‘A lot of self-employed ... will be breathing easier now’

Continued from FP1

“Having the star power of Warren Buffett backing this company is a significant vote of confidence.”

For months, the pullback of Home Trust has shrunk the amount of credit available in the marketplace and left people scurrying for funding, almost always at a much higher cost.

“Home Trust has always been in a leader in the space and the competition seemed to follow their lead. With them not as a viable solution or parked on the sidelines, it has seized up the whole credit vehicle for these type of loans. A lot of self-employed people will be breathing easier now,” Gaetano said.

Buffett’s move may also create confidence in the real estate sector which has been shaky in Toronto, following a decision by Ontario to slow the market in Canada’s largest city with new taxes on foreign owners and other measures.

Some in the real estate industry have also talked about a “Home Capital” effect on the doorstep, as nervous buyers just shied away from purchases. Average prices in Toronto are now off about 12 per cent from their April peak.

“Perhaps at the margin, the fact that Warren Buffett is willing to make this investment may send the signal to some that the broader housing market remains sound,” said Doug Porter, chief economist with Bank of Montreal. “Now, that might be a misreading of both the specific investment and the outlook for housing, but I wouldn’t doubt that it emboldens some potential buyers.”

Brad Henderson, chief executive of Sotheby’s International Realty Canada, said the percentage of the market held by Home Capital was small and competitors picked up the slack, meaning the company’s problems only caused a small slowdown.

“It wasn’t a systemic problem in the Canadian finance industry but missteps of one management team,” said Henderson. “Eventually it was going to be resolved. It’s not surprising a company like Berkshire Hathaway would step in. I will say he’s a famous contrarian so when everybody thinks it’s going to hell in a handbasket, he’s investing.”

Rob McLister, the founder of ratespy.com, said it almost seemed like Home Trust was “borrowing Buffett’s reputation” briefly and he doesn’t expect an immediate impact on access to credit or better rates.

“Until you start seeing Home Capital’s funding costs improve, their rates aren’t going to improve in the immediate stretch,” said McLister, who noted that higher-risk consumers have faced increased funding costs of 50 to 125 basis points with most of those borrowers looking for one or two-year loans. “Longer term, it will help, especially if (Home Capital) gets another equity deal. For Joe Borrower, it’s all about whether Home Capital can reduce its funding cost. The poor folks with trash credit or (who) can’t prove their income will benefit.”

Eli Dadouch, chief executive of Firm Capital Corp, called it a great deal for Buffett’s investment people but did wonder what it does for lending.

“I know it is the first step in stabilizing their business,” said Dadouch. “It’s not that there is a shortage of credit, it’s pricing. The Trust company was lending money at one per cent and lending at five per cent and making 400 basis points. The risk/reward on that business should be more like eight percentage points. People say pricing has gone up. You didn’t deserve that pricing in the first place.”