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Independent Director Alan Hibben (L), Chair of the Board Brenda Epriles (2nd L), Interim President and CEO Bonita J. Then (2nd R), and Interim CFO Robert J. Blowes speak following the annual general meeting of Canada's biggest non-bank lender Home Capital, the parent company of Home Trust, in Toronto, Ontario, Canada June 29, 2017.MARK BLINCH/Reuters

Executives at Home Capital Group Inc. spent a small part of Thursday's annual meeting discussing how they dealt with the lender's recent near-death experience.

They devoted a lot more time to plans for dealing with the next meltdown in housing. Home Capital's brass is looking ahead to the tests that await lenders of all stripes -- the problems that come when the economy cools, as it inevitably will, unemployment rises and homeowners begin to default on mortgages in larger numbers.

Home Capital just survived a storm that came out of a clear sky. In late April, against a backdrop of soaring home prices and a robust economy, the alternative mortgage firm was hit by a crisis of confidence. Regulators circled and depositors pulled their savings, causing a liquidity problem that was resolved in part by a potential $2.4-billion debt-and-equity investment from bluer-than-blue chip Berkshire Hathaway Inc.

On Wednesday, no one at Home Capital was doing victory laps over securing debt and equity financing from Berkshire, along with a ringing endorsement from superstar CEO Warren Buffett. Instead, the focus was on ensuring the company never goes to the brink again, by preparing today for far less friendly real estate markets tomorrow.

As part of Home Capital's doomsday prepping, the board is asking shareholders to approve Berkshire's offer to invest $246-million for an additional 18-per-cent stake in the company, at $10.30 per share, after already investing $153-million for a 19.9-per-cent stake at $9.55 a share.

With Home Capital shares now trading around $17, a number of investors used the annual meeting to question the logic of further diluting their ownership by selling Mr. Buffett additional equity at bargain prices. The Home Capital board unanimously supports the sale of additional shares and board member Alan Hibben, a veteran of restructurings, made reference to future market uncertainty by saying: "When it hits the fan next time, would you rather have 38 per cent of Buffett behind you, or 19.9 per cent?"

Executives at Home Capital made it clear at the annual meeting that this is as good as it gets in residential property markets. That same end-of-days tone can be heard from executives at several of the big banks.

Mortgage defaults are at record lows, home prices at all-time highs. Unemployment rates are also low, and Home Capital CFO Robert Blowes pointed out that holding a job is the single biggest factor in determining whether home loans get repaid. Government moves to rein in housing prices, such as foreign-buyer taxes in Vancouver and Toronto, are only beginning to percolate into the market.

Home Capital clearly doesn't expect the good times to last. While Brenda Eprile, the company's chair, went out of her way to thank mortgage brokers for their continuing support, Bonita Then, the interim CEO, talked about how the company is intent on improving its screening process on loan applications, to ensure it can say "yes" or "no" to a mortgage request quickly, and with confidence that the money will be repaid.

The final stages of the financial fix at Home Capital should play out by the end of July, with one or two more business lines sold, as the company raises the last of the cash needed to completely pay down a $2-billion standby line of credit from Berkshire that comes with 9 per cent interest rates. And in coming weeks, a new CEO is expected to arrive.

The arrival of new backers in the form of Berkshire, new approaches to doing business and even new management speak to a Home Capital leadership who realizes the fragility of even a large financial institution, and wants to make the business far stronger ahead of coming storms.

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The Canadian Press

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