0 billion funding facility
from a syndicate of Canadian banks on Monday..
"We are confident in the fundamentals of our business and
our funding model, but owing to these recent events we have
taken steps to reinforce our liquidity position," it said in a
Equitable shares rose 28.5 percent at C$46.89 in late
afternoon trading on Monday.
Equitable said it was also "focused on extending the term of
our GIC portfolio," which would entail extending the maturity of
any new guaranteed investment certificates, or GICs.
Home Capital's shares slumped as much as 29 percent before
regaining some ground on Monday and were down 13.2 percent at
The lender, which has hired bankers to help it secure
additional funding and assess options, has seen its shares
plummet since a securities regulator last month alleged its top
executives hid mortgage broker fraud from investors.
"It's a blow for the nonbanking mortgage lending sector,"
said David Cockfield, managing director and portfolio manager at
Northland Wealth Management. "Anything that diminishes the scope
of the mortgage market will leave people high and dry. It has an
Finance Minister Bill Morneau and the national banking
regulator are both monitoring Home Capital's situation closely,
the pair said. Morneau said he has been in touch with the heads
of federal financial regulatory agencies to discuss
Morneau said "the system is working as it should where
institutions facing challenges find market-based solutions,"
referring to Home Capital's ability to obtain a credit line.
Last Thursday, the Healthcare of Ontario Pension Plan agreed
to lead a consortium providing a C$2 billion credit line to its
Home Trust unit.
The Ontario’s Public Service Employees union said it opposed
using pension funds to finance Home Capital and wants stricter
guidelines governing pension funds' investments.
"It's workers' money going to finance a finance company that
sells mortgages to people who maybe can't afford the mortgages,"
said Warren Thomas, president of the union. "I think it's a
risky, inappropriate investment ... I just don’t think we should
be in the business of financing banks."
However, Home Capital has low delinquency rates and it
services less than 1 percent of the Canadian housing market,
Karl Schamotta, director of global product and market strategy
at Cambridge Global Payments, said in a briefing note.
"In contrast with the meltdown that triggered the global
financial crisis almost a decade ago, Home Capital's problems do
not relate to underperformance in the underlying loan portfolio
- and are likely too small to generate real systemic risk."
Depositors have been withdrawing more cash from savings
accounts that help fund Home Capital's mortgage book.
The company said the balance in its high-interest savings
accounts (HISAs) was expected to slump to about C$391 million on
Monday, from C$521 million on Friday. The balance was C$1.4
billion a week ago.
"While the pace of withdrawals does appear to be slowing,
funding is expected to remain a material constraint," Raymond
James analysts wrote in a client note.
Home Capital said Friday about C$290 million had been
withdrawn from its HISAs the previous day, compared to C$472
million on Wednesday.
Total deposits in Home Capital's less-liquid Guaranteed
Investment Certificates stood at C$12.86 billion as of April 28,
marginally lower than the C$12.97 billion, as of April 26.
The alternative lender is expected to report first-quarter
results later this week.
($1 = 1.3651 Canadian dollars)
(Reporting by Swetha Gopinath and Arathy S Nair in Bengaluru,
John Tilak and Solarina Ho in Toronto; Additional reporting by
Anna Mehler Paperny in Toronto; Editing by Sai Sachin Ravikumar
and Nick Zieminski)