HOME TRUTHS
Could the crisis with mortgage lender been avoided?
Home Capital Group Inc. is taking steps to right its business, but, even with what by all accounts is a sound mortgage book, it may not survive the fallout from the Ontario Securities Commission accusations that it provided misleading disclosure to investors.
That the fate of Canada’s biggest alternative mortgage lender is in question, with ripple effects hitting the broader financial services sector, has led to debates in legal, government, and financial circles about how things got so bad so fast, especially when there were obvious ways of heading off such a crisis.
Legal experts, for example, are questioning why Home Capital didn’t mitigate the damage by settling with the regulator that was about to drop bombshell allegations. They point to notable cases where companies did move on after settlements with the Ontario Securities Commission — Biovail Corp., Yorkton Securities, AiT Corp. — even though individual executives and former executives continued to fight the accusations.
Businesses, particularly regulated ones, are “loathe to have contested hearings with regulators, even when they think they are right,” said Robert Staley of Bennett Jones LLP in Toronto. “They’d rather write a cheque and take a sanction than face accusations of wrongdoing.”
Staley, who is not involved in the Home Capital case, but often advises companies and boards on regulatory matters, said firms “often want to settle to put issues behind them … mitigating the reputational harm that can come from a long and contested hearing.”
An agreed upon statement of facts in a settlement allows for a “favourable spin” to be put on the conduct in question, and penalties tend to be less severe than if a panel of OSC commissioners determines securities laws were breached, he said.
Discussions took place between the OSC and company representatives before the formal allegations were made and ahead of the worst of the carnage at Home Capital, sources say.
Such talks are confidential, though a media report amid the ongoing market turmoil this week suggested Home Capital founder and former chief executive Gerald Soloway had offered to settle and take the blame. However, the report did not say what sanctions Soloway offered to take that were reportedly rejected, or explain the more pressing question of why the firm opted not to settle, given the impact of the formal allegations on the company’s already slipping depositor base and share price.
Soloway did not respond to an interview request, and a company spokesperson said Friday that Home Capital “has no comment” on the issue of settlement talks.
“I think a settlement would have added some certainty — pay a fine and put the past behind them,” said a Toronto-based analyst.
In its absence, the formal allegations and a long-running and vocal short-selling campaign targeting the company combined to create a “perfect storm,” the financial analyst said.
On April 19, the OSC laid out its case against Home Capital and its disclosure of fraudulent income documentation in its mortgage business. The impact in the days that followed was dramatic.
In what was termed a “run on the bank,” depositors withdrew hundreds of millions of dollars from savings accounts in less than a month, forcing Home Capital to hastily arrange an expensive $2-billion line of credit.
The company’s shares plummeted, and have since tumbled by more than 73 per cent to close at Friday at $5.85, its lowest point in more than 10 years.
What started as a question of disclosure regarding an apparently isolated problem in 2014 and 2015 exploded into a full blown crisis of confidence — even though by all accounts there were no problems with the Home Capital’s mortgage book.
“Frankly, the mystery here is how it unravelled so quickly given that the business is still viable,” a veteran financial services lawyer with regulatory expertise said.
Investor concerns about Home Capital bled into other parts of the financial services sector, and even raised fears about possible cracks in Canada’s red-hot housing market.
Calming words from federal finance minister Bill Morneau that the two aren’t related seems to have done little to contain the fallout, which hit other alternative mortgage lenders such as Equitable Group.
Some market watchers have criticized politicians and regulators, saying they should have done more, and sooner, to contain the issues at Home Capital.
The message could have been clearer: the health of the mortgages underwritten by Home Capital is not in question — at least not as a result of the disclosure issues of concern to the OSC.
On Friday, Morneau’s press secretary Annie Donolo declined to address whether more coordination, and sooner, between government and regulators such as the OSC and the OSFI would have mitigated the fallout.
She deferred to OSFI “to speak to … questions on process.”
By law, OSFI deals privately and confidentially with financial services firms, and spokesperson Annik Faucher said the watchdog also “maintains ongoing dialogue with other regulatory agencies.”
But sources say there was limited direct communication, if any, with the OSC even as it became clear the securities regulator had serious concerns about Home Capital.
Whatever contact there was, “I doubt one regulator would talk another away from doing what it felt it needed to do,” said a veteran lawyer.
Home Capital has repeatedly asserted that it met its disclosure obligations in 2014 and 2015. “Home Capital Group has always carefully considered its disclosure obligations. The Company believes that its disclosure satisfied applicable disclosure requirements, and the allegations are without merit,” the firm said in a statement the day the OSC laid out its case. “The allegations will be vigorously defended.”
Some market watchers have criticized politicians and regulators, saying they should have done more, and sooner.