Remember the subprime mortgage bubble in the US in the early years of this century? It led directly to the 2007-08 financial crisis, the echoes of which are still with us today. It looks as if one of Canada’s major mortgage lenders is rediscovering the implications of that bubble.
Home Capital Group Inc.’s shares plunged more than 60 percent after the mortgage lender disclosed a costly new loan to tide it over as its deposits dwindle, intensifying a spiral of bad news for the company.
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“They did what appears to be to us a very expensive deal,” said David Baskin, president and founder of Baskin Wealth Management in Toronto, a former investor in Home Capital stock. “Basically they blew up the income statement in order to save the balance sheet, which I guess if you’re facing an existential crisis is what you have to do.”
Ontario’s securities regulator last week accused the company of misleading investors and breaking securities laws. On Wednesday, Home Capital shares dropped as much as 64 percent in Toronto to C$6.11, their lowest since 2003 after their biggest ever one-day drop. Other home lenders’ shares declined as well, with Equitable Group Inc. falling 32 percent, Street Capital Group Inc. down 7.5 percent, and First National Financial Corp., 8.5 percent.
Home Capital’s troubles come as housing prices have jumped in Canada. In Toronto, home affordability reached its worst level since 1990 at the end of 2016, according to a report from Royal Bank of Canada.
There’s more at the link.
Yes, I know, it’s Canada; but that country’s economy is a microcosm of the US market. Anything that happens there is very likely to be reflected in our own economy, and vice versa. As Zero Hedge points out, Canada’s entire wildly-inflated mortgage market is reeling under the shock of Home Capital Group’s crisis.
It’s precisely that sort of financial shock that preceded – and precipitated – the US financial crisis, a decade ago. The subprime mortgage crisis led directly, and very quickly, to a banking crisis – remember the Lehman Brothers bankruptcy?
This situation will bear watching.