Entries from March 2013 ↓

Rex F


Stocks surge to a record high, gold falls. So much for Cyprus. Now let’s get back to house horny.

First, F triumphs. The lawn ornament who walks like a man has managed to stare down a second bank trying to spark a well-publicized mortgage war and rope in a fresh load of virgins. The finance minister scared off Manulife from trying to throw a 2.89% five-yearer into the marketplace last week, and now he’s deftly emasculated BeeMO. The bank announced Monday its 2.99 Special will die on Wednesday.

This means you can pretty much kiss off the spring market, as rates rise back to the 3.09% mark. No, it’s not much of a hike and, yes, you can still get 2.74% money if you’re aggressive with most lenders, but any move up is an anathema to housing. Expect sales volumes to continue to badly trail those of last year, with prices to follow – as they already are in bellwether BC.

Why did the elfin deity do this? Simple. The peckerettes know full well where real estate values are heading. They also know mortgage wars appeal mostly to first-time buyers, most of whom have but 5% down. So a price correction over the next year of even a modest 10% would push all of these kids under water, as it would so many people who have turned homeowners in the last two years.

As the US experience has shown, people in negative equity stop buying cars, flat screens and trips to places where people wear mouse ears (Regina is so overrated). The macroeconomic concern is that an ocean of consumer debt combined with falling house values in a country where 70% of families own one, and 65% of the GDP is based on consumer spending, is toxic. So, sucks to your mortgage war. The minister will have none of it.

Is this unfair to certain lenders? Of course. These guys should be aggrieved that they’re slapped down for giving consumers cheap money while banks like TD Canada Trust deceive.

Ever heard of the peekaboo mortgage?

Here’s the come-on from your empathetic, caring lender: “Planning on taking a parental leave, a sabbatical from work, pursuing your studies while working part-time, or finance an unexpected expense? A payment reduction is a good feature to consider.” The TD (and others) allows borrowers to skip a mortgage payment completely, making only 11 monthly payments per year.

Why? Baby time. A new furnace. Or “take a sabbatical from work.” It’s marketed under three headings – Payment vacation, Payment Pause and Payment Reduction. But the result is the same in each case for those borrowers who have not prepaid their mortgages in advance (and who does?).

The portion of the missed payment which is interest (the bulk of it) is capitalized, which means it’s added to the principal amount of the loan. So when you miss a payment (or four) the amount you owe goes up, and thanks to the magic of amortization, you’ll end up paying it back at least twice over.

But there’s more: “If necessary, we will adjust the amortization period remaining at renewal so that the mortgage does not exceed the original amortization period remaining. This may result in an increase to the amount of your regular payments after the renewal.”

The bottom line: the bank has found a way to reduce annual mortgage payments by about 8%, which effectively reinstates (during a five-year term) the 30-year amortization which F made illegal last July. Maybe he should kick a few groins over there.

Finally, let’s not overlook an important leading indicator of the housing market. And it’s flashing red.

When a few thousand people were asked if they intend on buying a house in the next year or so, an historic number – 85% – said no way. This is the biggest annual increase in negative sentiment in the history of RBC’s annual poll. Three-quarters of respondents blamed changes in mortgage regs which make home loans more expensive (despite cheap rates) and slightly harder to get. This should tell you how fragile a thing real estate has become.

The larger reason buyers are retreating into their shells is fear. Being irritatingly human, people think things that are falling in value are more dangerous that those which grow more expensive daily. For homeowners trying to sell at last year’s prices, this is the kiss of death. Those houses will become more and more illiquid, with many selling only when they’re finally priced below market value.

By the way, the survey also showed half the people in BC think it’s turned into a market for buyers. The fact they aren’t should keep you up tonight.


cyprus 1

Exactly four years ago my retired cousin did three things. She called the financial advisor I’d found for her three years earlier. “I want out,” she said. Then she went to his office, collected a cheque and put her money in a CIBC savings account. Finally, she called me. Empathetic as always, I told her she was an idiot.

Despite having a balanced portfolio with just a fraction of the stock market’s volatility, her investments had declined by 22% while the Dow tanked 60%. Completely mesmerized by CNN and ignoring the advice of her financial guy, she bailed. A year later it was evident this had been the bottom. So I told her again she was an idiot.

I no longer get a call on my birthday.

People do this repeatedly, and never with good results. They buy high. They sell low. They scoop up unknown mining shares on a tip and have their asses handed to them. They think every market hiccup’s a 2008 redux. They gamble instead of invest. They never sell stuff that goes up because it’ll go higher. They turn into yield pigs. They take investment advice from relatives who drywall for a living. They panic instantly. They buy socks on sale, but never stocks on sale. They trust no one. And most fail.

Now we have this. Here’s Kate.

With  banks confiscating depositor money in Cyprus and legislation on the books to do the same in several other countries, how do I protect my RRSPs? There are rumours that the US gov’t. may force all IRA holders to buy government treasuries. Do you think this might happen in Canada? Also will holding my mortgage in an RRSP protect me, as long as I am paying my monthly payments on time. Would it be a safer option than holding stocks and bonds in my RRSP that the government may try and control?

She sent this to me yesterday amid the latest news of Europe’s bailout of the sad little state of Cyprus. The headline news is that in return for a $13 billion bailout, which will save the country from bankruptcy (of its own making after having built an economy based on dodgy banks), large depositors will be slammed along with bank shareholders and bondholders. In fact, the second-largest Cypriot bank will be forced out of business.

Typically, media coverage is focused on people lining up at ATMs where daily withdrawals are limited to a pathetic $130. Bank branches are closed for a week, which is better than the alternative (forever). People with big bank balances, including businesses and lots of rich Russians, will lose 20% to 40% of their funds in a one-time tax. Without the EU bailout, of course, a currency collapse might mean double the losses.

The bank being shuttered, called Laiki, will be split into two, one holding protected deposits under 100,000 euros, the other holding larger balances which will be taxed. It’s estimated about $31 billion in Russian money is being held on an island of only 800,000 people, which should tell you something about how Cyprus has been run.

The implications? If you have a fortune stashed in a bank in Slovenia, Spain or Greece, or own some of its bonds, then pay attention. Uninsured depositors are now fair game. This could certainly encourage some people to take all their money out, so they can feel safe before being mugged on the way home. Any bank runs or bond market selloffs would, of course, makes these stuttering states even weaker.

Ironically, though, the attention messy, conflicted little Cyprus is getting could ensure that European leaders never repeat this tactic. After all, bailouts and austerity measures don’t work when there are riots in the street.

But back to poor Kate, who’s obviously been wasting time reading that damn Internet. There is no legislation now passed to steal bank deposits in other countries. The US would never force retirement money into 1.7% government bonds. There is zero threat to private wealth, investments or savings in Canada. No government in a major country could ever control the stock or bond market. There is no contagion. There will be no financial collapse. No Canadian bank will fail. Nobody’s after your RRSP.

Still worried? Some days ago I wrote about what $100,000 deposit insurance covers (CDIC), and how investors are covered for at least $1 million in the event of a financial institution crumble (CIPF). The best protection, however, is the kind of portfolio I keep writing about – broadly diversified and carefully balanced between growth assets and safe stuff. The biggest risk for 90% of people remains the same. It’s not losing money, but running out of it.

Ask my idiot cousin.