Poor Warren Buffett. Home Capital Group Inc. shares have surged more than 50 per cent since the chief executive of Berkshire Hathaway Inc. sold his stake in the Canadian alternative mortgage lender in December.
Mr. Buffett left $88-million on the table by selling too soon, according to Globe and Mail estimates. But what’s more important to investors is that Home Capital’s stunning comeback over the past six months raises questions about whether recent regulatory changes to Canada’s housing market are benefiting some of the smaller players at the expense of Canada’s Big Six banks.
“We believe we are seeing high-quality borrowers coming to us that would have qualified for the big banks in the past but no longer qualify under tighter lending regulations,” Yousry Bissada, Home Capital’s CEO, said in an e-mail.
Faced with steeply rising home prices in key markets of Vancouver and Toronto, regulators imposed stringent lending requirements on uninsured mortgages (or those with a down payment of 20 per cent or more), starting in 2018. These changes are now being blamed for, well, working: The housing market is off its boil.
What’s more, traditional banks – which control about 80 per cent of Canada’s residential mortgage market – are reporting abnormally slow mortgage growth. Growth slowed to just 2.3 per cent, year-over-year, in the big banks’ fiscal second quarter and touched a 17-year low in December. That’s weighing on share prices that have been zigzagging for more than two years.
Alternative lenders, which largely cater to home buyers who don’t qualify for loans at big banks because they are either self-employed or recent immigrants lacking a credit history, are doing noticeably better than the bigger lenders.
Equitable Group Inc. shares are up 32.6 per cent from their 52-week lows. And Home Capital shares are up 26 per cent over the past month alone. By comparison, the big banks are up about 12 per cent this year.
Okay, Mr. Buffett didn’t exactly goof up when he sold most of his stake in Home Capital. He scored a 73-per-cent gain, according to Bloomberg, after Berkshire Hathaway rescued Home Capital in 2017 with a $2-billion line of credit and bought a 20-per-cent equity stake after the mortgage lender experienced a run on deposits that brought it to the brink of insolvency.
And yes, the money left on the table when Mr. Buffett sold his stake is loose change relative to Berkshire Hathaway’s US$4-billion in net earnings and US$24.8-billion in operating earnings in 2018.
Nonetheless, Mr. Buffett’s early exit, which initially sent Home Capital shares down as much as 19 per cent on the day the news was announced on Dec. 19 – clearly, many investors panicked – now stands in stark contrast to the lender’s success.
According to Marco Giurleo, an analyst at CIBC World Markets, alternative lenders reported loan growth of 11 per cent in 2018 amid strong employment and stabilized home sales.
In the first quarter – traditionally the slowest period for mortgage originations – Home Capital reported a 7.3-per-cent increase in single-family mortgage originations, year-over-year. The company will report its second-quarter results on Aug. 7.
In an e-mailed response to questions, Mr. Bissada acknowledged that tighter lending regulations are having an impact on Home Capital – and not all of the impact is good.
“We are adding some customers and losing others,” he said. “There are customers that we would have been able to lend to in the past that no longer fit our lending standards. Those customers are now borrowing in the unregulated market, leading to growing share by unregulated lenders,” he added, referring to private lenders that are not overseen by the Office of the Superintendent of Financial Institutions.
But alternative lenders such as Home Capital enjoy a key competitive advantage over traditional banks: Their niche on non-prime borrowers ensures a steady supply of potential customers.
“The segments we primarily deal in (new Canadians, self-employed business owners) have grown in the major urban centres where we operate,” Mr. Bissada said.
When Mr. Buffett announced he was selling his Home Capital shares seven months ago, he said he would be cheering for the company from the sidelines. With the shares now on a tear, the sidelines are an awkward place to be.