It doesn’t take a lot to topple a house of cards. Or in this case, a nation of toppy houses floating on a foundation of debt. Maybe it’s just another week of excess borrowing and undisciplined spending as real bloats higher. Or, perhaps, this is it. The moment of capitulation. Over the cliff.
In case you missed it, big news. Shares in Canada’s premier non-bank mortgage lender, Home Capital Group, just collapsed 64.5%. Stunning. Historic. That rolled back 14 years of corporate growth during which HCG loaned tens of billions in mortgages, an unknown number of which were liar loans, falsely documented, fraudulently taken and now the very poison killing the company.
Meanwhile yield-hungry investors who plowed their money into Home Trust or Home Bank high-interest accounts and GICs are getting out as fast as they can, worried the entire operate may blow up. About $600 million has been snatched back in the last few weeks, and the run could accelerate tomorrow.
The damage being done to the mortgage sector doesn’t end there. Pulled down in sympathy and terror were the shares of Equitable Group, Street Capital, First National Financial and Genworth. Remember all the buzz a while back about ‘bonus’ interest being paid by EQ Bank? Yup. Same guys. This blog warned you then the company behind those rates – Equitable – was an Alt mortgage lender with a giant portfolio of risk-drenched loans made to people who probably never should have been given home loans.
Home Capital was found to be making liar loans almost two years ago, punted at least fifty brokers, had a boardroom bloodletting and has been targeted by the tough-nuts regulators at the OSC. Now hemorrhaging depositors and facing serious securities charges, the company took a rescue package from an unnamed source with terms so punitive they’ll likely destroy it. What was an investment-grade, deposit-taking institution a few days ago is now a tatty rabble on life support forced to pay 22.5% interest on a borrowed billion.
This may be an interesting implosion of a rogue lender. Or more. Over the past year we have passed many milestones on a dangerous journey. Canadians owe more personally than the size of the entire economy. We’ve allowed housing to become the dominant part of the national GDP. The average home price shot ahead 33% in a single year in our largest urban area. Real estate values, and the borrowing to support them, have detached from economic fundamentals. Personal savings are down. A third of us are in worse shape than last year. Half are living paycheque-to-paycheque. Now the non-bank mortgage industry is on fire.
And it gets worse. On Friday Donald Trump tears up NAFTA.
The Canadian dollar lost more ground (and the Mexican peso croaked) on reports the Trumpster will sign an executive order Friday removing the US from the North American Free Trade Agreement. It’s a shocking second shoe after the White House slapped a fat tariff on our lumber industry this week. The ugly face of protectionism, nationalism and America-first populism is now countenanced towards Canada. So much for the three amigos, for thirty years of free trade and the efforts of our current prime minister to protect our most vital interests.
In fact as the news of the NAFTA bomb broke, Justin Trudeau’s cover-story interview with Bloomberg’s global magazine was being published. When asked about our most critical trade agreement, here was his somewhat incomprehensible response:
Nafta has been improved a dozen times over the past 20 years, and we’re always looking for ways to improve the benefits for all of our citizens. One of the things with Canada is we’re of a modest enough size that we never feel that the ideal outcome of any given deal is, we win and you lose. I mean, I think we’re always looking for ways where there is mutual benefit. And I think we’ve been able to demonstrate time and time again that trade can benefit both partners.
Take that, America. But he did pose for a fetching picture.
Update – Wednesday 10:40 pm EDT: White House now says US will not leave NAFTA ‘at this time’. Link
To summarize. We’ve become economically-dependent on real estate and now a key portion of the industry financing it is in a state of meltdown. Savers will be worried about billions sitting in the GICs and deposits of these companies. The most important trade agreement we’ve ever had, with our largest partner, could be about to end. And Canadians have amassed $2 trillion in personal debt as the greatest asset bubble of our times nears its climax.
This may pass without incident. But don’t count on it.