Shares of Home Capital Group Inc. (TSX:HCG) were up 10.46% in early afternoon trading on January 22. The stock is still down 1.3% in 2018 as alternative lenders have been battered by broader pessimism for the Canadian housing market. New OSFI mortgage rules that imposed a stress test on uninsured buyers and an early rate hike from the Bank of Canada has some worried that the market will cool dramatically to begin the year.
On January 17 it was revealed that famed short seller Marc Cohodes, who was a vocal Home Capital detractor since 2015, was suing the company for $4 million alleging “negligent and/or fraudulent misrepresentation”. The lawsuit alleges that Home Capital was aware of mortgage brokers using false income verification for mortgage originations by June 2014 and failed to disclose.
According to a Royal Bank of Canada Capital Markets report, Home Capital is likely to repay in full its $475 million of institutional deposit notes coming due in March. This is thanks in large part to the $4.7 billion in liquidity the company currently possesses. The bailout courtesy of Warren Buffett’s Berkshire Hathaway Inc. in mid-2017 has paid of substantially for the company.
Home Capital is still wrestling with a number of challenges going forward. In its most recent third quarter 2017 results mortgage originations were down $2 billion year over year. If the Canadian housing market goes through a prolonged cooldown Home Capital and other alternative lenders will struggle with loan growth in 2018 and beyond.
