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HomePet Industry NewsPet Financial NewsStephen Smith is solving the mortgage business

Stephen Smith is solving the mortgage business

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There is always another metaphorical mountain to climb, and Home Capital is his latest Everest

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Stephen Smith is 71, soft spoken, a self-made billionaire and a man, at his core, of great accomplishment, but also undeniably simple tastes, so he was in no mood to hold back after what his newspaper recently did.

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On Saturday mornings past, when he wasn’t out of town at one of his vacation properties north of Toronto, Smith loved nothing more than hunkering down at a greasy spoon near his midtown home, ordering a mess of bacon and eggs, and digging into the cryptic crossword. With pen in hand and the paper spread before him, he would tease out the answers, exercising his brain before tackling the rest of his day.

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“It was a ritual for me,” he said. “I had a whole routine.”

Now that ritual is over as his paper’s cryptic crossword cryptically has disappeared, upsetting many fans, though few, if any, could be an answer in a Canadian-business themed puzzle. Potential clues: name the mortgage industry titan who can quote Jane Austen’s classic Pride and Prejudice from memory; write computer code; skipped two grades as a kid; went bankrupt in his 30s; and has his name on the marquee of a top university business school.

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That’s what the acquisition of Home Capital is: an intellectual challenge

Stephen Smith

The answer to all of those questions is Stephen Smith, and at 1 p.m. on a dreary, late November day, he was in his office on the 20th floor of a downtown Toronto building with a view of Lake Ontario to the west working on — you guessed it — a crossword, despite recently acquiring alternative mortgage lender Home Capital Group Inc. in a $44-per-share transaction that values the company at $1.7 billion and has a “go-shop” clause expiring Dec. 30.

The puzzles are one way of keeping his mind sharp, but doing billion-plus dollar deals is evidently another. Smith had been pondering making a play for Home Capital through his holding company Smith Financial Corp. for more than a year, but he doesn’t consider the headline-generating transaction as “work.” The way he sees things, these are his golden years.

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“I would argue that I am retired, because I do exactly what I want,” he said.

His banker friends with the corner-office jobs are on-call 24/7. They are working for “The Man,” Smith said. But not him.

“I do this for the intellectual challenge,” he said. “That’s what the acquisition of Home Capital is: an intellectual challenge. It is not about the money.”

Betting the farm

That belief is strong even though Smith once lost every nickel he had in the early 1980s, declared personal bankruptcy and had to move in with his younger sister, Mary Louise, a.k.a. Marlie, and her husband.

That was not especially cool for a “nerdy” whiz kid from Ottawa, the son of a mid-level civil servant, who had twice skipped grades and struggled to fit in with his older classmates at St. Patrick’s High School in Ottawa’s Alta Vista neighbourhood.

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“I wish I hadn’t skipped, because I think it negatively affected me for the rest of my life,” he said.

Dressed in a blue blazer, but no tie, with trendy striped socks peeking out from his grey pant legs, Smith is refreshingly candid in laying his feelings bare. Ask him a question, and he thinks deeply upon it. He doesn’t betray any whiff of pretension, presenting instead as a polite, regular Joe, albeit one with an anything-but-typical story to tell.

You try not to bet the farm, but I had bet the farm

Smith

After getting an engineering degree at Queen’s University in Kingston, Ont., followed by a master’s in Economics from the London School of Economics — London being the place where he discovered his love of Jane Austen — Smith cycled through a series of corporate gigs at Philips Electronics, Canadian Pacific Ltd. and aircraft manufacturer Hawker Siddeley.

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He was a computer geek before computers were a thing to be geeky about. He was restless, and working for the man convinced him he was better suited to working for himself, so he struck out on his own, believing Toronto real estate would be a good way to make a few bucks.

He bought a quadplex near the University of Toronto, leveraged himself to the hilt, started developing townhouses in the downtown core and watched his finances implode when interest rates spiked in 1982. He describes the experience as a slow-motion disaster: all his eggs were in one basket, and market forces beyond his control kept squeezing the basket until it broke.

“You try not to bet the farm, but I had bet the farm,” he said.

Smith became depressed. He was 33, and suddenly living with his kid sister. To this day, it still embarrasses him that he went bust.

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“It is failure,” he said.

Some people are prone to frame their business successes as being masterfully engineered testaments to their entrepreneurial genius. But Smith views that narrative as a bunch of hooey. Wins often require a healthy dollop of good luck, but the losses — guess what — are on you.

“When people fail, it is a mistake,” he said. “Often people will say it is skill when they have succeeded, and bad luck when they have failed, but I am a little bit more the other way around.”

The comeback story

What everybody does agree on is that they love comeback stories. At the nudging of his younger sister, Smith finally got around to publicly sharing his bankruptcy yarn after he donated $50 million to his Canadian alma mater in 2015, which rebranded its business school, The Smith School of Business at Queen’s University.

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Stephen Smith donated $50 million to the Queen's School of Business in Kingston.
Stephen Smith donated $50 million to the Queen’s School of Business in Kingston. Photo by Ian MacAlpine /The Kingston Whig-Standard/Postmedia Network

Moray Tawse knows that story well because he is part of it. He and Smith co-founded First National Financial Corp. in 1988. The company is now the country’s largest non-bank mortgage lender and Smith is executive chairman.

Tawse describes the partners as complete opposites: Smith is analytical, forward thinking, the big-picture strategist who can see around the corners; Tawse is all instinct, a people person who goes with his gut.

The men rarely socialize with one another. They are not buddies, despite having been in business together for almost 35 years. They talk shop in Smith’s office Tuesdays, and while they don’t always see eye to eye on everything, their disagreements never get personal.

“Stephen is very argumentative, but in a good way,” Tawse said. “He always wants to challenge every thesis that somebody has, and then usually you can come up with the right decision.”

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Secret weapon

Establishing a company as a mortgage lending industry disrupter — particularly in the old pre-computerization days — that has survived and ultimately thrived in the shadows of the big banks is no small feat.

Underwriting agreements needed to be typed out in the 1980s, then retyped when interest rates changed. The process was cumbersome and slow, a drain on productivity for a startup that had five employees, including its two founders, working in an office that was so cramped the door wouldn’t close.

What the company did have was a secret weapon, a whiz kid. As Tawse was drumming up mortgage loans, Smith revolutionized the company’s internal gears by computerizing the underwriting process. In subsequent years, he wrote proprietary software that allowed mortgage brokers to execute deals anytime, anyplace.

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Even as chief executive, he could still be found fiddling around with the in-house technology, working out the bugs and coding updates right up until a few years ago when someone at the company — which today has around 1,600 employees and about $130 billion in mortgages under administration — politely mentioned it probably wasn’t appropriate for the boss to be doing such things.

“It was so complex that I just found it easier to make the fixes myself rather than trying to explain it to somebody else,” Smith said.

If that all sounds just a little bit remarkable, it really isn’t, not when you understand that Smith goes all in when he applies himself to something. Take backcountry skiing. It is not a sport for the faint of heart or the weekend hacker. He didn’t even ski until he was in his late 30s. Now, he flies out West four times a winter to rip it up on the slopes with his younger peers.

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Another example: his career goal financially speaking as a young man was to earn enough money to buy a cottage. After he bought a place in the early 2000s, he earned his pilot’s licence at a nearby flight school, because he thought it would be interesting. Another area of interest, at least when the weather is warm, is waking up at the crack of dawn to race around the empty neighbourhood streets of Rosedale on his bicycle with a bunch of like-minded buddies. He pays careful attention to his circuit time; clocking in, say, 1.3 seconds faster one day over the next, is a triumph.

“If Stephen decides he wants to do something, he works at it and works at it and works at it,” Tawse said. “At an age when people typically start giving things up, he takes them up.”

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In sum, there is always another metaphorical mountain to climb for Smith, and Home Capital is his latest Everest. Every experienced mountain climber, to extend the metaphor, understands the risks before taking that first uphill step.

What Smith and every Canadian with bills to pay knows is that interest rates have spiked, as have mortgage rates. The red-hot housing market has gone cold. Home prices are falling and could drop further, and every pundit this side of Bay Street is predicting a recession in the new year.

Tally it all up together, and buying a mortgage lender for people who get turned away by the big banks for having a spotty credit rating or being self-employed might not seem like the most fiscally prudent idea. But those who know Smith weren’t surprised by the timing of the Home Capital deal, although they were somewhat taken aback by the magnitude of it.

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“I knew Stephen wasn’t slowing down,” Jim Leech, the former chief executive of the Ontario Teachers’ Pension Plan, said.

Leech first met Smith at a dinner about 15 years ago. He was running a monster pension fund at the time and had never heard of Smith until Teachers’ partnered with him on a 2010 deal to buy American International Group Inc.’s Canadian mortgage insurance business, now called Canada Guaranty Mortgage Insurance Co.

“When somebody is going to be partners, and they come up with a major-sized cheque, you kind of have an impression of what this person is going to be like,” Leech said. “But Stephen wasn’t what I was expecting at all. He was very shy and humble. He was not a name dropper. He was like this good, ordinary guy.”

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The Teachers’ deal came on the heels of the 2008 financial crisis, when the Canadian housing market still looked as though it might crack, though it ultimately didn’t. Sound familiar?

Leech and Smith have since become friends and enjoy discussing business philosophy, among other subjects. Coming from the institutional investing space, Leech is all about diversification. Smith is a little different. He co-founded a non-bank, mortgage loan company, partnered in a deal to buy a mortgage insurance company, and is now buying a company that provides housing loans to borrowers who can’t get them elsewhere. To summarize: He knows what he knows.

“Stephen hasn’t really diversified a whole lot, and he has been pretty successful at it,” Leech said.

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Soft landing

Peering into the great crystal ball of continued economic turbulence Smith predicts house prices could “bounce along” for a spell, maybe drop a bit more, but he doesn’t foresee a cataclysmic housing industry crash in 2023.

People still have jobs, and people with jobs pay their mortgages. On top of that, home sales may be down, but Canadians are still buying homes, and, as per federal immigration policy, there are a lot more potential buyers on the way with 465,000 immigrants expected to arrive next year. There is also a housing shortage.

As for all the chatter about recessions and so-called hard landings versus soft ones, Smith counts himself among the softies.

“I don’t see us being in for a lot of pain, but we could be in for some pain, and it might manifest itself as a technical recession,” he said.

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Inflation is another issue Smith doesn’t see as a major problem. It’s ticking along around seven per cent, but the Bank of Canada could increase lending rates further without coming remotely close to the double-digit horror show associated with the housing crash and recession of the early 1990s, let alone the early 1980s.

“If you look at the rates today, by historical standards, or even by the standards of 15 to 20 years ago, they are not high,” he said.

It is a different age, to be sure, and the seemingly ageless Smith was headed to Turks and Caicos for the holidays with family to warm his bones, read some Jane Austen and challenge his brain with a few crossword puzzles — the answer to the tycoon’s ideal Christmas.

• Email: [email protected] | Twitter: oconnorwrites

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