Is it Clear Sailing for Home Capital Group Inc. After Q3 Results?

Home Capital Group Inc. (TSX:HCG) stock rose 3.34% on November 15 after releasing its third-quarter results in post-trading hours the previous day. Reactions to the results were generally positive, as the company returned to profitability. But is Home Capital Group truly out of the woods?

Home Capital Group posted net income of $30 million, or $0.37 per share, compared to $66.2 million, or $1.01 per share, in Q3 2016. Total loans under administration fell to $23.2 billion from $26 billion, and the company reported total mortgage originations of $385 million compared to $2.54 billion in the third quarter of 2016.

There was more good news for the housing and mortgage industry, as the Canadian Real Estate Association reported that seasonally adjusted resales of Canadian homes jumped 0.9% from September to October. Toronto home prices fell 2.8% in October, but were still up 9.7% year over year. The Teranet National Bank of Canada Housing Index showed the largest month-over-month decline in prices since September 2010.

Deputy economist at Canadian Imperial Bank of Commerce Benjamin Tal predicted that Vancouver and Toronto will return to strength due to the limited housing supply. Other analysts have called for a steep correction in 2018, as much as 5-10%, piling on an already significant correction since April.

New rules from OSFI are set to add a stress test for uninsured home buyers in January 2018 that could put a 20% dent into the purchasing power of prospective buyers. In an early November article, I’d discussed the impact of the new rules and how it could determine the direction of Canada housing in the coming year.

I also covered how the new rules could spark a run on housing in the final months of 2017. Prospective buyers who plan to put down 20% or more could move quicker if they surmise that qualification will be an issue in 2018. Some mortgage experts have also pointed out that mortgage lenders could extend the amortization period to as much as 35 years in the stress test process, possibly allowing buyers to qualify for a larger mortgage even with the higher rate.

The short seller Marc Cohodes targeted Home Capital Group and the broader Canada housing market. His criticism turned out to be prescient and highly profitable when Home Capital Group almost collapsed entirely in the spring of this year.

Cohodes was quick to react to the results released by Home Capital Group on November 14. He questioned why the company was unable to originate even with a liquidity position of $4.66 billion, including a $2 billion undrawn balance from the Berkshire Hathaway Inc. credit facility. Cohodes posted text claiming that the mortgage broker channel had “cut them off” and that “good borrowers are leaving … weaker clients will be forced to stay.”

In its second-quarter earnings call, Home Capital Group predicted that the new OSFI rules would hurt its loan growth, but that retention would improve. With an uncertain 2018 on the horizon for Canada housing, Home Capital Group remains a very risky play.

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Fool contributor Ambrose O'Callaghan has no position in any stocks mentioned. The Motley Fool owns shares of Berkshire Hathaway (B shares).

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