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Apr 28, 2017

Home Capital not a risky investment for us: HOOPP’s Jim Keohane

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Healthcare of Ontario Pension Plan chief executive Jim Keohane doesn’t see Home Capital as a risky investment, despite customers having pulled out hundreds of millions worth of deposits in the past 30 days, leaving observers concerned over how the lender will fund new mortgages.

Keohane, who until Thursday was on Home Capital’s board, says because of the way HOOPP’s $2-billion line of credit provided to Home Capital is structured, the pension fund is protected in the deal.

“The investment itself is backed by a significant pool of mortgages,” he said in an interview on BNN. “So, for every $1 we lend Home Capital, they’re going to provide us with $2 of mortgages as collateral. That’s where we get our protection from.”

Keohane also isn’t concerned about the quality of the underlying mortgages, even those tied to the 45 brokers Home Capital parted ways with after an internal investigation uncovered fraud in 2015.

“Most of those mortgages probably would’ve rolled off the books by now. We feel comfortable with the underlying quality of mortgages, particularly given the protection we have in terms of additional overcollateralization we have,” he said.

“The [housing market] scenario that would have to play out for us to lose money is pretty extreme.”

Keohane’s leadership role at HOOPP and his board position at Home Capital has raised concerns about a conflict of interest.

“Being on Home Capital’s board wasn’t a conflict of interest because HOOPP had no business connection with Home Capital,” said Keohane.

“As soon as it became apparent, when HOOPP was asked to be part of the deal, I recused myself from many board discussions at Home Capital and once we actually engaged in the deal, I resigned from the board.”

Despite the recent concern about the viability of the embattled lender, Keohane doesn’t think Home Capital would’ve folded without HOOPP’s financing, although he does acknowledge the money is a cushion to protect them.

But there are concerns Home Capital may face challenges in its day to day operations.

Andy Nasr, vice president and investment strategist at Sentry Investments, said Home Capital’s increasingly tenuous capital position will present problems when it comes to any further mortgage underwriting.

“You’ve got this $2 billion line of credit which costs a lot of money, and it effectively puts the brakes on your originations,” he said. “While the fundamentals in the existing business still look okay in the sense that we haven’t seen a big run-up in delinquencies, you’re having investors start to worry about the credit quality of the issuer, withdrawing money from those high-interest savings accounts because they’re no longer comfortable with the CDIC backstop,” Nasr told BNN in an interview.

Home Capital’s non-performing loans have held steady at 0.30 per cent of total loans outstanding. Despite the relatively strong performance of the company’s existing loan book, Nasr said this is an issue of investor sentiment given the rising negativity around the company.

“I think that creates a bigger issue because the company’s not really going to be able to grow in a significant fashion until it does calm investors nerves, which I think will be very difficult if there is a class-action lawsuit,” he said. “People look at the stock price, they see the headlines, and they think that Home Capital Group is no longer going to be a going concern, and if that’s the case, then, you’ve got money there, why not take it out and put it somewhere else?”

Nasr said investing in the company at the current time is inadvisable, given said uncertainty surrounding possible lawsuits.

“I’m not sure how anybody can with confidence handicap what this thing is going to be worth if there’s litigation risk.”