December 14, 2017
1 Year Closed : 2.64 % |
3 Year Closed : 2.74 %
5 Year Closed : 2.84 %
The Warren Buffet Factor|
A lot has changed since Warren Buffet decided to invest in Home Capital and the Canadian housing market.
The billionaire's company, Berkshire Hathaway, gave the beleaguered
company a $400 million cash infusion along with a $2 billion line of
Prior to this, Home Capital was in challenging position, predicated by a
damaging allegation in April that the company had misled its
shareholders by disclosing too late that an internal investigation found
evidence of fraud and had cut ties with 45 brokers. Although the
alleged non-disclosure had occurred at least two years prior, and the
company's business fundamentals were solid, the effect was immediate --
account holders started to withdraw their money, which resulted in a
small "run" on deposits.
Shareholders started to sell, resulting in a drop in share price. This
phenomenon also spread to a few other alternative lenders in the market,
who also saw their share prices fall, for no apparent reason.
While the Home Capital controversy shook up the market somewhat, and fed
the rumour mill with talk of bubbles, etc., none of that has come to
Home Capital Overview
Based in Toronto, the publicly-traded company offers mortgage lending,
deposits and credit cards through its principal subsidiary Home Trust.
Ninety per cent of the Home Capital's business originates from uninsured
mortgage clients who are turned away from traditional Banks.
As one of Canada's largest alternative lenders, the company is an
important player in the country's housing market. A niche-market lender,
Home Trust was one of the go-to lenders that mortgage brokers used for
self-employed borrowers as well as those with some damaged credit. When
the crisis occurred, brokers had to quickly find other mortgage lenders
to take up the slack.
If Home Capital was a bigger player in the market, there could have been
dire consequences. Its mortgage loan portfolio is approx. $20 billion
compared to the $1.1 trillion in residential mortgage loans of the
Was there a real issue?
Most analysts acknowledged that the underlying fundamentals of the
company were steady, although the allegations created uncertainty. Mike
Rizvanovic, an analyst with the Veritas Investment Research in Toronto
said in a Financial Post interview, "This is a very peculiar situation
where Home Capital has no issues around credit, and no issues with a
capital shortfall. Yet they are being decimated in terms of their
viability as an ongoing entity."
Clearly, Warren Buffet agreed. Not only does his investment put
much-needed capital into Home Capital, it was also a strong endorsement
for the company.
"Home Capital's strong assets, its ability to originate and underwrite
well-performing mortgages, and its leading position in a growing market
sector make this a very attractive investment," said Buffet, Berkshire's
chairman and chief executive officer, in a statement.
The Buffet Factor in Action
Almost immediately, Home Capital shares went up. Other alternative
lenders also saw their shares recover. Depositors are coming back, lured
somewhat by an excellent interest rate on deposit accounts.
The other immediate effect was increased confidence in the Canadian
housing market as a whole. Many mortgage brokers were forced to find
alternative lenders when Home Trust depositors began pulling out their
money, leaving the company with a liquidity problem. Mortgage brokers
have now begun referring business to Home Trust again.
Warren Buffet's investment sends a strong, positive message about Home Capital and also about Canada's housing market.
The Mortgage Group Canada (www.mortgagegrp.com)
Tuesday, June 27, 2017
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