Buffett in Bag, Home Capital Taps Canada Patriots for Funds (1)

(Bloomberg) -- Home Capital Group Inc., the embattled mortgage lender now backed by Warren Buffett, is wrapping itself in the Canadian flag in a fresh bid to win back deposits.

Three days before the nation celebrates its 150th birthday and a day before its own annual meeting, Home Capital bought a full-page advertisement in the country’s largest newspapers, calling on people to "invest in the true spirit of Canada." Bearing photos of beaming, hugging, smiling couples -- ostensibly homeowners -- it touted its deposits’ higher-than-market rates and government insurance.

"Plus, your deposits also help provide mortgages to worthy Canadians," the ad said. "The dedication of small business owners, and the hope of people who have faced personal and financial hardship are some of the finest examples of our collective Canadian spirit."

The Toronto-based lender is in its own spot of trouble: it’s trying to reverse a drop in deposits triggered by accusations that the company misled investors about the extent of mortgage fraud. After settling with the regulator and winning rescue funding from billionaire Buffett, the move to appeal directly to Canadians reveals the true backbone of its business, individual depositors.

Real Question

“The real question is not what you think or I think but what retail investors think," said Ron Butler, head of Butler Mortgage, that sends about 11 percent of its deals to Home Capital. The key is whether financial advisers will tell their clients to renew GICs, he said.

These guaranteed investment certificates are crucial to Home Capital’s survival in the long term because they help fund fresh loans. They are one of two broad types of deposits at Home Capital: GICs typically lock in depositors while high interest savings accounts are liquid deposits that bore the brunt of investors’ anxiety in the throes of the crisis. Founded 30 years ago by Gerald Soloway, Home Capital typically offers mortgages to people turned away by traditional lenders.

The company has lost about 7 percent of GICs since April, when the Ontario Securities Commission unveiled accusations against Home Capital and some executives including Soloway. High interest deposits were almost wiped out.

Buffett Boost

The figures have recovered in recent days after Buffett on June 21 agreed to buy C$400 million in shares and offered a C$2 billion credit line -- as well as helped by the 1.75 percent offered on a Home Capital savings account versus 0.80 percent at Tangerine, a unit of Bank of Nova Scotia. Home Capital’s total liquidity and credit capacity was C$1.48 billion on June 27, up from C$1.23 billion a week earlier.

“We are seeing a tremendous response from consumers and financial advisers in recent days as GIC investors respond to our attractive rates and the important steps we have taken to rebuild confidence in the company, most notably with the recently announced investment by Berkshire Hathaway," Benjy Katchen, executive vice president of deposits and consumer lending at Home Capital, said by email. “We are optimistic that this is just the beginning of a longer-term rebound in our deposits base.”

The GICs have expanded about C$93 million, or less than one percent, to C$12.11 billion on June 27 from June 20, according to a statement Wednesday.

AGM Watchers

At Thursday’s meeting, investors will be looking for progress on Home Capital’s plans to hire a new chief executive officer, as well as clues on its operating plans for the future.

Director Alan Hibben, who was brought on to replace Soloway on the board and win back confidence, said the firm would begin exploring a so-called originate-to-sell mortgage model this fall, a securitization product that would be less reliant on deposits.

The woes at Home Capital have set back the development of the Canadian residential mortgage-backed securities market by at least a year, Jamie Feehely, managing director at DBRS Ltd., said at conference in Toronto on Tuesday.

Winning Support

For now, the Buffett backing has helped Home Capital win support from some investors. Shares have rebounded 15 percent since June 21, paring this year’s decline to 45 percent.

Butler has also heard brokers saying that if such a savvy investor puts his money into the firm, it must be safe for retail buyers. Home Capital reached out a day after Buffett’s announcement and told Butler’s company that it was open for business again after a period of stalled deals.

But sending over more mortgage business “doesn’t fix their problem, Butler said. "You have to have all the GICs rolling over, no redemptions."

(Updates with company comment and liquidity figures starting in eighth paragraph.)

--With assistance from Chris Fournier

To contact the reporter on this story: Katia Dmitrieva in Toronto at edmitrieva1@bloomberg.net.

To contact the editors responsible for this story: Daniel Taub at dtaub@bloomberg.net, Jeanette Rodrigues, David Scanlan

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