Home Capital crisis might precipitate mortgage rates hikes - observers

The current troubles of Home Capital Group might lead to higher mortgage rates for less credit-worthy borrowers if concerns about the sector trigger an increase in funding costs for other subprime lenders, according to sector observers.

“Inevitably this will likely affect all lenders in the alternative space as it puts the spotlight on the risk, and questions the integrity of some of the mortgages they are lending on,” Spin Mortgage co-founder Steve Pipkey told The Canadian Press.

Marcus Tzaferis, a Toronto-based mortgage broker with MorCan Direct, said that the news about Home Capital could lead to a “crisis of confidence”' that could affect other non-bank mortgage lenders who use the GIC market to raise cash.

That could make it tougher for non-bank lenders to access funds—and that in turn will likely trickle down to subprime borrowers via higher mortgage rates, experts say.

“There’s no question that the cost of funds may go up for non-prime lenders,” RateSpy.com founder Rob McLister said.

If borrowing rates in the subprime mortgage market do rise, McLister explained the increase is not likely to be long term, especially if Home Capital manages to secure a buyer rather than having to face liquidation. Before the Home Capital situation came to light, McLister said that investor interest in the subprime mortgage sector was on the upswing.

“What happened with Home Capital definitely put a damper on investor enthusiasm for backing non-prime mortgage-backed securities. But once all of this shakes out — give it three, four quarters or so — I think we’ll see a resumption in liquidity in the non-prime market. People have short-term memories.”

On the other hand, if Home Capital is liquidated and the crisis spills over to other similar lenders, borrowers may find themselves turning to other sources of funding.

“There are still going to be many options and there are still quite a few suppliers in the market,” according to Mortgage Architects agent Matthew McKillen.

Home Capital declined to comment, with a spokeperson saying in an email that the company will not “speculate” on the issue.

After allegations from Ontario’s securities watchdog that it misled investors, the Toronto-based company suffered a significant decline in its stock price. Home Capital has pledged to defend itself, stating that the allegations are baseless.


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