Warren Buffett, famed American investor and business guru, is coming to the rescue of Home Capital Group Inc., the Canadian alternative mortgage lender that has been in the news for months. Berkshire Hathaway, a subsidiary of Buffett’s company, has indicated it will buy $400 million worth of common shares in Home Capital.
The news is restoring some confidence in the company, which is Canada’s largest alternative mortgage lender for those who can’t or don’t want to get a mortgage through one of the big banks. Share prices in the company had previously tumbled below $10 per share after it came to light in April that former Home Capital employees were accused of breaking the law in their handling of mortgage applications. However, now that Buffett is throwing his support behind it, share prices are back up to $19 per share.
Resolving Home Capital’s legal issues and cash crunch
On April 19, the Ontario Securities Commission (OSC) claimed that brokers falsified information on mortgage applications submitted to Home Capital, and the company, its CEO, and its CFO misled shareholders. The OSC says the company made misleading statements, falsified certifications of annual filings, and failed to issue a timely news release when several brokers were found to be falsifying applicant incomes on mortgage and loan applications.
After the news hit, investors began pulling their money out of the company. And since then, Home Capital has agreed to settle both the OSC allegations and a class-action lawsuit. The company is also in the midst of solving its cash crunch: last week Home Capital announced it was selling $1.2 billion worth of mortgages to a private equity firm working in real estate, and Buffett’s company has also announced it is extending Home Capital a $2 billion line of credit.
Subprime mortgage rates surge as a result
While the deal with Buffett’s company aims to get Home Capital back on track, the company’s issues are having wide-reaching effects on the alternative mortgage market. Since April, interest rates have climbed by up b 1.5 per cent for Canadian borrowers who want an alternative mortgage.
And since investors started making withdrawals, Home Capital has had trouble accessing cash to offer new mortgages. That’s pushed many borrowers to other alternative lenders and it is likely those lenders are now having difficulty keeping up with the increased demand, resulting in rate increases.
What this means for Canadian mortgage holders
While new borrowers – specifically those looking for a mortgage outside of Canada’s big banks – are facing higher interest rates in the wake of Home Capital’s issues, there is no immediate cause for concern for those who already have a mortgage.
As we previously explored, this also doesn’t necessarily indicate that Canada is in a housing bubble, even though home prices in Canada’s major real estate markets, like Vancouver and Toronto, are still well beyond average income levels.
If you have a mortgage with Home Capital, likely the worst-case scenario you’d face is your mortgage would be sold to another lender (such as what just happened with Home Capital’s sale of mortgage assets to KingSett Capital). The terms of your mortgage would continue as is, until it’s time to renew and renegotiate. Now that the company has struck a deal with Warren Buffett, the hope is Home Capital will avoid causing any further disruption to the alternative mortgage market.
If you’re a homeowner or potential homeowner, be sure to do your research before acquiring or renewing a mortgage. Let RateSupermarket.ca help you find the best possible rate for your budget and circumstances.