Short sellers are gloating, investors are writhing in pain – and everyone else is wondering whether Home Capital Group Inc.'s troubles will reverberate beyond the home lender's withering stock.
The share price of the Canadian mortgage lender fell 65 per cent on Wednesday, extending the total decline this year to more than 80 per cent.
The sharp downturn is raising questions about the company's future amid a dwindling deposit base and eroding confidence in management. The Ontario Securities Commission alleged earlier this month that the company failed to properly disclose flaws in its mortgage underwriting process to investors.
But the decline has spread well beyond Home Capital and is affecting a number of other significant Canadian mortgage players.
The mortgage sector is being battered by tremendous uncertainty at a time when concerns about Canada's housing market are growing louder.
Equitable Group Inc. shares fell 31.7 per cent on Wednesday, even though the lender continues to report strong quarterly growth.
"I think our company is demonstrably different [than Home Capital]" said Andrew Moor, chief executive officer of Equitable Group. "Nonetheless, investors tend to see things correlated. That's sort of what happens."
Analysts appeared to back him up: They remained upbeat on the stock with bullish target prices and recommendations, even as they slashed their outlook for Home Capital Group.
Other mortgage lenders were also caught in the selloff. First National Financial Corp. fell 10.7 per cent and Street Capital Group Inc. fell 9.8 per cent. Even mortgage insurer Genworth MI Canada Inc. fell 8.2 per cent.
The biggest banks weren't immune either, particularly those with a focus on the domestic Canadian market: National Bank of Canada fell 3.3 per cent and Canadian Imperial Bank of Commerce fell 2.2 per cent. The declines accelerated as the day progressed.
Amid the turbulence, Canada Mortgage and Housing Corporation, which backstops mortgages, provided a note of calm.
"We have no significant concerns about the quality of the mortgages in the Home Capital portfolio," CMHC said in a statement. "We are not concerned about either the current state of our financial exposures nor with the Canadian housing finance system in general."
Genworth said that Home Capital-originated mortgages represent about 1 per cent of its overall business.
But the risks of contagion clearly gripped investors.
Marc Charbin, an analyst at Laurentian Bank of Canada, said there is a concern that deposit-brokers – who match buyers to the GICs that provide liquidity for mortgages – could lose faith in other non-bank lenders.
"If liquidity declines arise across this sector, this could cause downward pressure on housing prices," Mr. Charbin said in a note. "While the possibility of this issue impacting the broader housing market is indeterminable, it is certainly not out of the question."
This idea was taken up by short-sellers who have enthusiastically targeted Canadian mortgage lenders under the belief that they are vulnerable to a downturn in the country's overheating housing market.
Marc Cohodes, one of the most vocal Home Capital Group short-sellers, said on Twitter: "$HCG is the Canary(Vulture) in the Canadian Housing Coal Mine."
Short-sellers, who profit when stock prices decline, often employ bluster to overstate their cases. Nonetheless, the view that Home Capital Group's decline reflects broader concerns with Canada's housing market is what could be weighing on other share prices.
"People tend to associate us with other people and we get sort of caught in the reputational risk," Equitable Group's Mr. Moor said. "But anybody who looks at our financial statements can see that we're in a very strong capital position."
The big banks have long maintained that their exposure to Canada's housing market is safe, due to diligent underwriting standards.
But key executives have been expressing concern about the market itself. "When you get a 20-plus-per-cent increase in prices in a given year in a marketplace, that's not normal," Dave McKay, chief executive officer of Royal Bank of Canada, said in February.
With files from Brenda Bouw and Janet McFarland
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