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In recent days, the investment-banking arms of both Bank of Montreal and Royal Bank of Canada, hired by Home Capital to explore its options, have been contacting some mid-sized financial institutions to gauge their interest in a possible sale, according to sources.CHRIS HELGREN/Reuters

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Embattled mortgage lender Home Capital Group Inc. is warning investors it will miss its financial targets for the year, as it begins to draw down a backstop loan.

Toronto-based Home Capital expects to draw down half of a $2-billion credit line today, offsetting some of its rapid loss in deposits. The lender has suffered a run on its bank as clients pulled hundreds of millions of dollars from high interest savings accounts in a matter of days.

The loan, secured last week from a syndicate led by led by Healthcare of Ontario Pension Plan (HOOPP), came with onerous terms: A $100-million fee, a 10-per-cent interest rate on outstanding balances and a 2.5 per cent standby fee on undrawn funds.

Read more: The rise and fall of Home Capital

"Home Capital also advises that the terms of the agreement will have a material impact on earnings, and will leave the Company unable to meet previously announced financial targets," the company said in a news release.

In recent days, Home Capital has been bleeding large sums of deposits on a daily basis. The alternative mortgage lender expects to have about $391-million in its high interest savings accounts, as of Monday, after settling Friday's transactions. That's down sharply from approximately $521-million last Friday.

Deposits in the firm's guaranteed investment certificates (GICs), which have a fixed term, have been steadier. They stood at $12.86-billion on Apr. 28, down from $12.97-billion two days earlier.

Recently, the investment-banking arms of both Bank of Montreal and Royal Bank of Canada, hired by Home Capital to explore its options, have been contacting some mid-sized financial institutions to gauge their interest in a possible sale, according to sources. At the same time, some of those same financial institutions have talked to each other about the feasibility of pooling resources to purchase assets from Home Capital, and executives could begin meeting soon to hash out the details.

For subscribers: Is Home Capital's crisis the pin that pops the housing bubble?

Read more: The rise and fall of Home Capital

The talks are still in early stages and hardly certain to lead to a sale. But Home Capital's crisis has unfolded quickly, and the need to find a buyer for the company or its assets could become more urgent if the lender is unable to stem the outflow of deposits and stabilize its business.

The turmoil surrounding Home Capital may only add to fears of a correction in overheating housing markets in some of Canada's largest cities, and the effect that could have on highly indebted home owners and consumers. And even as industry experts express confidence in the underlying quality of the embattled lender's current loans, there is concern about access to the mortgage market in the longer term: Home Capital has built its business by lending to borrowers who couldn't qualify for a home loan at a traditional bank for a variety of reasons.

Home Capital offers guaranteed investment certificates (GICs) and high-interest savings accounts through its subsidiaries Home Trust, Home Bank and Oaken Financial, but they are often sold to clients through brokers and advisers at other institutions. Several large banks, such as Canadian Imperial Bank of Commerce, Bank of Nova Scotia and RBC, have introduced a $100,000-a-client cap on purchases of Home Capital GICs, which is the maximum amount covered by Canada's deposit insurer. (RBC placed no limits on purchases through the firm's discount brokerage.)

Thus far, none of the six biggest banks are expected to enter the bidding to acquire assets from Home Capital, which places a spotlight on smaller and mid-sized lenders as well as credit unions.

Against this backdrop, investors and other financial institutions are closely watching the performance of Home Capital's closest rival, alternative-mortgage lender Equitable Bank, which has also seen its stock dip as investors get jittery.

A spokesperson for the Office of the Superintendent of Financial Institutions (OSFI), Canada's banking industry regulator, reiterated that it "continues to monitor the situation closely," but declined to comment further.

But OSFI appears to be taking the pulse of the market and watching for signs of contagion. Last week, the regulator sent an urgent letter to smaller and mid-sized financial institutions and credit unions, asking them to provide up-to-date information about activity in their high-interest savings accounts, according to a source. Specifically, OSFI wanted data on recent redemptions and current levels of high-quality liquid assets as soon as institutions are able to provide it.

Meanwhile, Home Capital's largest shareholder appears to be standing by the lender, at least for now. In a note to investors on April 28, the partners at Turtle Creek Equity Fund, which owned 13.7 per cent of the mortgage lender's shares as of Feb. 28, told clients the fund has not sold any shares of late. "We too are disappointed in the short-term situation regarding Home Capital," Turtle Creek's letter says, but then goes on to outline Home Capital's "history of careful underwriting."

"What has surprised most market participants is the speed and severity of the loss of confidence in the company," the letter says. "The fact that this is happening in the face of an exceptionally strong credit environment makes it all the more unusual."

Personal finance columnist Rob Carrick shares a positive note about the rising housing market in large Canadian cities like Toronto.

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