Financial Post   March 19, 2009

Barbara Shecter

Mortgage lender seen as target

A Toronto-based company built on extending mortgages to people who don't qualify for a bank loan, but without the disastrous results experienced in the United States, is increasingly being viewed as a takeover target.

Home Capital Group Inc., whose shares are trading at decade-low earnings multiples, fuelled the speculation last week when it adopted a shareholder-rights plan, or poison pill, which gives a company more time to drum up offers if there is a hostile bid.

But the 20% gain since then may have more to do with Home Capital's successful pursuit of a slice of the insured Canada Mortgage and Housing Corp. business dominated by the big banks that takes advantage of government incentives put in place late last year to stimulate lending.

"The government has been boosting the level of mortgages taken in through the CMHC programs and Home Capital has been able to ramp up activity here-- the yield is good and the government takes on all of the default risk," said Jeff Fenwick, an analyst at Cormark Securities Inc. "Meanwhile, Home purposely eased back on some of the other areas where they lend ... as they had been concerned about the housing downturn in Canada."

Tarred by the fallout from the subprime-mortgage meltdown in the United States, Home Capital's shares were off nearly 60% from a 52-week high of $41 last June before the recent rally that took the shares back to $23.64 yesterday.

Gerald Soloway, chief executive, said in an interview the company decided the tweak the business model beginning in the late summer of 2007, when the subprime crisis took hold in the United States and Canada's non-bank asset-backed commercial-paper market froze.

The company has reduced loans-to-value to take falling house prices into account and reduce the risk of losses from defaults, and ventured into the 80% insurable portion of the $800-billion Canadian mortgage market that is the territory of traditional banks.

This month, Home Capital's $200-million mortgage business will be evenly split between insured mortgages that take advantage of the spread between bonds yields and rates, and the company's traditional mainstay of uninsured loans for those who can't get them elsewhere, Mr. Soloway says.

"At this point, the margins of selling into the Canada bond program are very good... We don't apologize for being somewhat opportunistic and taking advantage of a market," he says.

CMHC insured mortgage pools are priced using Canadian government bonds and with bond yields being very low, the spread between the average mortgage rate in the pool and the rate paid on Home Capital's mortgage-backed securities has made it an attractive area for the company to be, analysts say.

It seems likely the big banks will take notice, especially because they are touted as potential buyers of Home Capital and have historically coveted the firm's healthy margins derived from higher interest rates on the loans that are perceived to be riskier. But Mr. Soloway says there have been no formal or informal approaches from suitors.

Financial Post

March 18, 2009

Becky Guthrie

Real estate: Has spring sprung?

Are these the first "robins" of spring? Signs of what we hope is renewed life in the housing market appeared today, with February resale numbers from the Canadian Real Estate Association showing a cross-Canada rise of 8.6% from January, and price declines showing the first deceleration in four months.

"It looks like the Category 5 hurricane which had been pounding the home-resale market has been downgraded to 'just' a Category 4," said Douglas Porter, an economist at BMO Capital Markets. Despite February's gain, sales are still off 31% year-over-year, CREA said. See the full story on our Homes web page here.

As well, there's the south-of-the-border news that new-home construction starts rose 22.2% in February after seven months of declines. Though it will take a good few months to tell, this may not be just a blip: Permits to build new homes - an indicator of future activity in the housing sector - rose 3% in February from the month before. (That result surprised analysts, who said a stabilization in single-family starts and the slight recovery in single-family permits - the first in nine months - was very good news indeed.)

However, an astounding 82.3% leap in multi-family starts - condos and townhouses - was "exceptional." (It was centred mostly in the U.S. Northeast.) Not only does this result mean developers feel they'll keep the buyers who signed on in pre-construction stages, and that they'll be able to sign on new buyers, it also means - perhaps more pointedly - that they've secured financing to start construction. See the full story, with its cautionary note, on our Homes web page here.

Globe and Mail

March 17, 2009

Tara Perkins

Banks begin to decline federal aid in first sign of recovery

Credit conditions easing, banks no longer struggling to raise funds to make loans

Canadian banks are turning down some of the funding that the government is making available to them, a sign that they are recuperating from the financial crisis.

The banks have stopped selling the government the full amount of mortgages they could under Ottawa's $125-billion mortgage purchase program, the centrepiece of the federal government's plan to help the industry.

"We actually don't need a lot of funding right now," a senior banker at one of the big five banks said yesterday. "All of the Canadian banks are pretty flush right now with cash."

That's not to suggest they aren't facing problems, with consumers increasingly losing their jobs and unable to pay off their debts. But the banks are no longer struggling to raise funds to make loans - at least for now.

 Credit conditions for Canadian banks have improved since late last year, as Canadians jittery about the stock market have left more of their money in bank accounts, giving them a ready pot of cash to fuel lending. At the same time, global credit markets have eased slightly as central banks have pumped billions of dollars into the financial system.

Federal Finance Minister Jim Flaherty announced the creation of the mortgage purchase program in early October, when it was extremely difficult for banks around the world to fund their lending operations.

He originally said Ottawa would buy up to $25-billion of mortgages from the banks, through Canada Mortgage and Housing Corp., to free up capacity for them to make new loans.

The purchases take place in periodic auctions that actually turn a profit for the government. Ottawa tells the industry how much it is willing to buy - for instance, $5-billion worth of mortgages held by the banks on their balance sheets - and then the banks each say how much they would be willing to pay, in the form of interest, to sell mortgages to the government. CMHC accepts the most profitable bids.

Bankers have been griping that the program, which is projected to earn billions of dollars for Ottawa, is expensive. But until last month, that hadn't stopped them from selling all of the mortgages that they could into it, and pressing Mr. Flaherty to buy even more. Well into the new year, banks continued to have trouble raising medium-term funds.

Ottawa boosted the size of the program twice, most recently announcing in the federal budget that it would buy a total of up to $125-billion worth of mortgages. The program has been successful in leading to a reduction in mortgage rates for Canadians, with banks passing on their lower funding costs.

But in the last couple of auctions, the banks have not sold the full amount of mortgages Ottawa was willing to buy. The most recent one took place on March 11, when CMHC told the banks it would buy up to $4-billion worth. Banks sold it about half that, $2.1-billion.

That followed the Feb. 20 auction, when banks sold CMHC $2.3-billion worth after it said it would buy up to $7-billion from them.

There are a couple of reasons why the banks have lost some of their appetite for the government aid.

More Canadians are pulling their cash out of mutual funds and riskier investments and parking it in deposits, such as chequing accounts and GICs. Deposits are the largest source of funding for the banks. If stock markets recover, and customers shift their money back into mutual funds and equity investments, the banks could find themselves in need of funding help again, notes Toronto-Dominion Bank chief economist Don Drummond.

At the same time, the growth of banks' loan portfolios is slowing. The soft housing market led to very weak mortgage originations in January and February, Mr. Drummond said.

Still, the slackening demand for government help does suggest that credit conditions have eased. The lack of take-up on the mortgage auctions "seems to point to the fact that the Canadian banks are not in a big liquidity crunch themselves," said Marlene Puffer, a managing director at Twist Financial Corp.

That means the banks' lending operations are not being held back by an inability to raise financing, she added: "Any constraints in terms of the banks lending are coming more from inside the banks than any constraints they're facing in terms of raising capital."

The Canadian Bankers Association said in an e-mailed statement that the mortgage purchase program is still an effective tool, noting that it's already injected more than $53-billion worth of liquidity into the marketplace so far.

A spokeswoman for CMHC declined to comment yesterday, noting that the details of the auctions are confidential.