Putting on the Brakes
Posted by Gail | Filed under In the News
The news is full of talk about housing bubbles and Canadians’ debt. And now, from our legislators — not our lenders — comes a move that’s being positioned as a step to protect us from ourselves. Tighter standards are being implemented to stop us from over-extending ourselves and to discourage real estate speculation, even as the Minister of New Rules says, “There are no definitive signs of a housing bubble.”
I don’t believe there’s a bubble. I believe that current low interest rates and our access to credit, often undeserved, has let us bid up the prices of houses without concern for what those houses will cost us when interest rates increase. I believe that because CMHC guarantees the banks that they won’t lose their money even if a customer goes belly-up, that lenders have thrown all caution to the wind and have given money out that they should not have. Sound lending criteria went out the window with the whole-hearted embracing of The Credit Score. And I believe all this will bite us in the butt eventually regardless of these new provisions because much of the damage has already been done.
Isn’t it ridiculous that our banks went hat in hand to The Minister of New Rules, begging for some relief from their own lending stupidity. Really? Dumb Canadians have no control when it comes to borrowing and you, Oh Mighty Minister, must help them. What about the stupid lenders that gave all that credit to Canadians?
And are our mortgages really our biggest problem? Even if there is a correction in the housing market, those assets are still assets, right? What about all that unsecured debt consumers have taken on with absolutely no backing other than the signature of their poor, feckless selves?
These new changes are wishy-washy: Now you have to prove you can manage the five-year rate in your cash flow calculations. I think this is only a salve wiped across a pretty severe case of the Debt Pox, unlikely to do much real good. And I don’t believe the Minister of New Rules is doing anything but trying to cover CMHC’s butt when it comes to reducing it’s exposure to risk. Witness the fact that people buying investment property must now come up with 20% downpayments to qualify for CMHC coverage.
This is the second time the government has stepped in to protect CMHC. Last time, after giving Canadians the rope to hang themselves good and high – 40 year amortizations and 0-down options for CMHC-guaranteed mortgages – they pulled back to the 5% down rule with a maximum amortization of 35 years. There was speculation that they would further increase the downpayment requirement and reduce the amortization, but that didn’t happen. Instead the Minister of New Rules decided that if you’re trying to consolidate your debt to your mortgage (referred to as “doing an equity-take-out”) you won’t be allowed to use more than 90% of the value of your home.
Once upon a time lenders followed a thorough investigative process when determining who would be able to manage credit and who would not. They looked at a customer’s character to see if she were working to built assets, not take on too much debt, and create a foundation as solid as a rock. They looked at her capacity to repay weighing her income against how she was spending her money. They looked at her collateral and her credit history – ALL of it.
Then came the Credit Score and lenders’ blind belief that this tool, above all else, is the best predictor of a customer’s ability to manage debt. Really? A tool designed to predict the most profitable customers – read “customers who pay the most in interest” so people who do NOT pay off their balances – is better than following sound lending practices? Hmm.
Now, people who only pay their minimums have been extended credit they don’t have a hope in hell of ever paying back because their capacities aren’t all that great and they have no collateral to speak of. Just look at the rising bankruptcy figures and you can see what’s to come. But, hey, they have great credit scores because they’ve been taking cash advances on their cards to make their minimum payments.
People, it isn’t a housing bubble that’s the problem. It is the fact that we’ve stopped using our brains. Lending people money to buy stuff isn’t smart when what you’re doing is encouraging people to spend more money than they make and live beyond their means. And the “tightening” of the mortgage rules will do little to save our asses when people will have to choose between paying their debt and eating.
The only thing that will eventually fix this problem is for our banks to be smart again. Once they were. Once they were some of the smartest banks in the world. Then they bought into The Credit Score and proved that they, too, could be dumber than dirt! They started giving credit to anyone who could sign her name, and they made sure that they used every trick in the book to get us on the hook. Now, with the potential for a slide in home prices around the corner, records levels of debt, and an over-exposed balance sheet, maybe they’ll finally wake up and smell the coffee.
February 17, 2010 at 9:03 am
the credit score is the same reason the credit crisis in the states happened. Only looking at the credit score and record low interest rates are what caused their issues in the first place. We are bound to head down the same road. I can’t believe lenders are stupid enough to only look at a credit score.
regards,
Jason
February 17, 2010 at 9:14 am
I’m on my way to saving up that 20% for a home. The skill that I’ve been practicing when it comes to saving for a downpayment is patience! Everyone wants a house, and they want it yesterday. I want a house, but I don’t want to be in debt forever for it… and so I wait.
Hubby and I also don’t have a steady source of income – so (I would hope) no bank in ther right mind would give us a mortgage.
February 17, 2010 at 9:18 am
You tell ‘em Gail!
February 17, 2010 at 9:33 am
Very well said!
February 17, 2010 at 9:47 am
Thanks for injecting a little reality into this debate Gail! The truth is, we used to have a good system for managing lending in our society and we threw it away so that consumers could live beyond their means and banks could make more money. We need to get back to better lending practices in order to stop this debt bubble from getting any bigger. The bigger it gets, the messier it’s going to be when it inevitably pops.
I just hope the Canadian taxpayers who have been paying down debt and saving (at 1%-2% returns) don’t get saddled with another bailout – this time for the banks rather than the auto companies.
February 17, 2010 at 9:47 am
It is amusing that the banks asked the governement to institute stricter guidelines. Heaven forbid one of the lending institutions just do it on their own, as a good business practice…oh no, the other banks might then make more $$ than they did and that just wouldn’t do!!! I agree with the idea, I just think that the banks don’t need governmental regulation to have ethical business practices.
Off topic, today I am feeling cranky about working hard and saving for things and yet friends have the same lifestyle all on credit!!! What is the point!? Arg.
Sorry. No further ranting.
February 17, 2010 at 9:56 am
Very direct point being made, and as both a former lender and long-term investor of real estate, life goes on. Rules are made to help the intellectually frozen people get by in life, so the fact that new rules had to be created to help those that have no common sense beyond the words “i want” comes to no surprise to me.
These rules have no bearing on me as an investor because with everything I do I look beyond the feeling of today, but spend much time looking at the what if scenerios of tomorrow so that I’m prepared to weather the storm.
Bring on the foreclosures, I have money that’s burning a hole in my pocket that I would like to invest.
Happy Capitalism
February 17, 2010 at 9:57 am
When I was looking to buy my first car I remember the hoops I had to jump through to get a loan – and the interest rate was pretty high since it was 1980! Since then credit has become something we ‘deserve’. It’s easy to get and easy to spend on items that will be long gone before the debt is paid. It seems ironic that banks went to a system that rewarded people’s credit score by how much balance they carried and how long it took them to pay it off provided that the payments were made on time! And now they are asking for help to reign that in.
On another note I am furious this morning. I received our renewals for car insurance for an 8 yr old mini van and 6 yr old car and it went up $44 per month or $528 per year without any claims, tickets or accidents. What the he**! On top of that my broker didn’t even bother to call me – just got the info in the mail. Now I will be calling her first thing this morning and probably shopping around. This is utterly ridiculous. Can’t imagine what would have happened if we were unlucky enough to have to put in a claim. We live in southwestern Ontario. Anyone else have this problem?
February 17, 2010 at 10:04 am
Another good post, Gail.
Hmm… the government and an insurance company (CMHC) want to save us from ourselves ? That’s laughable.
On the other hand, we have no one to blame but ourselves. No one held a gun our heads and forced us to sign that 0% down, 40 year mortgage. It was out our delusion and greed that made us sign. Anyone who thinks a mortgage like that is a good deal needs to give their heads a shake.
The government… the insurance companies… the banks… are only out for one thing… to make money ! And they are doing in on the backs, and pocketbooks, of hard-working Canadians. Sadly, some of them are none too bright. Never let someone else do your thinking for you. Educate yourself.
Yes, the banks and lenders have made it easier to get ourselves into mountains of debt, but they have been doing it all within the guidelines set out for them by the government.
IMO, if you can’t afford to pay off a house in a 25 (or max 30) year timeframe, then you should not be buying the house.
IMO, CMHC is tightening the rules, because they are starting to have to pay out on those 0% down mortgages. And we all know how insurance companies don’t like to lose money by paying out claims.
IMO, the government, and the banks, are tightening the rules, because they don’t want the properties that have been defaulted on. It’s too much of a hassle for them to deal with.
How does that saying go ? The road to hell is paved with good intentions.
I am glad that hubby and I didn’t let ‘others’ do our thinking for us. We only took on as much mortgage as we felt comfortable with. We were qualified for way more than we spent, but we didn’t buy into all the sales pitches.
February 17, 2010 at 10:10 am
To Leslie P…
That is typical insurance company behaviour.
They lose money on claims paid…
They don’t like to lose money…
SO, they increase all the rates to recoup the losses.
It’s sickening really.
Having previously worked in the insurance and banking sectors for almost 20 years, I have had the chance to see many things from both sides of the fence.
You can shop around and get a better deal for now, but eventually you will be subject to the same infuriating circumstances.
February 17, 2010 at 10:12 am
Having read this and other articles regarding the the new lending practices banks may adopt really peeves me. We are investors in properties, saving 20% per house is not going to work for my numbers. This will just make me go somewhere else for the $$ be it a hard lender or private person. I’d rather deal with someone who has the same goal in mind as myself. If I pay a bit more in interest but the numbers still work in my flow chart why not? I have no qualms about staying away from the big boys if they can’t/won’t help me, someone else will. We make sure our units are market priced, clean and we get along great with our tenants-I want to keep doing this but that 20% down won’t work for me.
Great post today Gail.
February 17, 2010 at 10:18 am
Powerful post Gail…or should I say rant? Either way, it’s one that will ressinate with a lot of people. My boyfriend told me he heard on the radio (yesterday) that the govt. was going to make it harder to get a loan.
Is the only new rule :”Now you have to prove you can manage the five-year rate in your cash flow calculations” –> and how are people supposed to prove that?! How can I prove I won’t lose my job or some other such thing.
wow.
February 17, 2010 at 10:22 am
I just want to point out one thing:
If, let’s say one of the five major banks becomes known for strict guidelines, would you go there when you want desperately to be approved for your home/mortgage/credit line?
I think a lot of people would shy away, going to one of the other four banks where (fingers crossed) “they approve me”.
I think that the financial institution would lose business, then stock holders very quickly and yes, banks are in the business to make money, not save us from ourselves. People have to take some responsibility themselves.
Diana: Keep saving, you know you have less STRESS in your life!
February 17, 2010 at 10:23 am
@ Liltac, I’m with you. The concept of using other people’s money to make money is sort of defeated with the new 20% down payment for real estate investors. I’ve lined up some good private lenders, mind you the strategy still works for us. We use 5% of our own money borrow the remaining 15% from our private lender at 10% interest. The amount we charge on the rental properties pays for the interest only payment to the private lender, pays our mortgage, pays property taxes and our property manager. In one year we refinance the property, take out equity and pay off the lender and we start the cycle all over again.
Always a way to make money, it just takes longer than before. Obviously our strategy won’t work in every market due to house prices, but in SW Ontario (Cambridge, Kitchener, Waterloo, Guelph) you’re dealing with real estate mecca.
All the best.
February 17, 2010 at 10:30 am
@ Jessie – you can’t prove that you won’t lose your job in those 5 years. What the banks do is make an assumption – if you have a job earning $50,000 now, then if you lose it you should be in theory able to replace it with a job earning $50,000 later.
February 17, 2010 at 10:33 am
Leslie P. – Those rates sound really high for the age of your vehicles. I would definitely be shopping around. Also, look at the policy. Have they added any new coverage? That happened to us last time and I just called and told them to take it off. It looks to me like your insurance company is taking advantage of your loyalty.
Another idea is to pay for your insurance annually. Monthly rates usually incorporate some kind of finance charge or fee. Shop till you get the rates you deserve. If your new company pulls the same thing next year, shop again. Good luck!
February 17, 2010 at 10:46 am
banks and insurance companies are evil. Pure evil.
Credit is too easy to get for some, impossible for others (unless they like payday loan places, where you can now (conveniently) take back jewellry from your exboyfriend to buy boots.)
what will they think of next?
February 17, 2010 at 10:47 am
“People, it isn’t a housing bubble that’s the problem. It is the fact that we’ve stopped using our brains.”
Best comment. Ever.
I’ve been reading a great deal about this issue in the media in the past couple of days, so I’m really glad you’ve added your two cents, Gail. As someone who is still hoping to be a homeowner, it is unsettling to find out just how feckless lending institutions have been in their handling of mortgages, but also reassuring of my own doubts about taking on too much without the sound financial grounding to keep up with a mortgage.
February 17, 2010 at 10:53 am
I have a lending story for you. I went to get a preapproved mortgage. I’m single. I have a steady job and no debt but I’m no Rockafeller. They offered me a $600000 preapproved mortgage with 5% down. I actually laughed at the broker. You have to be kidding me. There is no way I could afford that size of mortgage and eat at the same time. I would also die before the mortgage was ever paid off. I have purchased property but at less than half that size of mortgage with a reasonable amortization period and a reasonable downpayment.
February 17, 2010 at 10:56 am
In the same article about Flaherty imposing new restrictions, that the average homeowner has 96k worth of mortgage. I wish my mortgage were that low!
February 17, 2010 at 11:08 am
I went house hunting about 5-6 years ago, and I was approved WAY over what I could afford. In addition, houses 2 months prior to the month I was looking in, went for 60K less in the area…. are people cracked? Neighborhoods do not go up in value by 60K in two months. It is a bubble… but as long as everyone keeps blowing hot air, it won’t burst. And there’s alot of hot air in Toronto!
Another close person I know, was approved for a 500K bridge loan – half a million dollar people!, to cover between the new home they purchased, and their old home they still owned (yes, someone was confident enough to purchase a home without making it conditional on the other one selling — course, a real estate agent never doubts their ability to sell a home). Well one year later, they are servicing the mortgage on two homes, treading water and possibly pulling the husband’s business into bankrupcy.
Adding rules to the mortgage will not help people who don’t know what they can afford and what they can’t. (btw, I didn’t purchase a home, because everything was too costly and I would have been stretched too far).
I watch alot of Suze Orman as well, and it’s amazing how many people call into her show, they have money problems left right and centre, a financial expert ready to give them advice… and their first priority is “How will this affect my FICO score?” INSANE (FICO score is equivalent to Credit Report).
Nothing will help the criminally stupid, but the fact of the matter is that if the criminally stupid go down the tubes, they can create a suction that grabs us under too!
Why are insurance rates rising? Because alot of insurance companies lost money in the economic meltdown. And if they all have their rates around the same place… we can’t go any where else.
Why do we need to legislate common sense? Because some people are too stupid for their own good.
There are some honest, hardworking, fiscally minded people out there, who will find rates of credit cards, ability to borrow for businesses, mortgage rates etc affected by the ones in fiscal denial, who spend $ they don’t have on booze, restaurants, movies, clothes, etc.
I welcome the legislation… because a) I am glad that I don’t need it, and b) I am glad that it will help those that do.
But I do agree with you Gail, it should not be necessary to legislate common sense. People need to wake up and smell the coffee, it’s burning away!
February 17, 2010 at 11:11 am
Hear, hear! Very well said.
February 17, 2010 at 11:14 am
Joanne makes a great point. These lenders are behaving irresponsibly. But so are some consumers. We have also been offered way more credit than we could hope to pay off in our lifetime. We just said no.
Part of the problem may be that some of the people looking for loans right now don’t realize how loose the rules have become. In the past we didn’t have to worry about borrowing too much because the bank simply wouldn’t give us the money.
It seems like too many people are relying on the banks to do the math for them and don’t bother to do it for themselves. For some of these folks, it’s an honest mistake. They just don’t realize that the rules have changed. Blogs like Gail’s can help people realize that they need to understand these financial concepts and give them the tools they need to do it.
February 17, 2010 at 11:15 am
I dream of having rental properties. I know it will be at least a few years for me to be able to make that a reality – or so I thought. Now with having to have 20% down it feels impossible. This means I need to save likely 50K plus have a slush fund for the property? Looks like I’m gonna need a business partner or 10!
Finaincial Coach I’m heading over to your blog. I hope you have some more info on your strategy…
February 17, 2010 at 11:17 am
I agree that the banks have it all backwards when it comes to who they choose to lend to.
My fiance and I had some serious issues getting a mortgage. We’re students in our early 20s. We had 25% towards a down payment on a $75 000 house. We ended up needing a $59 000 mortgage to buy it.
Our financial system doesn’t fit the mold. We don’t have a steady full-time income. Instead, we work our buns off during the summer and save any excess. That excess trickles through the months to supplement our part-time income. That wasn’t good enough for the banks. In their eyes, you’re either a student, or a worker.
We ended up having to find someone (a bank manager who owed our real estate agent a bit of a favour) to do things the old-fashioned way. That way, they were able to realize that a 35 year amortization would not be forever, just for 2 years or so until we’re both working full time. Once we’re past our 5 year term, we’ll be able to quadruple our payments and own the house entirely in a few years.
Banks have a distinct lack of foresight. Their vision stops with the present. What did you make on your last three paystubs? What do you do now? What is your credit score? You can’t base lending on those three questions.
February 17, 2010 at 11:18 am
Leslie P
I just received my renewal last week and my payment went down by $17 a month… I’m sure it helps that my car is only 2 years old and I have no claims and live 5km from work.
My insurance hasn’t been the cheapest in the area, but it’s been the most stable. When we had the big insurance crunch 3-4 years ago I stayed with my group plan. It cost an extra few dollars then but the guys I know who went with other companies are now complaining how much thier insurances have gone up since then. I think I’m ahead.
February 17, 2010 at 11:30 am
I don’t see mortgages as the biggest problem – its unsecured credit IMO.
Most people will pay to keep a roof over their heads; it’s the credit cards that they don’t care so much about. When I was in lending, it amazed me how many people would become irate when I had to decline them for more credit. “How dare you decline me? I pay my bill every month etc etc” – Trying to have someone get the concept that more than 40% of there income in obligated debt payments was not a good thing was challenging at times. A lot of customers really didn’t see that as important. They felt they made enough money & all the bank should worry about was getting the monthly payment. Ridiculous! If you declined the customer, they took it as a personal attack on their character.
As a lot of people have posted in the past, society needs to stop relying on credit as a source of disposable income.
Yes, I agree the lenders need to take responsibility too – but remember they are a business, not the government. People have to take responsibility for their own money and what they can/cannot afford. A lot of posts indicate that lenders have offered ridiculous amounts. I haven’t had such an experience, maybe because of the province I am in and we do not have as much lending competition as say Ontario would? When I have shopped for mortgages, I have found them reasonable, yes sometimes higher than I felt I could afford, but the numbers fit within the TDSR. In my experience the ridiculous numbers came from B lenders and credit cards.
February 17, 2010 at 11:34 am
I am currently working for a Credit Union. We have always had a qualifying rate that we use when people apply for a mortage. Which is currently 7% it is higher than the posted rates the member would get but we do this to ensure that if they were up for renewal and rates have increase they can still comfortably make the payments (with todays income). Its not that we want to make it hard for people to qualify we want them to have financial security in their lives. (There are of course other parameters)
Some people appreciate the fact that we do this they don’t want to be overextended, other people get angry and will go places that will play games. I have heard of one FI that let a client borrow their 5% down creating a 0 down mortage.
What happened to buying what you can afford or a starter home.
February 17, 2010 at 11:41 am
Insurance companies seem to be more hated then banks but banks actually make more money than insurance companies.
I am an insurance broker. $500 increases are starting to be the norm and it is not fair or right. I agree. Please try to remeber that your broker is just the middle man. But your broker should have flagged your policy with that kind of increase. The company I work for flags any large increase and we try to remarket. In this day and time with all the insurance companies increasing rates sometimes you are still in the best place (meaning cheapest place) to be.
Back to the banks…..my husband and I both make a good living for the area we are in. My husband works in a position that will never be terminated. Unionized and local municipality. The banks love us. We have access to soooo much credit if we want it. This has gotten us into financial difficulty in the past and it is such a struggle to get out of it. My husband used to think that more was better but then he had no will power. At one point we had 13 credit cards. We are now down to 2. A long hard struggle. If they banks had been smart we would have never had so much and I wouldn’t be working 2 jobs now.
Combining your home and auto together will also get you a discount, normally off of both policies.
No matter what your premium is make sure you have Accident Forgiveness on your auto policy if you can get it. This will save you tonnes of money if you get in an accident that is classified as your fault and you would be amazed what is classified as your fault.
February 17, 2010 at 11:49 am
@Leslie,
Sadly, just another sign of the ‘times’ with respect to car insurance rates. I too just received my renewal and it went up ~ not too surprised as I had seen articles indicating that rates were going up in Ontario (Toronto) (http://www.cbc.ca/canada/toronto/story/2009/10/20/ont-insurance-rates.html). They are also warning that house insurance rates are also set to go up because of the tornado that hit Vaughan (Ont) and that as a result of the increased costs of material and labour to repair those houses, consumers can expect to pay for that through increased rates! Basically if you want to invest time shopping around, it may be worthwhile but as the industry is set up to cover claims that are made, the ‘cost’ eventually trickles down to most (all) policyholders.
@ Joanne,
Simply frightening, that they would pre-approve you for THAT amount. As the purchase of a home will likely be the largest loan one will typically take out, it would make sense to crunch the numbers before heading to the bank and getting lulled into a false sense of security by believing that the number they give you will fit your budget (and your ability to pay). Be proactive and do what is in your best interests. Be debt adverse and keep as much money in your own pocket, instead of lining the bank’s coffers.
Time to get back to reality – credit isn’t part of one’s disposable income and the ability to make monthly payments isn’t indicative of financial intelligence. As most people can attest (and in our world of pay check to pay check living), it only takes a job loss, reduced hours at work and related income disruptions to put us into financial distress and potentially on the street with no roof over our heads!
February 17, 2010 at 11:54 am
Leslie P-insurance rates all over Ontario will start going up, because insurers are crying about lost profits. They are blaming rehab costs (i.e., the money they have to pay to help you recover from injuries), but really it’s about the money their investments lost in the recession. Like all monopolies (essentially they are, because we are legally bound to have car insurane) they can do what they like without much recourse-like cut benefits and raise prices. Sucks to be an Ontarian who drives.
Gail-as I heard these new rules yesterday, I shook my head, and thought you’d be doing the same thing. I looked forward to your comments and they were exactly as I imagined. Well said!
February 17, 2010 at 12:12 pm
I don’t think the legislation is a bad idea, it’s saving us from ourselves. Just as the banks have proven that they can be irresponsible about who they lend to, how they calculate who is a good borrower, and the amount they will lend, we (as a whole) can be just as irresponsible by not running the numbers ourselves and understanding what is in our best interest.
Gail is 100% right that is is only a drop in the ocean, but just as with paying off our own debt, we can’t expect the banks to change overnight either. Baby steps! They are protecting themselves by requesting it be mandated, rather than sitting back and watching other banks reap the rewards of bad lending practices.
I believe we should go back to the old way of doing business. Minimum 10% down, 20% to not have to pay CMHC, max 30 year amortization, and actually looking at our finances to decide whether we are an acceptable risk or not.
And hey, here’s an idea… how about creating a ‘rule’ that says the mortgage payment should not be more than ~20% of the net pay? That way it is assured that individuals won’t be over extending themselves. It leaves plenty of room to include all the other household expenses such as utilities, insurance and property tax, and also bump up payments as well. People will go into the home buying market already knowing what they can afford and what they will be offered!
I know, I know… it’s logical therefore it isn’t something that will be adopted
Happy snow day to all in Nova Scotia!
February 17, 2010 at 12:32 pm
@ Sophie re: “And hey, here’s an idea… how about creating a ‘rule’ that says the mortgage payment should not be more than ~20% of the net pay?” Interesting idea but hard to enforce and also not sure it’s fair. For instance, I might pay 30% of my net pay to my mortgage but 0% to other debt servicing, while someone else might pay 20% of the net pay to mortgage and another 20% to other debt servicing.
I go the other way — if someone wants to borrow that much money to buy a house, go ahead. In their own words, my parents had to lie on their mortgage application in 1975 but spent the next 20 years making it ‘true’. Canada doesn’t have no-recourse loans like they do in the US, which means you can’t walk away from your debt if you walk away from your house so I think most people are reluctant to do so. Whereas in the states, all that happened reall ywas your credit score was crumpled. Here, you’d still owe the $600 large.
February 17, 2010 at 12:37 pm
Gail!
Love your work and how you are changing attitudes regarding debt and personnal finances. Your blog is great however I have a correction to make to your statement :
“I don’t believe there’s a bubble. I believe that current low interest rates and our access to credit, often undeserved, has let us bid up the prices of houses without concern for what those houses will cost us when interest rates increase.”
By definition a bubble is an unsubstanciated increase in prices, such as the one you are refering to when you say there is a bid up on the prices. This has been going on for more than 8 years and the cost of houses has been increased all this time to prices that cannot stay. That is the reason why Vancouver, Victoria and Toronto are in the world most unafordable housing town. (http://www.demographia.com/dhi.pdf) For anyone saving 20% to purchase a house, you’re doing the right thing but wait a couple more years and you’ll get a nice discount when this property buble will explode as it did in the States.
Cheers!
February 17, 2010 at 12:49 pm
I don’t understand the problem.
I think it’s a really good thing that the banks are asking for help to keep them away from hurting everybody.
It’s impossible to ask the whole population to change their habits or outlook in life without providing the stimulus to do so. People will not refuse to live in the big house just because they suddenly “see the light” or because they start watching TDDUP (even though financial education definitely lubricates the way!) . But just by itself and without tangible incentives, I really don’t think it will happen.
People will not stop using their SUVs just because they suddenly become environmentally conscious – not on a big scale. It will take more than that, such as having access to very good public transportation, or affordable green cars, and other incentives to use these.
That’s why we need the government – to make sure that when the bottom line interests that drive a lot of things in our world do not drive us into stupidity.
February 17, 2010 at 12:59 pm
I have a lot of problems with this post Gail, so I hope you don’t mind a little dissent in the otherwise usual happy chorus of comments.
First, let’s not forget the “golden days of banking” you wax about when banks didn’t look at credit scores and did an indepth look into your credit background. Let’s call it for what it really was: what colour is your skin, and who is your father? (never mind giving a mortgage to a woman). Whole neighbourhoods were redlined for being home to ethnic minorities. The banks only dealt with an exclusive ethnic/gender demographic, and everyone else could go suck it.
Hey… I can be wise banker too, if I can cater to an economy that systematically disadvantages 75% of the population. And yes, remember, that was an economy where most people couldn’t own property, basically unless they belonged to that 25% group, or saved up enough to make a monster down payment of 80%. So it was a good economy for the loan sharks, and that lucky 25% at the top. And the slum landlords who most people had to live under. (Just look at the old statistics with families of 8 living in 2 bedroom houses… you think it was a “wise and fair” economy that gave rise to that?)
Credit scores developed because it’s a reliable non-discriminating way to determine if you pay your bills sufficiently and on time. Which is really all a bank is entitled to ask you when paying your loans. It’s not fair to say (for example) “Oh, Gail’s a single woman supporting children: we can’t lend to her.” Because it impugns you with unfair judgment, and doesn’t look at the facts; but your credit score does. And it’s not like the banks want you to be able to disenfranchise them of profits.
Your credit score tells them, quite nicely, whether or not you will make them money. The people they really want to avoid are the ones who can’t pay on time: and–really–Gail: doesn’t your professional work expose you to enough people who can’t figure out how to pay a bill a time, that you appreciate that for financial institutions, that’s all they need to filter out–and it’s a good share of the population?
The housing bubble issue is very real. Especially for modest people who have done everything right. If investment properties collapse, and are sold en-masse, then too many people will find themselves with underwater mortgages: punishment for doing nothing wrong, other than playing by your much vaunted common-sense. By curtailing the senseless risk-takers the government helps make sure that people aren’t facing retirement with worthless assets… seems like the kind of thing I’d want my government regulating. It doesn’t matter how prudent you are, if a pyromaniac with matches lives in the apartment below.
The banks are in a difficult place if the government doesn’t change the underlying regulations. If they aren’t willing to grant people maximum-time minimum-downpayment, what are they supposed to do if they find themselves in court for discrimination? Instead, the financial lobby agrees: this will be a sensible step to take to sustain a strong economy. One would have to be fairly blind and deaf to the state of the world at the moment to not realize that this same banking lobby, and the ministry of finance you spend so much time disparaging, are winning plaudits from central economies around the world for keeping Canada out of the worst recession the world has seen since the 1930s. Granted, you are only one voice and opinion Gail: but it seems worth emphasizing that exact point when it comes to your thoughts on this matter.
Finally, of course laws are there to protect us from ourselves. We live in a complicated world. Laws protect us from those who would do us harm, and if that includes ourselves (How many people insist on drinking and driving, or not wearing a seatbelt ? You think that entails no risk to themselves?) then that includes ourselves. Why are you so scornful of that fact?
Well… most of the time I agree with you, and admire your work. Keeping doing the good work.
Richard.
February 17, 2010 at 1:27 pm
Full Disclosure, I work in insurance and I’m pretty passionate about it, so this will be long. That being said, insurance rates are going up, and unfortunately the investments we hold have not given back enough return to keep us in business as we pay out all of these claims, especially in southern Ontario in the metro areas.
I hear a lot of people grumbling about insurance companies’ profits. You probably think it’s crazy, but you actually want your insurance company to be profitable. Why? Because that’s where they get the reserves to be able to make million or two million dollar payouts to numerous clients when they are injured in an accident or a natural disaster strikes and they have total loss claims heavily concentrated in one area. If the insurance companies had made no profits in previous years, they would not have the money to pay out when bad things happen.
Because I know you will argue that they take in millions in premiums every year, yes, they do, but they also pay out almost everything they take in. I don’t want to give away specific proprietary information, but companies aim to pay out on average between 95 and 99 cents per dollar of premium on claims. We put the rest in investments so we can grow it and have a nest egg to pay our employees, make sure we have enough to cover all the contracts with clients (if we have 50,000 clients, each with upwards of $1 million in coverage, you better bet we have to be able to pay every single one of those clients their full coverage, even if every single one of them had a $1 million claim at the same time), give to our communities, maintain our buildings, in other words, to stay in business. The government heavily regulates how much money an insurance company has to have in reserve at any one time. If the company falls below that for a period of time, they are wound up, are forced to go out of business, and leave their clients uninsured, possibly with no refund of premium, until they can find someone else to take them on and insure them. Eventually, if insurance companies don’t make enough to cover the nut and put away money for a rainy day, they go bankrupt. Sound like a familiar story from a certain website and TV show?
Here’s another way to look at it. Insurance is peace of mind, and the promise to pay the vast majority of money you’d be responsible to pay if something happened.
It is not like a bank account – we don’t tot up all the premiums you’ve paid over the years and put that as the limit you should be able to withdraw from the pool – it could never work. Think about it: if you pay $1000 a year on home insurance, for 35 years, you’ve only paid in $35,000. Even with good growth on investing that money, it would never cover the half-million dollars or more it would cost to rebuild your house. So saying that you’ve paid in for all these years, never had a claim and are now owed a certain amount, doesn’t make any sense. You’ve paid for the knowledge that if something bad happened this year, you’re covered. And next year, you pay again for that knowledge – you can sleep at night not worrying where you’re going to come up with hundreds of thousands of dollars on short notice. That peace of mind is really the product you’re buying, which means at the end of the year, you’ve gotten the value for your money already.
So, every year you send in your premium dollars, and they go into a pool of money that is specifically earmarked to pay claims for everyone who paid premium. If you sent in $1000, and you have a claim of $1 million dollars, thank your fellow premium-payers for the money they put in the pool, because you’re now using their money to put yourself back on solid ground.
Lots of years, the pool of premiums is big enough to pay all of the claims for that year and put some away for a rainy day (profits). Some years, and we’ve been having a lot lately, the pool of premiums isn’t big enough to pay all of the claims, so we use up all of the premium dollars plus some of the emergency fund. If we can see that next year looks to be shaping up as another bad one, and the premium pool again won’t be big enough to pay all the claims and put some back in the emergency fund, we go to the premium payers and say, “You now have a choice: you can have the same coverage, but we need to top up the emergency fund, so we need more money. Or, you can pay the same money and be entitled to a smaller payout because you have less coverage. Or, you can shop around for somebody you think is in a better financial position than us.”
The same rule applies to insurance as to life: make more than you spend, and put some away, or you’ll go belly up. Think of all the things no one would be able to do if insurance didn’t exist: after your first house fire, you’d be living on the street unless you had enough cash to buy another home. The risk of driving would be so great you probably would choose not to (with that $2 million dollar injury judgement against you, plus buying the other party another car, plus buying yourself another car, plus paying for the other person’s medical bills, because remember, there’s no health insurance either, plus paying your new housekeeper/cook/babysitter because you can’t get out of bed, you’d better have a pretty hefty emergency fund of your own!) Running a business would be so risky only incredibly rich people could do it. Same for so many other aspects of life. Insurance underpins it all.
I agree Leslie’s broker should have notified her and explained the increase. I don’t think insurance as an industry does a good enough job explaining the pool of money concept, so people do end up thinking of their insurance policies as a bank account. If more people understand how it really works, they would probably feel better about it – no one likes to pay more money for something they need, but it saves them from paying an even bigger hit later. I have to pay more myself this year, because the cost to rebuild my home has gone up. But thank goodness I only have to pay a little bit of that, and not the whole shot, if something goes wrong! Vive L’insurance!
Flame away…
February 17, 2010 at 1:40 pm
I cringe every time new legislation comes out to “protect us from ourselves”. Am I the only person who read “1984″ by George Orwell? We are headed towards a dictatorship where we are legislated from the cradle to the grave and we’re begging for it! I don’t see any animals in a pack allowing themselves to be told what to do; when the young wolf thinks he’s strong enough, he’ll challenge the older leader and DEAL WITH THE CONSEQUENCES.
Also, the morality of the lenders seems to be: you must assume we are doing everything to hook you and if you fall for it it’s your own stupid fault and you deserve it. The banks don’t lose, they get the CMHC to pay them. They don’t take the money you owe them (credit, in a sense) as disposable income, they don’t spend your $250,000 mortgage the day you sign, they wait and rake it in. If you go bankrupt, they’ve still gotten all you paid until then and it’s still mostly all profit.
Maybe if housing prices were capped so that most people with a steady job could afford them we wouldn’t be running to credit to afford them. Or is that communism too? We are paying a mortgage on a decent house (albeit out of town) that is less than any rent in the entire area. We are able to put the extra “housing” money into savings, so in effect, the “downpayment optional” mortgage has actually allowed us to make more money because we knew what we were doing.
February 17, 2010 at 2:10 pm
@Sandy – Insurance Companies have been reporting *record* profits in Canada for years. The CEO of some insuranve companies are often paid in the double digit millions…. so yes, I think they don’t need to raise the premiums as often as they do.
February 17, 2010 at 2:12 pm
I haven’t read the comments above yet, because I want my first reaction down.
I am feeling very smug right now. Ever since the mighty lender increased my credit limit on my first card as an unemployed college student, I have had ZERO trust in how much they think they know me (or how much I could afford). Thankfully I was using my brain and never gave into the temptation of using the plastic! I knew what I could afford, and it did NOT include any interest payments.
Then came the absurd pre-approval for my first house-hunting with my husband. It looked good on papaer, but the math was uncomfortable in real life. We had good scores, but we were using our brains and KNEW that a mortgage payment was only PART of the cost of owning/buying a house. Even though it left us looking at crappy, tiny houses in an iffy part of town, we knew in our hearts what we could afford, not trusting what the bank told us. And we were RIGHT! When baby surprised us and work layed one of us off, we were VERY happy we didn’t have a maxed-out mortgage to deal with.
The preapproval is what they WANT you to borrow to get the most they can from you, not what you should be borrowing! And remember that nothing is guaranteed, life likes to throw curve balls, be ready for them before you commit to the deal.
February 17, 2010 at 2:29 pm
Wow… Amen!
I am a Canadian living in the US. And after watching some relatives buy a 600 sq ft condo for triple what it was worth and then struggle to make ends meet while the ARM increased, I was terrified to get into the housing market. But what a great and novel idea, Gail… use your brain. Go figure that elementary math would come in handy as an adult. Ha!
February 17, 2010 at 2:32 pm
@Kat – I can’t speak for all insurance companies -some of them I agree are ridiculous. But I know how much my CEO makes and it’s pretty small compared to almost any other national-level executive. In fact, it’s barely enough to put them out of the middle class. But also, keep in mind that the reports of “record” profits are always about the entire insurance industry in Canada, which is composed of about 250 companies. If 250 companies in Canada make up a $3-billion profit for the year, do the math as to how much profit each one of them is making. Desn’t cover a lot of big claims, does it? And big claims are on the rise. Compared to the banks, where for instance, ONE of the Big Five announces a $3-billion profit FOR THE QUARTER, it’s pretty reasonable. And yet, I don’t see waves of media outrage when the banks hike fees again. It’s a very strange mindset, and one that’s been successfully manipulated by a lot of interest groups.
February 17, 2010 at 2:45 pm
Now that I have read the above comments…..
Richard makes sense in that the “old way” of determining who would get credit was seriously flawed, BUT I think the credit score tool has been over-simplified and by using it as the definition of how much credit costs, it has converted this tool into a dangerous weapon for a lot of folks.
This nice, non-discriminating, hammer that was designed to build sturdy homes has been swung a little blindfolded for a lot of people by their greedy lenders. For some, it’s more like a devise for bludgeoning the unwary — not to say that the LENDERS are evil, like the above says: they are a business! The consumer has to be greedy too with a healthy dose of impatience and entitlement – bigger, better, faster! It’s the equivalent of putting one’s hand over the nail while the bank swings the credit-score hammer.
(Okay, I admit, I took that analogy a bit far)
February 17, 2010 at 2:57 pm
@Sandy – let’s go with your company being an exception for all the bad guys in the insurance racket.
I was not speaking of reports across the insurance sector, I have a self-directed portfolio. I follow the stock news, and I am speaking of the individual companies that I have seen in the news, that have made record profits – not some generic news report.
Also, there is a wave of media outrage when banks raise fees. In Canada, banks are practically a monopoly. But using an argument that the insurance companies don’t rip off Canadians nearly as much as Banks do – isn’t a very good point.
And down in the US? Forget about it. I watched a documentary, where a woman was dying of cancer (her diagnosis was terminal), her insurance ran out, she couldn’t get any more treatment that she had been receiving at home as she didn’t have anyone to look after her child, and the insurance company took her BED away. It was a hospital bed that moved up and down. Single mom, 10 year old child. What did she pay premiums for all those years?
February 17, 2010 at 3:04 pm
When I heard about the announcement of the mortgage changes I panicked and emailed my husband to book an appointment to get pre-approved for a mortgage right away. When, I delved a little deeper I realised it wasn’t going to affect us that much. It might mean we get approved for a lesser amount, but it should be a marginal difference. As far as investment property, with real estate prices in Vancouver, no property wouold be an investment with less than 20% down anyhow. With less than that, there would be no profit. I don’t think these changes are going to effect the housing market in Vancouver that much, our bubble will definitely keep growing.
February 17, 2010 at 3:26 pm
Great post, Gail. Wow, Richard, that was very thought-provoking. Lots of food for thought from both.
February 17, 2010 at 3:45 pm
Sandy, I must respectfully disagree.
I cannot perceive the car or home insurance as more than legalized gambling, enforced by government regulations. Having insurance companies publicly traded on top of that- is just simply mind blowing.
One needs to realize few facts:
– publicly traded company must act to protect shareholder interest. This is where it grows: dividend payout and increased capitalization. I guess you know where the money comes from for that
– having profit defined as a small percentage of the premiums paid, wouldn’t it be
in insurance company interest to keep paying bigger and bigger settlements and raising the premiums more and more to compensate “for the cost of business”. In the end, the same 1% of 1000 pays 900% more than 1% of 100.
I could go miles arguing about my desire to live my life the way I want, but I guess this path of arguments is not seen from your side of the fence.
February 17, 2010 at 4:25 pm
Doesn’t matter how it’s said or how you perceive. Life is not one big happy game of Monopoly. Get real and understand that if you want it, then you have to EARN it. Banks,Gov,etc. can pull-out all the stops and create all the *shocking* rules they want. Atthe end of the day,if YOU didn’t earn it, then you shouldn’t be spending it. There is no such thing as a FREE lunch..because someone somewhere had to pay for the food!
Happy saving!!
February 17, 2010 at 4:43 pm
I’m short on words today, but all I have to say is this – we need Gail Vaz Oxlade as our Minister of Finance!
February 17, 2010 at 4:54 pm
Siobhan! I agree!!!!!
February 17, 2010 at 5:00 pm
Great post Gail! How I wish you were running this country. Have you ever thought about politics? Maybe you could put some common sense into parliament for a change and turn this country around financially too. If anyone could do it, it would be you. You’re the best!
February 17, 2010 at 5:06 pm
One thing I forgot to mention is my pet peeve regarding housing. Many people get insurance to buy their house but then let it go afterwards knowing their family and community will be there if anything happens such as a fire. I end up paying to get these people up on their feet again plus paying my insurance which I keep paying monthly.
Why isn’t it like cars. When you renew your car or even motorcycle registration every year, you have to show your insurance papers. So why shouldn’t you have to show your house insurance papers every time you renew your mortage, or every 2-4 years else your mortage is increased to include insurance.
February 17, 2010 at 5:20 pm
Richard…a round of applause…I agree with you!
Credit scores are NOT the only thing the bank looks at…we still look at collateral and capacity to pay etc…
We as a society do indeed need laws to protect us from ourselves…common sense is getting harder and harder to come by…whether it’s in credit, driving and cell phone use, seatbelts etc…
The bank I work for does have the strictest lending guidelines of the Big 5 and I make no apologies for it…we should be strict and careful…not just for our business but for the client’s sake as well!…because let’s face it, when credit is granted and the client ends up with too much credit it’s always because the lender “was stupid and gave too much credit”…and not at all because the individual went all over town signing up for every credit card they could get their hands on and then racking them all up…maybe if people took responsibility for their own actions we wouldn’t need new laws to keep us responsible…just my humble opinion….
February 17, 2010 at 5:48 pm
I think that this is the first time I’ve read one of Gail’s posts and disagreed with her.
“Isn’t it ridiculous that our banks went hat in hand to The Minister of New Rules, begging for some relief from their own lending stupidity. Really? Dumb Canadians have no control when it comes to borrowing and you, Oh Mighty Minister, must help them. What about the stupid lenders that gave all that credit to Canadians?”
Gail, moments before you typed this paragraph, you essentially said that government should not interfere with Canadians’ ability to borrow, since we do not need “to be saved from ourselves”. I used to work for a government student loan centre, and you would be shocked by the number of people that didn’t make loan payments because they changed addresses and felt that the banks should FIND THEM if they really wanted their money, therefore they are not at fault. Yes, the banks could have been more strict in their lending practices, but aren’t we all adults that don’t need Big Brother to tell us how to manage our finances? Wasn’t that your original point? How can you argue against government control and advocate lending control in the same breath? Either we know how to think for ourselves or we don’t–which is it?
Secondly, the reason that beacon scores are so widely used is because it removes human error from the equation. Would you like to be at the mercy of a cranky bank officer that didn’t sleep because their baby kept them up all night? Or receive double the amount of affordable credit because someone wants to pad their commissions or hates to say no to people? When something is completely subjective, that means that it is open to interpretation and opinion. Would you like your ability to buy a home to rest solely on someone’s opinion? I know I wouldn’t!
I’ve made mistakes regarding my credit, and I’ve realized the error of my ways and have been working very hard to correct them. But I’ve never once blamed a lending institution for giving me too much credit. The bank didn’t take me out and make me pay for meals and clothes and sundry items–that was all me. And if you fear for your self-control, reduce the limit on your credit cards to prevent over-spending. I don’t buy into the “big bad bank” theory when it comes to spending. Interest rates, however, are another story…
February 17, 2010 at 6:14 pm
So excited with my self yesterday dropped my loan 2% in interest just by calling and asking what my bank could do for me. I have been looking to switch my loan to another bank because of my rate. It was a proud moment. My plan is to rent for the next 4 years so the bf and I can save up 80k for a downpayment because we dont want to be bogged down with a large morgage payment. It will give us more than 20% down payment!! working towards that one so the new ruling doesnt affect me at all. Trying to keep my head on straight sometimes there is temtations that take me off course but not far!! Eyes set on the prize!!
February 17, 2010 at 8:14 pm
I recently saw a mortgage broker to be pre-approved for my home loan for a property to live in.
I already have an investment property with a mortgage on it, and the mortgage broker offered me 511,000- extra for a mortgage for my property to live in.
That is completely ridiculous, so I told him there is no way I am taking all that money and my plan is to buy for around 325k.
He told me I was the first person ever to turn down the money.
S
February 17, 2010 at 8:17 pm
Anne; I early renewed my mortgage 1 year ago and had to prove home owners insurance as a condition of my mortgage and just completed a mortgage switch last week and again (with a different lender) had to prove home owners insurance.
Working with a mortgage broker provided us with an opportunity to consider doing a mortgage switch to obtain an even better (below prime rate) variable rate. However, despite having steeler credit and no payment defaults on our mortgage (and the mortgage already “insured” under CMHC), we were still turned down by one lender due to the line on my DH’s Notice of Assessment that showed a negative number (he is self employed). Lenders do use other conditions than just your credit score when determining if you are client they wish to take on.
February 17, 2010 at 8:52 pm
Joanne’s lending story reminds me of one of my own. Back when I wasn’t as smart about money I applied for store financing (don’t pay a cent for a year, no interest, etc etc) to purchase a bed. The bed came to $1700 with taxes. The finance company approved me for $9000!!! The saleswoman tried to sell me pillows. Hah! Rediculous.
I only purchased the bed, then it was my responsibility to call them back and ask for my available credit to be reduced. Lending companies are just ludicrous and too willing to help you sink.
February 18, 2010 at 1:26 pm
I’m a day behind reading the above posts but I have to say that I agree with Richard & Sandy in regards to their comments about banking and insurance. At the end of the day, you as a consumer need to make yourself aware of what you can afford. I don’t have anything else to add, I think they covered all the major points.
I also work in the insurance industry and people that complain about high premiums have no idea of the amounts awarded by courts for injuries (incredible!) and the amount of property damage that can result from a severe storm in an ubran area. Between the hail/wind/sewer backup damage for one single storm the costs can be in millions. (I live in rural Alberta and ONE sewer backup claim in a home can result in a $40,000 to $50,000 claim if the basement is finished and that’s a conserative amount.) As Sandy said I want my insurer to be profitable AND pay out the insured claims covered in my contract.
By the way, comparing Canadian and American insurance is like comparing fruit, apples and oranges that is. They’re both similar (i.e. fruits) but they also have some huge differences.
Just my thoughts from over 20yrs in the business.
February 18, 2010 at 9:03 pm
Another person agreeing with Richard. I’m not saying that the way credit scores are put together couldn’t be improved, but I agree that it is much better for their to be a standard that helps to eliminate bias, including racism, sexism, disablism, you’re-not-married-ism, and so on.
While banks could raise their lending standards for mortgages, they went to the government for lending changes because banks aren’t the only institutions that offer mortgages. They’re not generally worried about people paying off their mortgages – if they default, CMHC has them covered – they’re worried that people will default on their credit cards before defaulting on the mortgages that some broker arranged with a lender with looser rules. That could cost the banks a lot of money, so they want regulations tightened up so that they don’t get hit just because someone else is lending money like candy. That’s not to say that people shouldn’t be more careful about the loans they choose to take – but for many people, if a lender says “you can afford this!”, well they’re the experts, so they take the experts word for it.
Personally, I would like the government to tighten up lending standards back to where they were before the Conservatives dropped them to 40 yrs, 0 down. Bring back 25 yrs, 20% down!
I live in Victoria, and I believe that’s the only way the sanity will return. I have $100,000 that I’d like to use as a downpayment for a house without putting myself into debt for 30 years. But the way things stand, I can’t.
March 25, 2010 at 12:27 am
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