How Mortgage Fraud and Poor Management Sunk Home Capital Group
Wednesday, April 26, 2017 is a day that will forever be etched in the memories of Home Capital Group shareholders. In a span of a few hours, the company’s stock plunged 65 percent — it started the trading day at $17 per share, and closed at $5.99. One of Canada’s biggest mortgage lenders, once valued at $2.5 billion, was reduced to a mere $350 million. Thousands of Canadians were faced with a scary prospect — what’s going to happen to my mortgage if Home Capital goes bust?
A week earlier — April 19, 2017 — the Ontario Securities Commission released a scathing report on Home Capital’s business practices. The report, the result of an 18 month-long investigation by the OSC, concluded that Home Capital made “materially misleading statements” to its shareholders, blaming the decline in its mortgage business to “external vagaries, such as seasonality and competitive markets.” In fact, it was internal fraud that was depleting Home Capital’s bottomline.
The OSC report sent shockwaves through a mortgage industry already reeling from the impact of tighter lending requirements. By Friday, April 28, investors were fleeing — the company’s high interest savings deposit balances dropped to approximately $500 million, from $2 billion.
Investors, it turns out, were spooked by the no-holds-barred tone of the OSC report that accused a trio of top executives at Home Capital for deliberately covering up the fact that their employees were committing fraud — forging incomes of mortgage applicants in order to ensure that they would qualify for Home Capital mortgages.
Capitalizing on bad credit
Home Capital Group is the holding company of Home Trust, which provides Canadians a range of credit options including mortgages, lines of credit, and credit cards. Unlike borrowing from one of the big five Canadian banks, it’s much easier for the average borrower to be eligible for a Home Capital credit product. This is simply because Home Capital targets Canadians who usually wouldn’t qualify for a mortgage from a bigger lending institution like Scotiabank or TD.
In February 2015, it was discovered that more than 30 of Home Capital’s mortgage brokers were inflating the incomes of mortgage applicants, a practice that is called “bad underwriting”. It is estimated that these brokers brought in $880 million worth of mortgages in 2014 alone, 10 percent of the overall number of mortgages brought in by all of Home Capital’s brokers.
While that was big money, it was unfortunately obtained through illegal means. When this information finally made it to the top of Home Capital’s corporate ladder, CEO Gerald Soloway ordered an internal investigation which resulted in the firing of 30 brokers, 4 underwriters and 2 brokerages.
Because Home Capital’s revenue (at least for their mortgage portfolio) was quite heavily dependent on the illegal methods of these particular employees, the company started suffering financially. They reduced their monetary targets dramatically, but insisted that it had nothing to do with the income fraud mess.
They instead blamed “macroeconomic factors”. Odd, considering the positive housing climate — booming demand, and low interest rates.
Read more: https://news.vice.com/story/the-spectacular-implosion-of-home-capital-group?utm_source=vicetwitterca