Home Capital is a company based in Toronto, Canada and was serving a particular group of home buyers – those that are self employed and new immigrants. Typically they do not have consistent earnings or a track record so the large banks tended not to give them a mortgage. Home Capital went after this market and had loan losses of less than .05 %, this made them a solid company. They had problems – they funded themselves by selling Guaranteed Income Certificates and their loans were a little higher than the competition. The problem came on renewal, now the people had a history of paying back their mortgages, the competition would take over their mortgages and give lower rates (the banks had less risk as the people build up a little equity in their homes). The churn rate meant Home Capital had to reach out to mortgage brokers to sell their mortgages. However for the past 20 years by the regular metrics of the stock investing, the company was highly rated.

Then a regulator said some of the mortgage brokers were less than perfect, not as bad as it was in 2008, but not what it should be. The company stopped doing business with the mortgage brokers and that should have been the end of the story for the business still had limited loan losses. Then something happen and confidence began to unravel in the bank business. The companies which distributed and help push the GICs put a hold on them and encouraged its customers not to buy them. The lack of GIC deposits lead to more money going out than in. The company had to go to an large institution to get a loan but it carried rates of nearly 20% on the first billion dollars or expensive money. Questions were asked why so expensive? and more money flowed out of the company. All of the above happened in a few weeks, in Feb the company was solid with a stock in the $30s and paying a dividend,  in March the stock slipped, in April the stock hit a low of $5.00 and no longer pays a dividend. A new President, Board of Directors and selling mortgages at a discount has kept the bank afloat.

Linking to dividend paying stocks, in the financial industry, the basic strength of the bank is confidence. Once that confidence goes, it does not matter what the previous numbers were, confidence is going. Similar to your reputation, it takes years to build up and a few moments to lose it. In the case of Home Capital, it paid a dividend and people were attached to the story and the company, but if you did not sell, you are hoping the assets are still worth $20 a share.

There are more questions than answers, till the next time – to raising questions.