Oaken = Home Capital Group - risky business? | General financial discussion | Discussion forum

I am sure there are others on this forum who can, if they wish, give you more detailed analyses. I have no special expertise in this, but here are some of my thoughts, as an amateur.

I have also been following some of the events surrounding HCG in regards to these issues, with interest, but have not read the specific items that you have posted..

It appears that HCG (parent of Oaken et al.) is mostly invested in mortgages, many or all of which might not meet the criteria of the big banks. This means they can charge higher rates and pass on higher savings rates to us. They have their criteria, whatever they may be. Some, or perhaps many, of these mortgages are insured by CMHC, which means they are backed by government, so I conclude they must be safe.

At some point, I think it was about a year ago, HCG realized that some of the mortgage brokers they deal with were shady operators. (A mortgage broker is someone who acts as a matchmaker between lenders and borrowers.) It's a legitimate business but it is not regulated as it should be. As far as I could see, HCG took the necessary means to sever their relationships with these dubious brokers, but it cost them a lot in PR simply because they had worked with them in the past and they probably still had some mortgages on the books that they ought not to have had. They wrote off some of these, I forget how much. All banks have to write off some bad debts from time to time. I couldn't say if this was a large enough amount to be a problem, but it did not seem that way to me at the time.
Who knows how many other financial institutions may have been dealing with these same brokers? But what we all heard about was the fraudulent ones that HCG ditched.

They had another issue more recently. At the moment it slips my mind what it was exactly, but it will come back to me. HCG acted quickly to send out a press release addressing the problem, however, which seemed reasonable to me.

I think it was Brian who noted in another post somewhere that HCG has a rating in the B's (as a stock investment) from DBRS. This is significantly lower than the ratings allocated to the Big Banks. So, on that basis, they might be considered a higher risk for owning stock, and, by extension, for savings.

A few out there in the investment world have raised red flags because the Vancouver and Toronto housing markets are so inflated right now, suggesting that HCG is particularly vulnerable. I don't know to what extent HCG's mortgages are on properties in these areas. It seems to me that the whole country could be vulnerable, depending on how our economy goes, and certainly defaults have been reported in Calgary etc due to the oil bust. All banks have vulnerability in this area, but the Big Banks do have more diversified portfolios so are stronger in this regard.

So, yes, there is vulnerability because of the nature of what HCG invests in. I am less concerned about the "scandals" that have been raised about how the company operates.

I believe the stock is rated as a "hold" right now by consensus of some who specialize in these things. "Hold" is an ambiguous word in these kinds of ratings. Sometimes it means just what it says; other times it can be code for "Sell" because they almost never are willing to say you should sell anything.

I take heart from Peter Hodson (at least I think that's his name - just going on memory here) who rated it a "Buy" earlier this month, in the Globe and Mail if I remember correctly. I generally find him pretty sensible, but he has sometimes made some bad calls, as has everyone. He thinks the problems have been or are being satisfactorily addressed. The stock is down at the moment. If you agree with Peter, it's a good time to buy the stock, and also a good place to put your savings.
Their dividends have been rising steadily, which is normally taken to be a sign of a good stock to buy, although some businesses will continue to offer and even raise their dividends even when profits are down because they don't want to disturb the investors. I believe the yield last year was something over 3%, but that may not be sustained this year, although dividends increasing.

In answer to your question about past defaults, yes, I had a relative who had money in a bank that failed in the 1990s. It took quite a few months but he did get his money back eventually - perhaps about 9 months but I can't remember for sure. As long as you remain within CDIC limits, I think the only significant risk is that of having to wait. When you wait, you have no access to your money, and you miss out on any opportunities to reinvest it which may come up while you're waiting. So, these things should be taken into consideration if they will pose problems for you. At the time, my relative also lost quite a bit of interest. I think this included all the interest in the GIC, but it's so long ago that I can't say for sure. I also think that they have changed the rules and now you would get the interest up to the time of default. However, this should be checked into as I am not certain. There is a potential risk of loss of interest to date of default if I am wrong about that; and almost certainly you would lose interest between time of default and time of reimbursement.

Personally, I have found Oaken to be a better-run institution than most of those I deal with, from the point of view of Customer Service. I consider this a good sign and I hope that level of competence extends to their investment staff.

We have to put our money somewhere. For those of us who gag on the rates offered by the Big 'Banks, these smaller banks with higher rates remain attractive. I don't feel, personally, that Oaken is any worse than the others. It may even be better. But that's a personal decision.

I am comfortable with investing at Oaken. However, I would not go over CDIC limits because that's not really sensible for any institution, perhaps especially the smaller lower-rated ones.

Yes, they do have 2 separate financial institutions under their umbrella now. Many banks have this but they don't take advantage of it in the way that Oaken is doing. TD, for example, has 4 or 5 of them, but they have it organized in such a way that it's difficult to place your money in the one you want it to go into.
With the two institutions, Home Trust and Home Bank, both being CDIC-insured, you could potentially put a lot of money in Oaken. For a family of two, including RSPs and TFSAs, this could potentially add up to over a million dollars quite quickly. It would all be insured, if allocated properly, but you might not want to do this if you are concerned about risk of default, simply because it's a lot of money that could be hard to access. You might choose to only put some of your money with Oaken.

This is just my "take" on it, after reading various things online. As I said, others will likely have more detailed technical considerations to offer, if they choose to do so.

slow_n_steady said

…
I read the Canadian blog by Danielle Park called http://www.jugglingdynamite.com and today's post was related to Home Capital Group and how it is deemed a high risk company (see http://jugglingdynamite.com/20.....in-canada/ ).

On the BNN video linked to on the above blog post, the guest mentions how there seems to be a lot of red flags in Home Capital Group including a significant amount of fraud. I have not fully read the article linked to on the blog entry yet.
…

This is part of supposed exposé from an anonymous short seller:

•This report exposes "Re-Charge Corporation", an entity that is partially controlled by one of Home Capital Group's Board Members and in our view constitutes a related party entity.

•We found evidence that Home Capital Group has been transferring loans from its balance sheet to Re-Charge Corporation.

•We hypothesize that the only logical reason a growth-starved lender would transfer loans off balance sheet is to hide non-performing loans.

Pretty sensational, until one reads Home Capital Group's explanation in their August 24 press release. The "scandal" is about $125 million of its $18.1 billion in loans:

Home Trust, in the normal course of its business, from time to time sells loans to third parties, when loans require work-outs or restructurings. All loans sold to third parties are accounted for, with any losses reflected in write-offs for the related period. Loans sold to all third parties [including Re-Charge Corporation] since 2013 totaled less than $125 million, and was approximately $12 million in 2015 and $nil in 2016 on a current on-balance sheet total loans portfolio of $18.1 billion.

Further explanation was given by a Home Capital spokesperson in Globe & Mail (Aug. 24, 2016): Home Capital stock in turmoil after anonymous short seller’s post:

Home Capital spokesperson Phoebe Buckland said the lender typically looks to offload delinquent mortgages if they involve complex deals that their own staff can’t work out themselves. The mortgages are usually sold at a discount or sometimes at face value to buyers who included Re-Charge. “The idea is that they like to keep all the loans they can, but if it is something unusual, they would look to sell,” she said. Loans sold at a loss are accounted for as a reduction in the company’s profit.

I doubt that Home Capital Group will topple because of problems with $125 million of $18.1 billion or 0.7% of its mortgages. Really, these third parties that buy bad mortgages are just fancy collection agencies.

I also don't think it sinister for a mortgage lender, like Home Capital Group, to invite someone who runs one of these fancy collection agencies onto their board of directors. Such expertise could prove useful to the business.

Loonie said
…
At some point, I think it was about a year ago, HCG realized that some of the mortgage brokers they deal with were shady operators. (A mortgage broker is someone who acts as a matchmaker between lenders and borrowers.) It's a legitimate business but it is not regulated as it should be.…

We had a previous discussion Mortgage Fraud last October.

Found some more details at Canadian Mortgage Trends: Home Trust Clears the Air. These are some of them:

• The company says the fraud it uncovered in broker files centred on “falsification of income verification documents.”

• “The deficiency was that some of these (job) letters had been altered,” said Home Capital Group CEO Gerald Soloway. “…Instead of making $64,000 the person suddenly made $84,000.”
…

• Most of the terminated brokers had submitted more than one deal with falsified documentation. “Some of it could have been caught by the broker,” says Pino Decina, EVP Residential Mortgage Lending at Home Trust.
…

• In our interview, we carefully clarified one key point with Decina. He says there were no instances found where a Home Trust employee was aware of fraud, but subsequently allowed the mortgage to close. That had been a widely circulated rumour for weeks now.

• A “small number” of employees were terminated following this incident. Decina notes simply that they “could have done a better job” during the underwriting process.
…

I am not sure that I agree with Bill about whether some institutions may be greedier than others. I'm not sure we know. We would need to have access to confidential information that they are never going to give us. One thing we do know is that the Big Banks have huge profits and pay handsome dividends to shareholders. So, if they wanted to, they could certainly pay depositors more. They choose not to. I'm sure there is a complicated set of reasons why this is so, but, then, a rationale can be created for most corporate decisions. There's a lot of wiggle room between .55% currently offered in most savings accounts and, say, 1.75% at Oaken, but they choose not to enter this space. And, amazingly, people accept it.
I find, in conversations with people, that while most are not aware of the rates offered by the smaller banks, their reasons for not being interested are vague and uninformed. They seem to be suspicious in principle, as if it couldn't be true. It's not because they are aware that the smaller banks take certain kinds of risks and it's definitely not because they know the ins and outs of CDIC coverage. As long as people keep putting their money on deposit at the Big Banks for paltry rates, there is no incentive for those rates to improve. When and if the money dries up, rates will go up.
It may also be that the Big Banks, increasingly, are not very interested in the cash provided by small fry like us. To the extent that they are interested in personal banking, their focus seems to be more on "wealth management", serving the needs of the few. For the rest, the attitude seems to be, well, we'll take your money if you want but we won't give you anything for it.
I used to have more money at TD and would receive inquiries from their staff periodically trying to get me interested in an investment account. Now that I've moved most of it out, they are no longer interested in me as a customer. I'm happy, and I have to conclude that they are too, i.e. that they didn't want my money very badly, as nobody ever called at the time I was moving the money out. The last time one of their cashiers pointed out to me (as they used to do repeatedly) that I should/could invest my money better through their advisors and wouldn't I like to talk to so-and-so in the branch about that, I said that I wouldn't because I was going to move it somewhere where they gave me better rates. He smiled weakly and said nothing.

As regards previous bank failures, it is my understanding that, following the failures of the '80s and '90s, banking regulations were tightened so as to make this less likely in future. Indeed, better regulations were cited as a reason why Canadian banks did not fail during 2008-9 as did some US banks, notwithstanding the fact that some Canadian banks utilized US bailouts. As there have been no further bank failures, it seems these changes have been effective, which bodes well for HCG.

It should perhaps be borne in mind that CDIC too has its criteria. Banks have to meet them in order to be insured. They will not insure an institution that looks like it is likely to fail.

The Big Banks are paying out just fine, thanks, except it's to shareholders instead of depositors. In my life I've made a lot of money (so far) recognizing that, and I know a lot of other folks (and pension plans and other institutional investors) have had the same experience over the decades. Who knows what the future holds but so far I've no criticism of them whatsoever - I'm greedy so just keep doing what you're doing, Big Guys!
Also I doubt there's many folks who have lots of money to put into GICs or savings accounts like those of us who frequent this site - pretty much everybody I know spends their "extra" money on trips, vehicles, home stuff, data plans, etc, maybe they do save a bit, but if they are investing long-term it's in whatever their financial advisor, maybe down at the bank, directs them to, i.e. usually mutual funds. I've got some adult kids who do that and when I (just once!) refer to the fees they're paying they say they don't care, they don't want to spend their time on these things, they've got better things to do apparently (lucky them!). So I think the vast majority of people who might have a bit lying around just can't be bothered to worry about whether they're getting .5% or 1.5%, it's not enough to make a difference and they're really not that interested enough in finance to spend the time many of us here do, and so the Big Banks are ready to serve them. Guess we all pay for convenience, for time-saving services, for different things, some people do it with their finances.

it's absolutely true that CDiC does not have enough money to cover everybody if there were massive defaults.

Two points about that:

1. Check previous threads with posts from NorthernRaven who has looked into this matter. It seems the credit unions have better coverage than the banks as a percentage, but CDIC has other back-up options to draw on. In no case does the insurance cover everything.

2. I figure the smaller banks like HCG are the canary in the coalmine, as it were. CDIC can handle defaults by small banks, as it did in the '80s and '90s. So, I don't worry about that. The real problem would come if a big bank defaulted. This would no doubt result in extraordinary and unpleasant measures on the part of government. Thus, I will stick with the small banks. In my view, which some will disagree with, they are actually safer than the big ones. Here's why. If a small bank defaults, I will get my money back; if the big bank defaults, I am less confident that I will get it back because CDIC won't be able to cover it, especially if more than one involved. I might not even mind having to wait for the money to be reimbursed if chaos breaks out in the meanwhile with the larger banking sector, as my money may be safer languishing in process at CDIC than being redeposited somewhere else. This buys me time to consider what to do with the money other than putting it in a bank. Of course there are many, perhaps most, who believe religiously that a big Canadian bank essentially cannot fail. I am not one of them.

It's always good to have Norman1 here to dig out the fine print for us and share his usually dispassionate analysis. thx.

Loonie said

p.s. I read the piece about what Marc what's-his-name had to say too but was not persuaded. He was too eager to say this is "just like the US". It's not. We have different banking regulations; we already survived 2008 much better than the US because of our conservatism; and as a people we are, it seems, naturally more cautious about money and not so much risk takers as our friends to the south who are buoyed with this incessant optimism which says they are the "greatest country on earth".…

It also helps that Canadians are not as "full of it" as that guy. What a "puff" piece that article is!

The guy supposedly ran one of the "largest hedge funds in the world" with US$1.5 billion under management. I think we mortals are supposed to be impressed by that.

That's really nothing in the fund management world, especially in the US. Here in Canada, Royal Bank's RBC Global Asset Management manages mutual funds. Just one of their funds, the RBC Canadian Equity Fund, has C$2.4 billion! Their RBC Canadian Dividend Fund has C$16.6 billion.

More info on Home Capital Group.

http://business.financialpost......-group-inc

The questions are.
Too many issues, (proportionately unacceptable as compared to other FI's) should I invest there?
Issues the norm, unfortunately theirs were publicized while other financial institutions have same issues?

There were really only 2 issues, as I understand it. I don't consider that to be statistically significant. I wouldn't consider the retirement of the CEO to be an issue, as he was well past "normal" retirement age. The portion he cashed out is small potatoes compared to what he has invested in HCG and I can think of a lot of good reasons he might have had for doing so.

Because I don't consider it statistically significant, I have not been motivated to compare to issues at other FIs. Certainly, however, all of them write off substantial amounts in bad loans, some of which they probably should never have made. I believe they have an expectation that a certain percent will default. It's comparable to the stock market, wherein investors believe that even if some of their stock picks tank, others will make up the difference and they will still come out ahead.

I am not concerned about Oaken. And, as AltaRed notes, it's insured anyway.. And now we have two avenues for that within Oaken.

The other day, I was in TD branch removing most of the remaining money that I have with them. It's now down to less than 10% of what I had there at one time. I said to the teller, "it seems as if TD isn't really interested in savings accounts any more". His response was to continue staring at his computer screen and to say "it depends." He made no effort to dissuade me from my decision or to refer me to someone who might or to ask why I might think that. No doubt he already knows. Whether the account was over the CDIC limit or under it, they never seemed seriously interested in my savings account as such at any time. I am curious what he thought it might "depend" on. But I was not curious enough to ask.
I have had accounts with TD for 30 years, and now they have lost almost all of that money.
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