Given the ructions in the U.S. subprime - or ridiculously high-risk, to put it more accurately - mortgage lending and the Canadian market for non-bank asset-backed commercial paper, the notion that Canadian "non-bank mortgage lenders" may be a fine place to stash your money these days may at first sound faintly ludicrous. But it's Friday afternoon and perhaps you're feeling mellow. Analyst Phil Hardie at Dundee Securities in Toronto thinks they're a darned good bet. As far as he is concerned, the ABCP mess has in fact created a great big buying opportunity. He initiated his coverage of the sector Friday by bestowing a "market outperform" rating, otherwise known as "buy," on Home Capital, Equitable Group and First National Income Fund. They all "stand to benefit significantly" as banks and other "traditional" financial institutions tighten their lending and underwriting standards in the credit crunch, he said, albeit with the caveat that the Canadian economy remains healthy. Mr. Hardie has a 12-month target price of $43 for Home Capital, which is currently trading on the TSX at $34.77, of $38 for Equitable ($29) and of $21 for First National ($16.01). "Non-bank lenders active in residential or commercial mortgages stand to gain through increased loan volume as an increasing number or borrowers are rejected by banks, and the relative loan pricing differential declines," he says in a 102-page report to clients. By his calculation the, uh, "non-prime" mortgage market could probably sop up another $55-billion in loans on top of the mere $10-billion outstanding at the moment, meaning the field is probably about $65-billion big. For deposit-taking entities such as Equitable and Home, he said, the fact that the ABCP market has seized up may pose a significant opportunity. "With strong balance sheets and ample regulatory capital, both companies are well positioned to aggressively buy up less risky mortgages, originally slated to have been packaged as ABCP, and keep them on their own books." As for First National Income Fund, it owns 20 per cent of First National Financial, which, according to Mr. Hardie, is the largest non-bank originator and underwriter of single family residential mortgages in Canada, and has recently launched a "near-prime" mortgage program that has "experienced strong growth."
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