Who might be a suitor for Home Capital?
Ailing lender controls $26.4B in mortgages
With troubled mortgage lender Home Capital Group Inc. exploring “strategic options,” including a possible sale, a list of credit unions, trust companies, and competitors in the alternative mortgage-lending sector are all being considered as potential suitors.
The country’s biggest banks could also be in line, but i ndustry sources say an acquisition by a bank would be more complicated, and could require isolating Home Capital’s $ 26.4- billion worth of mortgages in a separate subsidiary.
Whoever steps forward, should an auction or sale take palace, the federal government and regulators are likely to have “a profound influence” on the outcome, says Jon Levin, a veteran mergers and acquisitions lawyer at Fasken Martineau LLP in Toronto.
If a sale is undertaken, potential suitors are probably most i nterested in buying the mortgage assets — which do not appear to be “unduly problematic” — rather than the whole company, he said.
“I do not see i ndustry players rushing to buy the operating company since they would also be buying the l i abilities, i ncluding regulatory liabilities,” Levin said. As for the mortgages, “I could see a buyer offering a guaranteed amount plus a contingent amount tied to loss experience.”
The type of mortgages Home Capital underwrites suggest a large bank is a less likely buyer than a credit union, trust company, or even rival mortgage lender, analysts say. Home Capital’s mortgages are originated primarily by brokers for homebuyers who don’t qualify for traditional bank loans, such as the self- employed and recent immigrants.
In addition to serving a different client base, Canada’s big banks have leaned toward originating their own mortgages, rather than using the mortgage broker channel. This is partly due to a regulatory requirement introduced by the Office of the Superintendent of Financial Institutions in 2013, which required t hem to conduct more due diligence for broker- originated mortgages.
“I think the only way for a bank to participate would be containing the ( Home Capital mortgage) book in a separate subsidiary,” said a Toronto- based analyst, noting that some big banks have stopped using mortgage brokers and originate the loans only through their own channels.
Operating an alternative mortgage lender through a subsidiary is not without precedent, he said, referring to Canadian Western Bank’s Optimum Mortgage operation.
But he said credit unions would not be constrained by the same regulatory issues as banks. It’s a point that was echoed by other industry watchers, who said the co- operatives would be among the likely suitors to kick the tires at Home Capital if the troubled lender or its mortgage assets become available.
Bill Maurin, t he chief executive of Ontario’s largest credit union, Meridian, told the Financial Post his firm is watching events play out at Home Capital, which hired bankers last week to advise on “strategic options” for the business.
“We are currently monitoring the Home Capital situation, but at this time, we have no plans in place to acquire any aspect of the Home Capital book,” Maurin said.
Rival alternative mortgage lenders such as Equitable Group Inc., Street Capital, and Equity Financial Holdings Inc., are also likely to look at Home Capital’s assets if they are put up for sale.
But Andrew Moor, chief executive of Equitable, said there could be differences in the processes and controls at Home Capital, which makes it difficult to entert ain buying a mortgage book from his competitor.
“It would certainly be hard for me to get comfortable with the books within Home Capital, and therefore, have any interest in purchasing them,” he told the Financial Post.
In addition to its book of mortgages, Home Capital Group has a banking licence, which could draw buyer interest if the firm or its assets are put up for sale.
I DO NOT SEE INDUSTRY PLAYERS RUSHING TO BUY.