Toronto-based Home Capital Group Inc.Home Capital Group Inc. lends money to those who can't get it elsewhere, a potentially scary prospect coming out of one of the worst recessions in history. Yet it has default rates that are lower than the chartered banks and posted a $41.7-million profit in the first quarter.
Chief executive officer Gerald Soloway said there's no secret to its success - Canadian homeowners will do just about anything to stay in their homes. Even with residential real estate showing signs of stalling, he's sure the economic recovery will ensure default rates stay near 1 per cent. Here's why.
You lend to those who can't get money from traditional sources, such as the banks. How did your lending change through the recession?
Usually the people we deal with are in business for themselves, are new immigrants or have a past credit problem. That's about 20 per cent of the population. That's the market we have always catered to; we look to service the group that has trouble at the bank. But unlike our peers in the U.S., we never lend more than 80 per cent of the value, so the homeowner always has substantial equity in the property. When the commercial paper failure occurred in Canada in 2007 and the Canadian economy clearly began to tip, instead of doing 80 per cent we dropped to 65 per cent. We were much more strict in our criteria. By the middle of 2009 we started to see the economy substantially improve, and we're back to lending the way we did for the past 23-odd years.
What sort of economic insight do you get from the people walking through your doors?
Now we see the economy is really very good from coast to coast. Everyone seems to be participating in the recovery, so we're quite comfortable lending the way we always have. We think the economy is doing better than the statistics show. Economists seem to think the growth will slow, but we don't see a slowdown. We see it going ahead - we see people refinancing their homes to put it into their business and to make investments. We think that's a great leading indicator that employment will increase.
Isn't it ominous that people are taking money out of their homes to invest?
A house sale is a vote of confidence in the economy. Someone saved money for 20-per-cent down or more and put it in a house. They have to be comfortable that the market will be okay and that they will have the capacity to make payments before they think of doing something along those lines. Unlike the U.S., people in Canada have substantial equity when they buy a house.
The minimum down payment in Canada is 5 per cent; that's hardly substantial.
Even at 5 per cent you need to qualify for a mortgage, have low debt, been in a job a certain amount of time. If someone can fulfill all those requirements, then the arrears are fairly low, because even at 5 per cent you have a commitment. These aren't people who are unqualified - they are able to buy the house and carry the costs.
What if they run into trouble? Their stocks plummet, their business is ridiculous?
Ultimately, we have the covenant on their mortgages. But what we really want is for an individual to be able to sell if they have a problem. We don't want to be the ones trying to sell it, so when we see deals we want to be sure the value is real and sustainable. And in a better economy, people can solve their own problems. So if they can't afford to live somewhere, they sell their house and pay off the mortgage and maybe have a little bit left over.
Doesn't that presume housing values will continue to increase? What do you think will happen?
We've taken a historical view of the market and we don't think it will be down more than about 5 per cent, and that's if it goes down at all. It's not crushing; markets fluctuate all the time and most people will be able to sustain that quite easily. There's also a very good chance the housing market will just move sideways. The general tone in this country is that the economy is very good and the U.S. is getting better, which can only be a good thing.
What about your other products? Your default rates on your credit cards are low; why is that?
People are paying; we aren't having collection problems. On our Visa product, we have rates that are about half regular rates. The difference is we get a collateral mortgage on their residences. We have a little more security, so we can do it for lower rates. People use the cards in the traditional way, but also as a way to get a home equity line. Our average Visa is for about $35,000, as opposed to $3,000. But they are registering a collateral mortgage with us. Last year the average writeoff for credit-card debt among the banks was between 3-and-5 per cent. I think ours was about 0.30 per cent. If housing values drop it could creep higher, but then again if the market drops suddenly then everyone is going to get it.
When is the best time to be you - recessions or recoveries?
We do okay in both environments. A recession is bad for everybody, but this is a very good time.