Earlier in the week we ran an interview with Home Capital Founder Gerald Soloway, who’s retiring this spring. His career accomplishments leave big shoes to fill, and that’s where our next interviewee comes in.
Home Capital’s soon-to-be-CEO Martin Reid is dedicated to boosting the company’s broker market penetration and driving its stock to new highs. But that won’t be without challenges.
We were curious about Martin’s take on some of the risks Home Trust faces, so we asked him about them, and he graciously answered.
Here is that interview:
CMT: How has last year’s experience with document fraud made Home a better lender?
Martin: While Home Trust has always had a strong risk-management focus, it is fair to say that this incident has served as a catalyst for us to broaden our scope and further strengthen Home for the future. At the same time, we understand that it is critical that we not lose sight of the need to maintain a strong, broker-first focus for which Home has long been known. We feel that the revamped processes we have put in place achieve this balance and we are very pleased with the progress we have made on this front.
CMT: Why are the shorts wrong about Home Capital?
Martin: In my view, the shorts are not just wrong about Home Trust, but they’re missing the mark on the entire Canadian housing sector. Certainly house prices will fluctuate in response to market conditions, but the Canadian housing market is not repeating the experience that led to the U.S. crisis.
One of the leading contributors to the U.S. housing collapse was a dramatic increase in lending to unqualified borrowers. In Canada, mortgage lending may be on the rise, but with the regulatory tightening of the last few years it has been to high quality borrowers who are purchasing properties in an active, robust market that continues to be supported by strong fundamentals.
There are other important differences as well, not the least of which is that in Canada, you cannot simply walk away from your property without suffering significant and long-lasting damage to your credit. Alberta is an exception in this regard, but during the height of the crisis in the U.S., holders of underwater mortgages were handing in their keys in droves. This led to an oversupply of properties adding further downward pressure on prices.
CMT: What is it going to take to knock down the Toronto and Vancouver housing markets, and how do Home’s stress tests suggest it would fare in a 20% correction?
Martin: As long as demand for homes in Toronto and Vancouver continues to significantly outpace supply, we expect prices to continue to rise in these two cities, albeit likely at a slower pace than what we have seen the last couple of years. In fact, in Toronto February results show that sales were up 21 percent while prices rose 15 percent compared to February 2015. Given this level of activity there is no indication that the supply-demand imbalance is set to narrow any time soon. This is especially true of the single family homes.
It is worth noting that while detached units remain in high demand, the luxury condo market in both cities does appear to be over-supplied and this could lead to a levelling or softening of prices. This does not represent a risk to Home Trust as condos represent only about 7% of our business with much of that in townhouse-type condos.
Factoring a 20% correction in prices into our models, we would obviously see an impact on our business but it would not automatically result in a dramatic increase in losses. It might require a slight adjustment to our work priorities around originations and possibly an increase to the collections side of our business. Canadians will typically continue to make their payments even when the value has dropped. Even so, a 20% retracement is highly unlikely in the face of the significant demand for resale properties, and until this demand eases, a correction seems unlikely. What we are more likely to see would be a levelling off of prices in the Toronto and Vancouver markets.
CMT: Where are the biggest growth areas going forward? Is “A” lending, with all the competition, still a promising long-term profit generator?
Martin: Our primary growth area will continue to be our traditional “Alt A” business. We obviously know this segment well and feel there is significant capacity to expand in the coming years as more borrowers find they may no longer qualify for prime mortgages.
Regulatory tightening in the past as well as the Big 6 banks tightening in response to a slower macroeconomic environment will cause more strong quality borrowers to fall short of the lending criteria required by the large banks, hence providing the opportunity for Home.
We also expect to see an increase in the ranks of workers categorized as self-employed, as well as new Canadians with limited Canadian credit history. Both groups have traditionally been under-served by the major financial institutions and for these borrowers we have our Classic mortgage product.
While the “A” side has not been our core focus, it does allow us to offer a full suite of competitive products to the mortgage brokers. In 2015 we launched our “Ace Plus” product that caters to those individuals that just barely miss qualifying for a prime insured mortgage. This is really new territory for Home and we see lots of growth in this product in 2016. We see an opportunity to attract more borrowers who just miss qualifying for an insured mortgage with the banks.
CMT: Thank you, Martin.