This February, the CEO of Home Capital Group stepped down amid allegations of broker fraud, which culminated in a violent stock price drop. Immediate comparisons were drawn between this case and the American housing market crash in 2008, and predictions of an impending Canadian economic collapse were strewn across major papers like Maclean’s, the Financial Post, and Forbes.
These predictions were problematic for two reasons. First, news sources that constantly flip between extreme fear-mongering and a disdainful casualness and overuse inaccessible financial terminology make it extremely difficult for students to understand our financial system.
Secondly, whether or not this is a financial crisis, students will be the first demographic that the Home Capital fiasco will affect, regardless of whether we are paying attention.
Home Capital is an alternative mortgage lender that is part of a larger group, Home Trust Company. Despite being the largest of its kind in Canada, the company is effectively a minnow in the Canadian financial pond when compared to traditional lenders. As an “alternative” lender, they lend money to clients who are often turned away from traditional banks due to uneven credit scores — including students.
Two years ago, Home Capital disclosed that 45 of its mortgage brokers had been falsifying borrower income and employment information. Then, in April 2017, the Ontario Securities Commission charged the company for failing to inform their investors about the implications of these actions. This caused investors to pull out from the company, and even after a $2 billion line of credit, the company is in danger of closing.
The subsequent panic of those who invested in the company was understandable: a similar series of events sunk the American economy in 2008. At the time, mortgage brokers were increasingly pushing mortgages to borrowers with shaky credit histories who would be unable to pay them back. Big banks would then package these shaky mortgages into allegedly low-risk, subprime securities and people would invest money in them, betting on the fact that they wouldn’t fail. The banks were able to disguise the fact that these mortgages were given to borrowers with falsified income statements and bad credit history, due to to ratings agencies giving ‘A’ ratings to bad mortgages. Eventually, people failed to pay their mortgages, and millions of Americans ended up homeless and losing millions. The entire economy collapsed.
At the same time, it can be argued that people are wrong in thinking that this is the start of that same pattern in Canada. Home Capital is a relatively small mortgage lender in a very niche part of the market. They only lend to individuals that had been rejected by the larger, heavily-regulated lenders, and they were held accountable for it, something that never happened in America circa 2008.
What this does prove is that there is a growing need for financial literacy, especially amongst students. It is easy to believe any version of the facts that are being thrown at you, especially ones that include phrases like ‘collateralized debt obligations’ and ‘low-risk, subprime securities’. Regrettably, this can lead to serious implications being lost in the financial terminology.
If Home Capital, the largest alternative lender is going to incur losses, it will be harder for other alternative lenders to access funds, resulting in higher mortgage rates. This is problematic for adults who have only been out of school for a couple of years and are unable to obtain a mortgage from traditional banks.
Now, most of us are probably not going to be buying a house right out of school, and — fingers crossed — some of us might never have to use an alternative mortgage lender like Home Capital. But the need for us to understand a financial system that can be incomprehensible to outsiders is more important than ever. Insufficient-funds fees, short-term teaser interest rates, and payday loans, while seemingly innocuous, are common money pitfalls that students regularly fall into because of a lack of financial understanding.
It is idealistic to say that every student should have an in-depth knowledge of such fascinating topics as the Canadian housing market, the intricacies of mortgage lending, and the muddy depths of bank transaction fees. But, as millions of people learned in 2008, these structures have a huge effect on our lives. At the very least, we have an obligation to try.
Claire Velikonja is an incoming second-year student at the Faculty of Engineering studying Chemical Engineering.