Financial Update for March 19, 2009

Stocks close higher for 7th session: Fed to buy US$300B of Treasurys to free up credit markets
· TSX+69.50
· DOW +90.88 after the U.S. Federal Reserve surprised investors in announcing it will start buying U.S. Treasury bonds to help unclog credit markets. The move - which economists call "quantitative easing" - is aimed at effectively reducing market interest rates since the Fed's key rate, the federal funds rate, has been ratcheted down as low as it can go.
· Dollar +1.43c to 80.24USD
· Oil -$1.02 to $48.14US per barrel.
· Gold -$27.70 to $888.70USD per ounce
· Canadian 5 yr bond yields -.20bps to 1.69 Four weeks ago it was at 2.07
· http://www.financialpost.com/markets/market_data/money-yields-can_us.html

WASHINGTON - A U.S. congressman says the House of Representatives plans to take up a bill Thursday that would impose a 90 per cent tax on bonuses paid to top-earning employees at AIG and other companies receiving big government bailouts. New York Democrat Charles Rangel, who chairs the tax-writing House Ways and Means Committee, said Wednesday the tax would hit employees making more than $250,000 a year.

Mortgage lender seen as target

Barbara Shecter, Financial Post Published: Wednesday, March 18, 2009
A Toronto-based company built on extending mortgages to people who don't qualify for a bank loan, but without the disastrous results experienced in the United States, is increasingly being viewed as a takeover target.

Home Capital Group Inc., whose shares are trading at decade-low earnings multiples, fuelled the speculation last week when it adopted a shareholder-rights plan, or poison pill, which gives a company more time to drum up offers if there is a hostile bid.

But the 20% gain since then may have more to do with Home Capital's successful pursuit of a slice of the insured Canada Mortgage and Housing Corp. business dominated by the big banks that takes advantage of government incentives put in place late last year to stimulate lending.

"The government has been boosting the level of mortgages taken in through the CMHC programs and Home Capital has been able to ramp up activity here - the yield is good and the government takes on all of the default risk," says Jeff Fenwick, an analyst at Cormark Securities Inc. "Meanwhile, Home purposely eased back on some of the other areas where they lend ... as they had been concerned about the housing downturn in Canada."

Tarred by the fallout from the subprime mortgage meltdown in the United States, Home Capital's shares were off nearly 60% from a 52-week high of $41 last June before the recent rally that took the shares back to $23.64 yesterday.

Gerald Soloway, chief executive, said in an interview the company decided the tweak the business model beginning in the late summer of 2007, when the subprime crisis took hold in the U.S. and Canada's non-bank asset-backed commercial paper market froze.

The company has reduced loans-to-value to take falling house prices into account and reduce the risk of losses from defaults, and ventured into the 80% insurable portion of the $800-billion Canadian mortgage market that is the territory of traditional banks.

This month, Home Capital's $200-million mortgage business will be evenly split between insured mortgages that take advantage of the spread between bonds yields and rates, and the company's traditional mainstay of uninsured loans for those that can't get them elsewhere, Mr. Soloway says.

"At this point, the margins of selling into the Canada bond program are very good... We don't apologize for being somewhat opportunistic and taking advantage of a market," he says.
CMHC insured mortgage pools are priced using Canadian government bonds and with bond yields being very low, the spread between the average mortgage rate in the pool and the rate paid on Home Capital's mortgage-backed securities has made it an attractive area for the company to be, analysts say.

It seems likely that the big banks will take notice, especially because they are touted as potential buyers of Home Capital and have historically coveted the firm's healthy margins derived from higher interest rates on the loans that are perceived to be riskier.

But Mr. Soloway says there have been no formal or informal approaches from suitors.
"I'm the wallflower. No one's asked me to dance," he said, adding that implementing the shareholder rights plan, which is to be voted on by investors at an annual meeting in May, had been under discussion for some time.

As for the $1-billion in insured mortgages Home Capital could take from the banks this year, Mr. Soloway maintains that it wouldn't rock the boat because it would be a small fraction of an estimated $640-billion pie.

"Nobody at any of the big banks wakes up and says, ‘I've got to get Home, they're eating my lunch,'" he says. "It is significant for my business, but it's not enough to bother anybody else."
Mr. Fenwick, the Cormark analyst, said he doesn't expect any would-be buyers will make a move on Home Capital in the near term.

"A bank would be a natural buyer but given the current climate right now, I think it would be challenging to sell the idea to shareholders given that the media would label Home as a sub-prime lender," he said. "However, Home Capital has recently been trading at decade lows... and they may have been concerned about an opportunistic bid."

With no takeover premium in mind, Mr. Fenwick has a target of $30.25 on the stock. The company expects to deliver earnings growth of 10% to 15% this year.