Canada prop­erty mar­ket faces melt­down threat

Financial Times USA - - COMPANIES & MARKETS - BEN MCLANNAHAN — NEW YORK

A fight for sur­vival at Canada’s big­gest non-bank mort­gage lender is spark­ing fears of a broader melt­down in the coun­try’s prop­erty mar­ket. An­a­lysts have warned of ex­ces­sive lever­age in the mar­ket for years, as home-price growth has run well ahead of in­comes.

A fight for sur­vival at Home Cap­i­tal Group, Canada’s big­gest non-bank mort­gage lender, is spark­ing fears of a broader melt­down in the coun­try’s su­per-heated prop­erty mar­ket. Shares in Home Cap­i­tal came un­der pres­sure last month after On­tario’s se­cu­ri­ties reg­u­la­tor said it had failed to promptly dis­close pos­si­ble fraud among some of its mort­gage ap­pli­cants. The com­pany has since bat­tled to stem an out­flow of de­posits de­spite agree­ing to tap a high-in­ter­est credit line to shore up its fi­nances.

Stephen Poloz, gover­nor of the Bank of Canada, said in an in­ter­view at the week­end that Home Cap­i­tal’s prob­lems were “idio­syn­cratic”, and he saw no sign of broader con­ta­gion.

But vanishing de­posit fund­ing — down about $600m this month, from about $13.5bn at the end of April — has prompted par­al­lels with New Cen­tury, the sec­ond-big­gest sub­prime lender in the US that hit se­ri­ous trou­ble about 18 months be­fore the Lehman cri­sis.

“Reg­u­la­tors have their heads in the sand,” said Marc Co­hodes, a vet­eran short-seller who be­gan to tar­get Home Cap­i­tal a cou­ple of years ago. “They should have said, ‘these guys are done, the big banks will pick up the slack, we’ve got rid of a bad ac­tor’. In­stead, they’re try­ing to sweep it un­der the rug, try­ing to pre­tend it’s a one-off.”

An­a­lysts have been warn­ing about ex­ces­sive lever­age in Canada’s prop­erty mar­ket for years, as home-price ap­pre­ci­a­tion has run well ahead of in­comes. Last week, Moody’s docked its credit rat­ings for the six big­gest Cana­dian banks, cit­ing “el­e­vated” house prices among a host of risks.

Home Cap­i­tal’s woes are “not an en­cour­ag­ing sign of the health of the Cana­dian hous­ing mar­ket and the coun­try’s broader fi­nan­cial sec­tor”, said David Neuhauser, man­ag­ing di­rec­tor of Liver­more Partners, a Chicago-based hedge fund.

Author­i­ties have tried to let some air out of the mar­ket. Last sum­mer, the Of­fice of the Su­per­in­ten­dent of Fi­nan­cial In­sti­tu­tions tight­ened su­per­vi­sory stan­dards for mort­gage un­der­writ­ers, while of­fi­cials in On­tario last month im­posed a string of curbs in­clud­ing rent con­trols and levies on for­eign buy­ers. But the mea­sures could come too late for Home Cap­i­tal, which said last week that rep­u­ta­tional hits could have cast “sig­nif­i­cant doubt” over its abil­ity to stay in busi­ness.

On an earn­ings call with an­a­lysts, Home Cap­i­tal di­rec­tor Alan Hibben said the com­pany was ex­plor­ing var­i­ous strate­gic op­tions.

“We’ve ob­vi­ously done sce­nar­ios out the yin yang here . . . sce­nario A,B, C and up to what­ever let­ter you want,” he said. “As you can ap­pre­ci­ate here, the run-off sce­nario is the last one that we ever hope to be ex­e­cut­ing.”

The com­pany de­clined to com­ment on its out­look, while Bank of Canada said it would not com­ment on spe­cific in­sti­tu­tions. Mr Co­hodes, who lives on a chicken farm in Sonoma County, Cal­i­for­nia, said he be­came in­ter­ested in Home Cap­i­tal after see­ing a 2013 pre­sen­ta­tion by Steve Eis­man, one of the cen­tral char­ac­ters of The Big Short, Michael Lewis’s book about the US mort­gage cri­sis.

About a year later, after it be­came clear that the com­pany was chas­ing vol­umes at the ex­pense of qual­ity, he be­gan short­ing.

He said the Bank of Canada gover­nor needed to get se­ri­ous. “When the prob­lem hap­pened in the US, ev­ery­one was say­ing it was ‘con­tained’. But it’s like the Great Lakes: Michi­gan wa­ter goes to Lake Su­pe­rior. In­stead of say­ing, ‘we have a prob­lem’, they need to fix it.”

An­a­lysts have been warn­ing about ex­ces­sive lever­age in Canada’s prop­erty mar­ket for years

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