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The entry to the Home Capital Group's headquarters in Toronto’s financial district.

Chris Helgren/Reuters

A charismatic founder of a once high-flying subprime lender is dogged by scandal. Potential buyers circle the distressed company as regulators probe allegations of securities violations and risky mortgage practices.

Gerald Soloway and Home Capital Group Inc.?

Nope. California-based Countrywide Financial Corp., circa 2007.

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The similarities in the rise-and-fall story lines of Home Capital and Countrywide are disquieting.

Countrywide and its founder and chief executive Angelo Mozilo were the epitome of the American mortgage excess in the mid-2000s – the investor hype, the dodgy lending and the inevitable hard fall. Bank of America swallowed the troubled company in 2008 for a tenth of what it was worth just a few months earlier. Mr. Mozilo eventually agreed to a record $67.5-million (U.S.) in fines and a lifetime ban from serving as an officer or director of a public company to settle fraud and insider trading charges.

Countrywide grew to become the largest mortgage lender in the U.S., with nearly 16 per cent of the market. Its demise was the proverbial canary in the coal mine, a signal that the U.S. housing collapse had begun.

That isn't what Home Capital's struggles are all about. This is not Canada's Countrywide moment. For one thing, there's no indication of fraud by the company or its executives, and the company is simply too small a player to matter. Its $20-billion (Canadian) in mortgages is dwarfed by the dominance of the Big Six banks, which have more than $1-trillion tied up in residential real estate.

But its fall from grace suggests something important is afoot – a shakeup of the residential mortgage finance sector.

And if history repeats itself, the story will end with the country's Big Six banks reinforcing their dominance in the financial services market.

Canada has not seen a major consolidation in financial services since the wave of trust company failures in the 1980s and 1990s.

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There were 23 bank failures in the 1980s and another 18 between 1990 and 1996. Many others fell into the arms of the big banks. There hasn't been another failure in the more than two decades since.

Home Capital's problems may be a prelude to a new wave. This week, a syndicate of Canada's largest banks committed to lend $2-billion to Toronto-based Equitable Group Inc., an alternative mortgage lender that, like Home Capital, has been stung by a flight of depositors.

The so-called "alternative" mortgage market has grown rapidly in the past decade. The top four non-bank mortgage finance companies grabbed nearly 13 per cent of mortgage underwriting in 2015, up from less than 4 per cent a decade earlier, according to the Bank of Canada.

But there are signs of stress on the fringes of the mortgage market, where Home Capital also makes its home. Its customers are often the people larger banks won't touch, including the self-employed, recent immigrants and those with low credit scores.

The Bank of Canada has warned in recent months about a worrying rise in the number of high-risk borrowers – those with mortgage-to-income levels north of 450 per cent. In its December Financial System Review, the central bank highlighted the concentration of this growing debt problem in the hot real estate markets of Toronto and Vancouver, where many of the alternative mortgage lenders operate.

Regulators and industry officials are fond of highlighting the soundness of Canada's banking system – most notably, the absence of a bank failure during the global financial meltdown of 2008-09.

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But that soundness has as much to do with high levels of concentration in the banking industry as it does with effective oversight. The fringe of the market just isn't that big, and it may be about to shrink.

Banking has followed a familiar pattern in Canada. New entrants come into the banking space, expand rapidly and then retreat or fail, leaving the big banks with their traditional stranglehold.

The result is that Canada's bank failures have tended to be marginal, never seriously threatening the broader financial system.

It also comes at a price. Consolidation, and a reversion to the big banks' traditional dominance, would mean less competition, more fees and higher mortgage rates.

Home Capital's struggles are a bad omen for both borrowers and investors alike.

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