Home Capital’s decline: A red flag about risk

How many of you have heard the recent stories about Home Capital’s decline?

The company said that its high interest savings account balances fell by $591million from March 28 to April 24 and many more withdrawals have occurred since. The problems for one of Canada’s largest mortgage lenders started two years ago when it revealed that alleged fraud by more than 40 mortgage brokers had added nearly $2 billion in mortgage to the company in 2014.

Home Capital stock tanked 60 per cent on April 26 after the company revealed it had to secure a $2 billion credit line to protect against heavy capital outflows due to depositors fleeing the troubled mortgage lender. Many investors are holding lockedin-GICs there, too, which means they can’t flee the troubled lender until their investments mature.

The story of Home Capital’s decay should be a red flag for yield hungry investors.

Canadians have had a great run of luck in getting good returns on their income investments by taking on more risk, but this story goes to show that the risk is real.

When searching for better returns, you need to ask yourself what will happen if something goes wrong and if your money is protected.

The Canada Deposit Insurance Corporation (CDIC) insures deposits held at Canadian financial institutions up to $100,000. The CDIC is well funded, with about $3.4 billion in cash and investments plus the ability to borrow up to $20 billion more with federal government approval. Home Capital and its subsidiaries (Home Trust, Home Bank and Oaken Financial) are covered by CDIC, so GIC investors holding less than $100,000 should be OK if they fail completely. For those that hold larger amount though, there is a lot of unknown.

Of course, a simple solution is to hold no more than $100,000 with any one institution so that each deposit is fully covered. If you deal directly with a bank, they will likely never tell you this, since they want to keep all of your assets under their roof and heavy-handed fees. An independent advisory firm can take a $500,000 GIC account and place $100,000 each with five different lenders to ensure proper coverage. Is Home Capital alone? Very unlikely.

While a widespread lending institutions failure is not expected, it is quite possible that a few more lenders will run into similar problems in the next little while.

I’ve recently written about the high risk that Mortgage Investment Corporations (MICs) carry and cautioned investors to be very wary of holding any money in these risky assets (email me if you want a copy of that article). Another example: Just last week, the Calgary-based Walton Group (which boasts their 35 years of experience and more than $5.1 billion in real estate assets) filed under the Companies Creditors Arrangements Act. I’m sure we will hear a lot more about them in the news soon and, unfortunately, we’ll hear a lot of stories about those who invested in “nice safe mortgages” and earned an eight per cent return have in fact lost some or all of their money.

What should you do? As always, the best option is to find an ethical and truly independent investment advisor who has your best interest (and not the bank’s) in mind. They should be able to properly explain the risks associated with each type of investment and help ensure that your entire invested amount is guaranteed where appropriate by the CDIC.

If you want to learn more, consider attending the Breaking Up With Your Bank seminar I mentioned a few weeks ago.

Brett Millard is the owner of SPEIR Wealth Management in Kelowna. Reach him at brett@speirwealth.com.