Dear Mr. Morneau – Please Don’t Let Us Lose Money on Home Capital

May 29th, 2017 · Mortgages, Rental Property

In this article I mock the Financial Inquirer’s weekend piece written by a US Hedge Fund guy and a Canadian who manages an Taylor Asset Management. It deserves to be mocked, and I’m honestly sick of these talking heads that prop up Home Capital Group. They should all be forced to buy shares. Guys seriously, would you buy some of this for your mom’s retirement fund?

Due to our irrational optimism, we got our employer to buy shares in the Canadian Stinky Mortgage Pile AKA Home Capital Group. Fortunately we bought most of our shares on sale. We are writing to plead with Finance Minister Bill Morneau to act to save our bonuses. We now realize there is no hope for the company because of all the shady accounting and mortgage fraud as pointed out by US short seller Marc Cohodes. He is right, but we don’t want to admit that this entire situation mirrors the USA financial meltdown.

Let’s begin by examining these similarities, which was precipitated by an irrational national obsession with the value of real estate, followed by an “the ends justifies the means” attitude on the part of borrowers and lenders alike. Because no one remembered that falling house prices could exist, anyone could qualify for a mortgage, and because everyone believed that real estate was a sure bet, no one was very concerned about it.

Defaults didn’t exist at this time because if you got into trouble you could just put your house on the market, have a bidding war, and make a sweet profit.

In this environment, lax underwriting standards and cheap mortgage debt combined with HELOC’s encourage Canadians Americans to borrow their fucking faces off, past the point of all reason.  Nobody noticed because they were all caught in the same mania and anyone who failed to display the same delusion was promptly laughed at, shunned and ostracized.

Canada was one of the few industrialized nations in 2008 and 2010 that had a mortgage bubble but refused to allow any reason to disturb our collective agreement that everything was fine. Except of course the 16% drop in real estate in 3 months, but that was nothing after the $114 billion in liquidity support and $69 Billion in loans CMHC purchased during the time. After this event the Canadian Banks continued their exceptional underwriting standards.

Nearly all Canadian provinces have recourse mortgages which means not that much when it comes to people making endless payments on a house that is worth much less than they paid for it.

As Canadian mortgage regulation has become more stringent, and buyers more and more irrational, many buyer have turned to B lenders including but certainly not limited to Home Capital Group. There is a fantastic and vibrant shadow economy of lenders that advertise on almost every street corner with their signs, on craigslist and kijiji, and through mortgage broker networks. If you want a house someone will almost certainly finance it. There is even a healthy secondary private market for mortgages in default which are bought at par by shady lenders who “help” borrowers by getting them to sign new mortgage with predatory terms and fees. But let’s not think about that. In response to the new regulations borrowers and lenders alike have found ways to get their freak on or buy a house which ever you prefer.

For the banks and Home Capital Group is is very easy to sell your mortgages to another entity that will obscure your default rate. Of course if the mortgage is insured by CMHC we’ll pretend it isn’t happening for a whole fucking year. But don’t let that fact disturb your narrative.


Yet the facts are the open invitation to the nasty dirty short sellers (especially that awful chicken farmer Marc Cohodes) who have examined the situation, done the research, and used their money to bet against the insanity of the Canadian Housing Market. They don’t even have to be smart, it’s the Big Short 2. Our collective delusion and house frenzy and fear of economic collapse doesn’t change a thing. When a Big 5 bank thinks it’s smart or necessary to advertise international student mortgages with no income checking, don’t you think we all need to stop the madness? Why the hell would an international student need a house? What the hell is the matter with you CIBC? Are you on Maple Syrup again?

To be clear, Home Capital Group, should just be put out of it’s misery. It’s over and you’ve already shored up Equitable Bank. Yes I saw what you did there. I’m sorry but Canadians are going to have to take a very bitter medicine, and if the government hadn’t kicked the can down the road during the USA financial crisis, we wouldn’t even be here. Now we’re at a place where Canada’s house prices are higher than the USA’s even with our funny money. It’s not a question of can you, it’s a question of should you. The dangers of continuing are worse than the dangers of stopping the madness.

House prices need to adjust to a reasonable level, we’re just on a cycle of endless increase of debt, fueled by more debt and most of that debt is on houses.

I work for landlords, I see the level of speculative behavior. No one makes money on rent, everyone is speculating on price increases. That is all. The landlord business is no more and instead we just have an endless stream of speculators. It’s truly awful and while I never imagined missing the cheap bastard landlords of yesteryear, at least they acknowledged the value of a great tenant, and knew they had to change the smoke alarm batteries once per year.

While I’m terrified of the fallout, I’m more terrified of what happens if the bubble isn’t pricked and we all just keep pretending this is sane and normal. Oh and can you build some rental buildings please? Not you personally, but we need some rental buildings that aren’t condos. That may soften the blow for our construction sector, which will be devastated when the condo market blows up.

Bye Home Bye

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Dear Mr Evan Sidall-CMHC & Big 6 – Fix Moral Hazard

May 28th, 2017 · Mortgages

Click On Picture To Enlarge

Dear Mr Sidall,

I have seen a marked change in CMHC’s attitude since you took office. Thanks for that. Canadians have gone completely and totally house crazy and it’s really not necessary or beneficial in any way. A house is a place to live and honestly the cheaper the better. The idea that you need a giant house is frankly wrong minded, unecological and silly. Canadians are way overhoused as housing is the new status symbol. Granite all the way the way baby…


I digress, my request is as follows. I know it’s hard with the way CMHC takes a full 365 days to recognize a mortgage default, and the fact that up until last month prices were raising in an insane irrational manner and so unless the house caught fire it could practically be sold for a profit and so losses were low, but you are the boss of CMHC. Please request the files of some defaulted mortgages from the lender and look for signs of mortgage fraud. This would be in the insured portfolio. Then call the CEO’s of the big 6 (I imagine they are on your Rolodex) and tell them that you are not insuring fraudulent mortgages they issue.

The banks must be held responsible for proper due diligence on the loans you insure. To be honest I would prefer a 10% deductible on the insurance, but you can’t have everything. As a taxpayer, I want all of our interests aligned and I think that if the taxpayer loses, the banks should lose too. If their paperwork is a great as they all claim, then there should be no problem.

Many Thanks,

Rachelle Berube

P.S. I do love real estate, it is my career, but we’ve gone way too far.

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GTA Market Hit Hard By Plummeting Prices

May 28th, 2017 · Rental Property

While apparently the Vancouver market has recovered from the Foreign Buyer Tax a year later, I believe that the Toronto Market has to deal with a number of other significant blows simultaneously.

  1. Tightening of credit due to Home Capital Group
  2. Rent Increase Legislation Changes
  3. Change to Laws Regarding Owner Occupancy Re:Sales
  4. Mortgage Syndication Fraud
  5. Consumer Fatigue with High Prices
  6. Poor Economy reliant on us selling Real Estate to each other
  7. General Endemic Mortgage Fraud
  8. Bear Epidemic in Toronto

The bottom line is it won’t take much to topple this house of cards because the fundamental support required to sustain these house prices isn’t there. Incomes are not rising and we are facing a depression of catastrophic proportions because up to 25% of our economy is reliant on us selling real estate to each other.

There is nothing to this bubble except the consumer sentiment that house prices always go up.

I would also love to officially welcome John Pasalis to the darkside. It’s very bearish here. Follow him on Twitter @johnpasalis

Happy Sunday!

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Home Capital Group – Zombie – Not Dead – Not Alive

May 25th, 2017 · Mortgages

Earlier today I watched a special on BNN with Brian Madden and he said something intelligent. I like that, and I wish more people were being honest and straightforward instead of pumping the stock up.  A lot of people are pinning their hopes on Oaken Financial and Home Bank to be able to increase deposits with 3+% GIC’s and they are CDIC insured for principal and interest. So Brian says “Just because you’re insured doesn’t mean you should invest there, after all you don’t leave your house with the stove and oven on just because you’re insured” I have no idea what’s involved in a CDIC claim, but it’s going to be a pain in the ass. It’s insurance, and while it’s nice to have I keep my eyes open while driving.

Home Capital Under Fire For A Long Time

For many of us, it may seem like Home Capital Group just happened yesterday and is all over the news but really a lot of people have been watching them for a long time. Anyhow I came across another power point about them dating back to analysis in 2015.

HCG Chronology v2.pptx

These are very well thought out serious long standing issues that have never been resolved, until not with the HOOPP loan and the disappearing reserves. No amount of 3% GIC’s is going to fix that. If Home had spent half the time addressing the concerns and substantive issues rather than avoiding questions and scoffing at the short sellers the company might not be awaiting a bailout or a bankruptcy filing or OFSI takeover right now.

I’m sorry your dog has cancer Mr Soloway, but it’s time to put it out of it’s misery. When the tumor was small you ignored it and now that the tumor is huge and full of rot, it’s going to spray everyone in the vicinity.

Bye Zombie

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Mortgage Syndication Fraud & Why It’s Wrong

May 25th, 2017 · Mortgages

This is my attempt to explain what mortgage syndication is, how it works, and how it goes right and wrong. There is a lot of talk about the mortgage syndication fraud going on in the market right now and I doubt a lot of people understand what it is and how it works.  If you are currently involved in a mortgage syndication fraud please contact David Franklin at There are also a ton of other informative articles about mortgage syndication fraud.

How Mortgage Syndication works

First of all, unlike your house which is easy to get a mortgage on, there is a lot of property that is very hard to get lenders to lend on. For Example: land outside a major city, perhaps farmland that you want to make a subdivision on or an empty derelict property with potential.

Commercial property of any kind pays higher interest rates. Banks when they lend are more concerned with how much they would get if they sold it today, then any potential the property might hold.

In most cases the potential in the property might need to be unlocked with some money spent on the project. There is usually some entrepreneurial action involved in the venture.

For example, lets say I want to buy a parcel of land, with the view of eventually rezoning and creating a subdivision of houses. I might not have the money to buy it by myself or I may not want to lock up my money there. I might approach investors to help me purchase the property. Those investors might just give me the money directly or hold a mortgage on the land.  If 10 people each put in $500K we would get a lawyer to draw up the documents and voila a syndicated mortgage or lien against the land. Then I would be required to make payments just like a regular person does for their home.

If I am one of the investors, I am usually sophisticated, I would have my own lawyer look over documents, do appraisals, and generally make sure my money is in good hands. I would know going in that if the City doesn’t rezone, or market conditions change, or the property owner defaults, I could lose my money. Howeve; because I know the value of the property and the purchase price, I would be comfortable with the risks. Generally the owner of the property would have to offer a personal guarantee as well so if the deal doesn’t work out, I could force him to pay me.

The syndicated mortgage is a marriage of equals, people with money to spare, and people with a solid, vetted business plan/venture. Every party knows the risks and is able to do the due diligence required to ascertain their level of risk.

Mortgage Syndication Scams

All the mortgage syndication frauds involve cloaking of asymmetry of risk in an unequal relationship. This means one of the parties has a lot more information than the other. One of the parties will generally know more about the business than the other. One party will be more educated than the other. One party will have more access to professionals than the other. In most cases the mortgage syndication company will actually be offering an investor that has never had any other information or exposure to the investment. The relationship is more like teacher to student.

Generally the information will be provided to the investor and any professionals consulted will also be provided for free by the mortgage syndicator.  Appraisals, legal advice, accountants will all be part of the sales channels and carefully curated by the syndicator and given to you if you have any questions. You won’t have too many questions because the mortgage syndicator has approached you through a trusted person such as a mortgage broker.

A lot of these mortgage syndication “opportunities” come through a mortgage broker or exempt securities dealer. They are paid a 10% commission to find people willing to provide funds for different projects. It’s a pretty good payday but the problem is that the average mortgage broker also doesn’t know how to evaluate the quality of the different projects they might be offering. All they really know is that they are offering a mortgage that is secured against real property. All of the marketing material is of very high quality and emphasizes how this is a mortgage secured against real property and therefore safe and guaranteed.

Mortgage Security

You’re the lender but you’re bringing your assumptions with you. Typically the average person assumes that a mortgage is secured by real property. That’s because all of the mortgages you’ve been involved in your entire life are from the lendee side via a conservative lender, in a long term bull real estate market. Unless your house caught fire, your house went up in value for the last 20 years or more.  That’s why your typical interest rate for a residential house is so low. It’s been so long since the last downturn that even the banks don’t remember declining house prices. It’s been so long that the last time we had a downturn we still had 25% down payments.

Banks and other mortgage lenders have established systems to check if the properties they are lending on have ample security. For example: Mortgage of $800,000 on a $1,000,000 house. You as an individual have no access to the the software banks use. That’s if you could even use it to evaluate the property you are lending money towards. Software is very good at evaluating the 499th house in an existing subdivision, but not so good at figuring out the market value of an agricultural field in North Brampton that will eventually become 300 lots if the City changes it’s zoning.

So how will you figure it out? Because you’ve just become the mortgage lender now. In most cases you will rely on a document from the mortgage syndicator. Unfortunately that’s a terrible idea because in many cases, it’s a Letter of Opinion instead of an appraisal or an appraisal from a “friendly” appraiser. Don’t be misled by appraisal, they can be very wrong.

Appraisal is an inexact science, and what can be reached in an open market bankruptcy sale is not usually the same price as if the property would be privately marketed. You can be sure that the number on a mortgage syndicator’s Appraisal/Letter of Opinion is insanely optimistic.

Mortgage Position & Security

If you are lending on a property and you are lending in first position, that means you are the first to get paid back in the event of a sale of the property (forced or not) if you are in second position you are the second to be paid back. If you are lending in third or forth position, there is a chance your mortgage is not secured by the property depending on the sale price achieved. This is why these mortgages tend to be more expensive and ask for more personal guarantees from the owners of the property. Interest rates of 12% & 14% etc are not unheard of. Mortgages that may be unsecured have interest rates similar to credit cards that are also unsecured. Not surprising.

Where the Wrongness Starts

The mortgage syndicators don’t actually do too much. What they do is arrange the loan between the owner/developer of the land and the investor. However they have misled the investor into thinking the risk of lending is very small, when it is actually very big. In many cases the investor thinks his loan is secured by real estate, meaning that the property could be sold for them to recover their money. This is incorrect. The mortgage syndicator arranges a mortgage for the investor at a low interest rate of 8% but charges fees of 30-50% and pockets the difference. The investor has all the risk but the syndicator has most of the money.

Here is an Ontario Land Titles document for a site at Lake & East in Oakville and it’s a perfect example because the mortgages on this document were issued on the date of purchase. 20150528_ServiceOntario

This is not unusual for the mortgage syndicators involved in these deals but it is unusual for the transactions to be so blatant. If there is some time between the transactions, then the syndicators can always claim there was some property increase in value.

Here’s another title search from a project up by The Gore Road in Brampton. Gore Road Search It is currently zoned agricultural, however, there is a change to the Brampton City Plan that will allow this land to be rezoned in the near future. I can’t say how much the land is worth exactly, however, I would not want to be an investor in this project at 8%. It all depends how much the land would be worth on the open market as it currently is, in it’s current state of development. Currently the project is in the process of being subdivided into lots and there is a chance the project will be ok. The  price appreciation hides a lot of errors and has prevented a lot of lost investments.  The property’s current status is still a farmer’s field. The idea of risk is that at least some of these projects will fail. The idea of being a secured mortgage holder is that when the property is sold, the investor will get their money back. Unfortunately as illustrated by the examples above, some of these mortgages are not secured against property. This is the opposite of what the investor is told.

In most traditional projects these development costs would be borne by the developer/owner of the property. In some of these examples the owners of the project literally have no skin in the game. Some people think that’s a wise and smart way to conduct business. I think that I prefer when the investor and owner/developer interests align, and both parties lose when there is losses and both parties win when there is profits.

Mortgage Syndication Fees / Charges / Interest Hold Backs

Another fact that is not usually disclosed is the mortgage syndicator’s compensation structure, which is very lucrative for the syndicator and ends up leaving just a percentage of the amount invested to invest in advancing the project. The investor will not be made aware that 30% to 50% of their money just went to the syndicator as fees. The developer doesn’t pay the interest on the money either, it’s actually held back by the mortgage syndicator. Honestly, you’d get a lot more of these projects failing a lot faster if the syndicators didn’t do that, because land doesn’t produce income, so how are you going to pay a mortgage? Then at the end of the term, the capital needs to be returned to the investor.

Syndicated Mortgage Terms

The actual fees and holdbacks and costs start on page 4 good luck figuring it out. I couldn’t, all I know is that it was a lot of money that was paid out in fees and charges.

Now The Failures

The root of the problem is that a large part of the capital invested is never used to advance the project, the investors are not warned of the risks and when they are, they don’t invest. Recently in Alberta a giant property syndicator/landowner went bankrupt because of new more stringent disclosure requirements by the Alberta Securities Commission and Alberta real estate going down.  Additionally even collapsing under the accounting requirements of 600 different companies. Even though the form of this investment is slightly different the concept is the same, sell pieces of land/mortgages to people who don’t know the real risks and charge them fees.

Because land doesn’t generate income, as soon as the money raising and fees stop, the company folds.

This particular failure hit the CBC news and here’s the print article about it.

There is another similar project here in Toronto at Kennedy & Sheppard that has declared bankruptcy. It’s a seems like a virtually identical situation as the project in Winnipeg, still the original parking lot, but the investors have put a lot of mortgage money in, and the value of the land is in question. We will have the answer to how much the property is worth soon, because the lot was sold but we won’t find out the purchase price until the June court date.

Anyways, I’ve gone on long enough, if you don’t understand that investing in Syndicated Mortgages is another facet of the Bezzle in Canadian Real Estate (Bezzle = Quantum of Undiscovered Fraud) I leave you with the wise words of John Pasalis .

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