Since its founding in 1986, Home Capital Group has concentrated in subrpime mortgages (or Alt-A in the mortgage jargon). These loans are granted to individuals not meeting banks criteria to obtain a mortgage. HCG has been able to succeed at the game through his niche expertise to assess the risk of this type of clientele, its traditional financing by issuing certificates of deposits and its conservative capital structure (high tier-1 capital ratio). In summary, HCG has long feasted from the crumbs that fell from the table of major Canadian banks.

The summer of 2008 arrived and with it came an unprecedented financial crisis which led to a significant lessening of competition in the canadian mortgage market. HCG saw a golden opportunity to enter the “traditional” mortgage market . What was their Trojan Horse? Independent mortgage brokers! The latter, seeing less alternatives for their clients were very happy to welcome HCG in this market segment. From now on, the small Toronto company would sit at the big table!

In Q3 2009, 68% of mortgages issued by HCG were triple-A mortgages insured by CMHC. 29% of the mortgage portfolio of HCG is now CMHC-insured compared to 15% at December 31, 2008. Mortgage brokers seem very satisfied with the personalized service that offers HCG. A service that contrasts greatly with what they get from the big banks. Big banks have their own sales force and have always had an ambiguous relationship of collaboration / competition with mortgage brokers.

In conclusion, Home Capital Group has used the crisis to reduce the risk level of its business while increasing profits. The firm run by Gerald Soloway is another example that the theory stating that we should take more risks to make more profits is in fact … just a theory!

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