Jameson Berkow

Reporter

Follow|Archive

There are three possible ways for the latest scandal surrounding Home Capital Group to end, according to the only analyst urging clients to buy shares in the alternative mortgage lender.

Stephen Boland of GMP Securities argues the most likely scenario is the company “works through” allegations from the Ontario Securities Commission that it intentionally misled investors about an internal fraud probe in 2015. Home Capital may see funding costs rise, Boland said, which would make it more difficult for the mortgage business to grow.

“However, we believe [Home Capital’s] importance to the housing market and mortgage competition means regulators will make every effort to keep the company in operation,” he said in a report to clients published Monday morning, adding Home Capital originates roughly $7 billion worth of single family residential mortgages every year.

The second, less likely, scenario in Boland’s view is for regulators to determine Home Capital is no longer viable and forces either a full or partial sale of the business. The third and, according to Boland, least likely worst-case scenario is Home Capital ends up with no liquidity and no one willing to buy the business, in which case GMP expects regulators to supervise a run-off of the company’s books over three years.

“We believe this is least likely as it would pose a material reputation risk to the alternative mortgage market,” Boland told clients. “Liquidity risk would increase for other lenders and, in this heated housing market, access for borrowers to alternative lenders is paramount.”

“Regulators must maintain this access,” he said.

GMP is cutting its price target on Home Capital to $27.50 per share from $37 previously and maintaining its “buy” rating on the stock overall. While Cormark Securities holds a “speculative buy” rating on the stock, implying higher risk, no other analyst is currently encouraging clients to purchase Home Capital shares.