Shares of Home Capital Group Inc. (TSX:HCG) were up 2.37% at the bottom of the noon hour on November 15th. The beleaguered alternative lender has seen its stock drop over 50% in 2017 after a crisis with its mortgage underwriting practices almost sunk the company in the spring.
The company responded by shuffling its executive management team and reconstructing its underwriting procedures. Now, after a significant housing correction in the spring and summer and new OSFI mortgage rules set to kick off in January 2018, Home Capital faces a number of challenges. The new rules that require a stress test for uninsured buyers are expected to slow loan growth for lenders.
Home Capital Group released its third-quarter results on November 14th. The company managed to return to profitability and posted net income of $30 million compared to $66.2 million in the previous year. Total loans under administration dropped to $23.2 billion from $26 billion in Q3 2016.
The company also reported a steep drop in total mortgage originations – from $2.54 billion to $385 million in the quarter. Home Capital Group reported a liquidity position of $4.6 billion with the still-undrawn balance from the Berkshire Hathaway Inc. credit facility.
The Canadian Real Estate Association reported that home resales were up 0.9% in October from September, but home prices declined. New OSFI mortgage rules have the potential to cool housing prices by another 5-10% in 2018. Investors should be cautious even as Home Capital Group signals a recovery from the brink of collapse.
