As one of Canada's largest alternative mortgage lenders, Home Capital Group Inc. is a popular target for investors looking to short the Canadian housing market.
Nearly 20 per cent of Home Capital's free float is shorted, making it the fourth most-shorted stock in Canada, according to Bloomberg. These housing bears have been burned by Home Capital's stock in the past, which had risen on the strength of the Canadian real estate market. But Monday's plunge in the company's share price went in their favour for a change, sending the stock price to its lowest level in nearly two years.
Home Capital's shares fell almost 19 per cent Monday on news that the volume of single-family mortgages applications plummeted 27 per cent in the second quarter from a year earlier – even as home prices continued to soar in major markets.
The company sold $1.6-billion in new mortgages in the second quarter, well below the $2.5-billion that some analysts had predicted. It was the second straight quarter Home Capital has missed analysts' expectations.
Company officials blamed increased competition for the mortgage business, particularly for prime borrowers, along with Home Capital's cautious approach to issuing new mortgages amid falling oil prices and a sinking Canadian dollar.
Home Capital also said it ended relationships with some mortgage brokers after an internal review, which "caused an immediate drop in originations."
Sources familiar with the company's mortgage broker business say Home Capital cut ties with several brokers in Ontario, its largest market, after an internal audit found some brokers weren't providing proper documentation for new mortgage applications. Company officials did not reply to requests to comment.
"It's just a good, intelligent approach if you're questioning the type of client information that's being brought to you," said mortgage broker Ron Butler, who does business with Home Capital. "This is something that Home Capital can recover from very quickly."
The company said despite the drop in mortgage originations, it was keeping its target of 8-per-cent to 13-per-cent annual growth in diluted earnings per share in the medium term, and expected to report diluted earnings per share of $1.03 for the second quarter, down from $1.05 in the same period last year.
"We are confident that the steps we have taken in the first half of 2015 were necessary to ensure the continued long-term profitability of our business, in spite of the short-term impact on originations," chief executive officer Gerald Soloway said in a statement. Originations had begun to rebound toward the end of the quarter, he added.
However, several analysts slashed their ratings on Home Capital, warning the company's growth estimates were too optimistic. "We expect the competitive prime mortgage environment, macro concerns and changes to its broker relationships to constrain total originations over the next six to 12 months," wrote Macquarie Capital Markets Canada Ltd.'s Asim Imran in cutting his target share price by 20 per cent to $44.
The bulk of Home Capital's mortgage business comes from uninsured mortgages to borrowers who have been turned down by the major banks or other traditional lenders, often home buyers with tarnished credit, self-employed workers or new immigrants. The company's uninsured mortgage business dropped 16 per cent in the second quarter from a year earlier.
The company's lower-margin prime mortgage business, which lends to higher-quality borrowers who qualify for mortgage insurance, took the biggest hit. Home Capital said it originated $280-million in insured mortgages in the second quarter, down 55 per cent from $619.6-million in the same period last year.
Home Capital's shares have fallen from a high of $55 last fall on investors' concerns that lower oil prices would hurt the country's housing market. But analysts shrugged off concerns that Home Capital's sinking share price was a warning sign of an impending home price correction.
"We think this is an HCG-specific growth issue," wrote Royal Bank of Canada analyst Geoffrey Kwan, "not an early signal of rising losses or broader housing stress."