8 Reasons Why We Think Home Capital Group is Probably Not Going to $0 and How the Shorts Might Have Saved HCG From Itself
1. The recent price surge in the greater Toronto area has added additional equity to many of their sub-prime customers. This not only helps their customers refinance at lower rates, it also increases HCG's ability to off load some of their mortgages to deleverage their balance sheet, if needed.
2. Weighted-average loan-to-value (LTV) ratios for uninsured single-family residential mortgages originating in 2016 was 72.2%.
3. Weighted-average LTV ratios for all uninsured single-family residential mortgages in 2016 was 60.9%.
4. Net non-performing loans as a percentage of the gross loan portfolio ended the year at 0.30%. This is low for a sub-prime mortgage provider considering their high net interest margin.
5. Total net interest margin, including the securitized portfolio, was 2.37% for 2016.
6. If more liquid assets are needed, Home Capital Group has insured mortgages to sell. Selling virtually risk free mortgages is an easy task, if given enough time.
7. Almost a quarter of the single-family residential mortgages are either discharged or sold annually. If new mortgage originations decrease in 2017 their balance sheet will deleverage itself. Less mortgages means less deposits needed on their balance sheet.
8. Sub-prime mortgage lenders don't have problems during the bubble, it is only after the bubble has burst that shit hits the fan. If we were in a market crash instead of a market rally, then Home Capital Group could have been in a much tougher situation. The $2,000,000,000 credit line, should give them ample time to deleverage their balance sheet (if necessary) and to restore confidence.
A real estate market crash can make a sub-prime lender go into default, but a sub-prime lender tanking, usually doesn't crash a healthy housing market.
Important Note: We are not saying you should buy the stock, but you should think twice about shorting HCG after the shorts have already taking it below $7.