Canadian subprime lender woes may spark contagion

It generally starts with a firm no one has heard of, in an industry few knew existed, with seemingly little ramifications to the general health of the overall economy.

Then a comment or a suggestion in the market can ignite a contagion, which sets off a bank defaulting on a loan and through a heighten market reaction we have a crash.

This could be the first steps of that. Today.

On Friday, Home Capital Group’s — Canada’s largest non-bank lender — stock cratered by more than 60%,  after disclosing that it needed emergency liquidity injection of $1.5 billion in the form of a credit line to counter a run on the bank.

Home Capital Group is paying upwards of 20% interest on the infusion. The “pay-day loan rate” was needed as a run on the firm by depositors dropped capital by 25% to $1.5B in the last two weeks. The rate signifies how dire the situation is for the firm.

To confirm the beginning of a contagion, rival Canadian firms also took it on the chin Friday with Equitable Group falling 17 percent, Street Capital Group Inc. off 13 percent, while First National Financial Corp. declining 7.6 percent.

The Canadian housing market has been on fire over the last year with an infusion of Asian capital hitting the west coast as Vancouver saw a 15% rise over the last year. However the hottest markets seem to be in the east with Toronto home prices on average soaring 25% over the same period, according to data collected by the Mail & Globe news organization.

Much of Home Capital’s loans are said to be subprime as the lender struggles to keep growing in a market that was seeing slowing growth.

And to add a bit of controversy to the mix the “pay-day loan” with 22% interest rate was made by the Ontario Pension Plan, which is run by Home Capital board member and OPP CEO Jim Keohane.

Keohane is reportedly said to have stepped down from the board a day before making the loan.

So cracks have started to form, where they will reach is anybody’s guess, but systemic risk has ramped up north of the border and contagion is something that by definition is hard to contain.


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