Tag Archives: senior debt

COVID-19 could spur a rash of consumer insolvencies in Canada

COVID-19 could spur a rash of consumer insolvencies in Canada 

 

Canada’s insolvency rate will spike up should the ongoing coronavirus outbreak persist, according to Scott Terrio, manager of consumer insolvency at Hoyes, Michalos & Associates.

In Ontario alone, consumer insolvencies swelled by 17.5% on a year-over-year basis last January. This came in the wake of a year that had the second-highest number of annual consumer insolvency filings ever in Canada.

Terrio warned that this figure will noticeably increase in the very near future.

“I think 20% estimates will be drastically low if this drags on for months,” he said in an interview with BNN Bloomberg. “This [virus impact] is now drastically out of control.”

Declared as a pandemic by the World Health Organization last March 11, the COVID-19 virus has ground global markets to a standstill, with economies currently on freefall.

As of press time, more than 225,000 cases have been reported in over 150 nations. Jobs markets have suffered as governments worldwide mandated various restrictions, including social distancing and work stoppages.

The possibility of lower, or even zero, income has especially dire implications upon Canadian tenants, Terrio stated.

“Renters who lose their jobs are going to be in big trouble [in major centres]” he explained. “This is going to lead to huge increases in insolvencies, it’s just a matter of when.”

“I’m hoping [the government is] aiming more funds at people who don’t own homes. If 93% of people filing insolvencies are renters, there better be support for renters,” Terrio added.

“Once people lose their jobs and absorb what happened, this is going to be crazy. Could be summer, could be early fall. But I think it will happen within six months, and I think it’s going to be way more than we thought.”

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Rack up debt. Declare bankruptcy. Repeat. And repeat again. How thousands of Canadians are doing it and costing the rest of us.

Clockwise from top left, repeat bankrupts Stéphane Flynn, Jacques Bélanger, Joseph Cloutier and Charles Rotenberg.
Clockwise from top left, repeat bankrupts Stéphane Flynn, Jacques Bélanger, Joseph Cloutier and Charles Rotenberg.

It was his fourth in 10 years, during which time he had relied on Canada’s insolvency system to rid him of more than $100,000 in debts.

This time, the buck was going to stop. The judge overseeing the case had had enough. Nantel, she ruled, did not deserve yet another fresh start.

“He’s shown no reluctance of using bankruptcy to be freed from his debts,” the judge, known as a registrar, wrote in a 2012 decision. “His past conduct demonstrates a contempt for the rights of his creditors.”

Discharging Nantel of his fourth bankruptcy — liberating him of the debt that led him into insolvency — would undermine the integrity of Canada’s bankruptcy system, the registrar said. She denied his application.

Nantel, who refused to comment for this article, persisted.

Four years after the 2012 ruling, Nantel, now working as a mechanic and living 120 kilometres east of Montreal, went before a different registrar and received a discharge from that same bankruptcy.

And eight days after that, he declared bankruptcy for a fifth time, owing more than $37,000 in new debts.

Nantel is one of a staggering number of Canadians who are washing themselves of their debt by re-using a bankruptcy system meant to rehabilitate honest but unfortunate debtors, a joint investigation by the Toronto Star and La Presse has found.

Bankruptcy system insiders and observers are surprised at the magnitude of the nationwide problem revealed in the investigation’s data analysis.

One in five Canadians who filed bankruptcy in 2018 was doing it for at least the second time. That works out to 11,500 debtors who filed their second, third, fourth or even fifth bankruptcy, according to data obtained from the Office of the Superintendent of Bankruptcy.

“One fifth-time bankrupt is probably one too many,” said Thomas Telfer, a law professor at Western University who has authored the country’s most detailed research on repeat bankruptcies.

“It shows that the bankrupt has not received the message.”

In cases of repeat bankruptcies, the courts have said focus is expected to shift from rehabilitating a debtor to protecting the public and the system from being abused.

Yet, despite the courts’ stern rhetoric, government data shows the vast majority of completed proceedings end with the person released from their debts.

The Star and La Presse have interviewed dozens of debtors and insolvency experts, including the trustees that administer bankruptcies and retired court registrars who previously presided over bankruptcy cases.

Many repeat bankrupts are people marred by bad luck, their lives sideswiped by job loss, divorce, illness or other tragedies that catapulted them back into insolvency.

Others, however, rack up the same kinds of debt over and over, then turn to bankruptcy for what the courts have called a “fiscal car wash.”

“In some segments of society, it’s become almost a game. People take advantage of the system and they take advantage of the leniency of the registrars,” said Yoine Goldstein, a retired Canadian senator and lawyer who led a task force advising the government on potential reforms to Canada’s insolvency laws.

Unpaid taxes owed by repeat bankrupts make up a portion of the nearly $4 billion the Canada Revenue Agency has written off since 2009 because of consumer and commercial insolvencies. In Quebec, the provincial tax agency has lost nearly $2 billion to insolvencies in the last five years alone.

Meanwhile, credit card lenders absorb the cost of bankrupts who do not pay their bills by charging high interest rates to their customers who do pay their debts.

The Star/La Presse investigation has also found the problem of repeat bankruptcies is greater in Quebec, home to an overwhelming number of the country’s third-, fourth- and fifth-time bankrupts.

In some cases, such as Nantel’s, four- and five-time bankrupts have shed their debt more quickly and easily than had it been their second bankruptcy.

When a person declares bankruptcy, a trustee sells whatever assets are available and distributes the proceeds to creditors (some assets, such as clothing and registered retirement savings that are more than one year old, are protected).

In some cases, when the bankrupt’s income exceeds what a government formula deems necessary to maintain a reasonable standard of living, the debtor must make “surplus income” payments, increasing the amount of money creditors recoup.

The bankruptcy is over when the person gets discharged — a release from the legal obligation to pay back what was owed, though it does not cover certain debts such as child support or alimony.

Unless someone such as a creditor opposes, a first bankruptcy is automatically discharged in nine months or 21 months. The second bankruptcy can be automatically discharged in two years or three years.

Subsequent bankruptcies go to court, where the judge can grant a discharge or refuse it. If granted, the discharge is completed after a delay, known as a suspension, or with conditions, such as the debtor having to prove he is up to date with his taxes. Often, a discharge comes with both a suspension and conditions.

Although the total number of consumer bankruptcies is going down year over year, the percentage that are repeat bankrupts has steadily climbed.

Third-time bankrupts have become common in some provinces. Fourth and fifth bankruptcies, once almost unheard of, are now “a scourge,” registrars have said, and “a clarion call to systemic integrity and to the court’s role in it.”

Repeat bankrupts include real-estate agents, roofers, restaurateurs, tax lawyers and drywallers.

With each bankruptcy, they are required to take two financial counselling sessions. Some debtors, however, take away the wrong lesson.

“They go through bankruptcy and they learn, frankly, how easy it is and how forgiving it is. Then think, ‘Gosh, why don’t I do it again?’ ” said John Owen, whose previous business helped credit lenders pursue claims against insolvent consumers.

Owen testified in 2003 before a Senate committee reviewing Canadian insolvency laws, and he warned of the country’s disproportionately high rate of repeat bankruptcies.

At that time, about 10 per cent of bankruptcies filed were repeats. That rate has now doubled.

“There’s a cost to it. No question. There is a societal cost,” he said.

It’s unknown how much lost tax revenue can be attributed to repeat bankruptcies. One thing, however, is clear: The government, sometimes, only recoups pennies on the dollar, if it gets anything at all.

Three-time bankrupt Jacques Bélanger has racked up mountains of tax debt to the CRA and Revenue Quebec. After the Laval man’s meagre assets were picked over in his most recent bankruptcy, filed in 2014, the CRA, owed more than $101,500, received just $59.20 — less than Belanger spent a month on cigarettes.

Three-time bankrupt Jacques Bélanger has racked up mountains of tax debt to the CRA and Revenue Quebec.

“I want to make clear that I never exploited the system. I was just unlucky,” Bélanger said in an interview.

There are few debts more important than the payment of taxes by those enjoying a good income, said registrar Nathalie Champagne in 2017 when faced with Charles Rotenberg, a former Ottawa tax lawyer. Rotenberg, who surrendered his licence after the law society found he misappropriated a client’s funds, was on his third bankruptcy, this latest leading the CRA to write off $313,000. “The Bankrupt before me has enjoyed a good income and he has not paid his fair share of taxes which is unfair to the rest of the tax-paying public.” She refused his discharge.

Rotenberg travels every year and lives in a five-bedroom house bought by his wife and works as a consultant, Champagne noted in her decision, adding “his life and lifestyle have been seemingly unhampered by his third bankruptcy.”

Rotenberg told the Star he drives a Honda. The other car in the driveway, a dark grey 2018 Cadillac sedan, is registered to his wife, vehicle records show. He said that when he travels, it is to visit family. The money that the law society found he misappropriated has been paid back, he said. His consultancy’s website says he helps clients with “Dispute resolution with the Canada Revenue Agency.”

Rotenberg said he assumed substantial liabilities from a business partner who had been managing the books which, coupled with serious health problems, left Rotenberg unable to work and continue to pay creditors and led to his third bankruptcy. He said the court will not let him re-apply for his discharge until 2021.

Charles Rotenberg, a former Ottawa tax lawyer, is on his third bankruptcy, this latest leading the CRA to write off $313,000.

The courts can refuse a discharge when the debtors’ behaviour has been particularly reprehensible.

In 2015, a Quebec court decided it was the best way to handle the fifth bankruptcy of Stéphane Flynn. In an interview, Flynn blamed his bankruptcy on runaway costs in his construction business and clients who didn’t pay on time. In reviewing the case, the judge saw a man with more than $500,000 in debts who treated bankruptcy as a way to escape his debts.

“It is extraordinary that he has been allowed to do so multiple times without opposition to his release,” registrar David Cousineau wrote in his decision to refuse Flynn’s discharge.

Except it was not extraordinary. Discharge has become routine for repeat bankruptcies.

Of the 395 proceedings involving fourth- and fifth-time bankruptcies that were completed between 2011 and 2018, just 21 resulted in a discharge being refused, according to federal data. That’s five per cent.

In every other case, registrars gave a conditional or suspended discharge. (The majority of fourth- and fifth-time bankruptcies filed during these years have not yet had a discharge ruling, according to the data).

The willingness to grant discharges marks a notable shift from how courts historically treated repeat bankruptcies, their decisions guided by an often-quoted judgment that a “third bankruptcy is one too many.”

Stéphane Flynn blamed his fifth bankruptcy on runaway costs in his construction business and clients who didn't pay on time. In reviewing the case, the judge saw a man with more than $500,000 in debts who treated bankruptcy as a way to escape his debts. The discharge was refused.

“Third-time bankruptcies are of grave concern, often demonstrating a degree of irresponsibility that justifies simply refusing a discharge,” Manitoba Justice Colleen Suche said in 2012 in upholding a decision to deny a three-time bankrupt a release, forcing him to re-apply in a year.

Michael Bray, a retired registrar in New Brunswick who presided over insolvency hearings from 1999 to 2013, said the stigma surrounding bankruptcy has diminished. He said stiff sanctions can be used to dissuade a debtor from returning to insolvency.

“It used to be that most people that came for their first-time bankruptcy…a lot of them never wanted to be here again. I think that feeling is gone now,” he said.

“If the courts don’t impose a good sanction, then it’s not difficult to be a three-, four- or five- (time bankrupt).”

Canada’s Superintendent of Bankruptcy, whose office regulates and supervises the insolvency system, would not be interviewed for this article.

In written answers, her office said insolvency laws contain “safeguards against potential abuse,” and the decision to discharge a debtor with three- or more- bankruptcies is a matter of judicial discretion based on the circumstances of each case.

Some trustees say the court’s shift stems from repeat bankruptcies becoming more common and, as their shock value dissipates, registrars are growing more sympathetic to how financially tenuous many Canadians have become.

Another theory is that registrars, aware that creditors almost never attend court to oppose discharges, are asking: If the people owed money don’t care enough to be here, why should I dole out a harsh penalty?

“That was the frustrating part of that job. You’re supposed to be somewhat of a gatekeeper but no one is complaining,” said Scott Nettie, a registrar in Toronto bankruptcy court from 2005 to 2012 with a reputation of coming down hard on debtors who misused the system.

“I know there are registrars across the country who, in those situations where no one is there (opposing discharge) and no one is complaining, they’re like, ‘go forth and sin no more,’ ” Nettie said. “Then there are others, and I was one of these, who struggled with: ‘But it’s not right.’ ”

Among the least engaged creditors, according to Nettie and other trustees and registrars, are credit card companies.

Scott Nettie, a registrar in Toronto bankruptcy court from 2005 to 2012 with a reputation of coming down hard on debtors who misused the system.

Credit lenders rarely oppose a discharge and once discharged, many repeat bankrupts have little trouble securing more credit.

A Nova Scotia man filing his fifth bankruptcy had amassed more than $20,000 in credit card debt, even though two of his earlier bankruptcies remained on his credit report. A businessman from Collingwood, Ontario, had 10 cards in his wallet and owed more than $64,000 when he filed his third bankruptcy in 2014.

Those credit card companies may only recover a portion of what they’re owed.

“They don’t care,” said Nettie. “They’ve already costed the price of losing that part of the business completely into what they charge the rest of the paying customers. Why would they pay good money after bad to pay someone to come (to oppose in court).”

A spokesperson from the Canadian Bankers Association said the country’s banks are prudent lenders that only offer credit to borrowers they believe can and will repay the loan.

Losing money to a four-time bankrupt was not something Dieter Gauger could easily absorb. In 2013, Gauger, a retired millwright, and his wife Edith hired a Hamilton contractor to renovate their Stoney Creek townhouse.

The contract said the work would cost $65,000. But after collecting $60,000, the contractor, Stephen Monahan, left the house unfinished and unliveable, Dieter said. The Gaugers drained thousands from their retirement savings to pay someone else to complete the renovations while they stayed in a Super 8 Motel. The Gaugers took Monahan to court, where in 2015, they got a default judgment for nearly $36,400.

But Gauger does not expect to see any of that.

Two months after the court order, Monahan filed for bankruptcy, his fourth. Described by one registrar as “a menace to credit system,” Monahan told the court his first three bankruptcies were his own fault, the consequences of poorly managing his business. His latest, with nearly $93,000 in debts, was the result of cancer, he said. He said his prognosis is grim.

“I’m very sorry to the people I owe money to and I’m sorry for my failures,” he told the court at his October hearing. Citing his poor health, the court issued Monahan a suspended discharge. He can be free of the debts as early as summer 2020, as long as he pays roughly $1,600 in outstanding administration costs.

For Gauger, it doesn’t feel just.

“I lost $36,000,” the 76-year-old Gauger said. “The system worked for Monahan but not for me.”

The problem of repeat bankruptcies is particularly prominent in Canada’s eastern provinces.

Since 2011, Nova Scotia has had the most repeat bankruptcies per capita in the country with 75 for every 100,000 residents — more than double the national average.

The high rates are likely fueled by a combination of low wages, an unstable job market and a high cost of living, especially in places like Cape Breton, said Rob Hunt, a trustee with Grant Thornton based in Nova Scotia.

“We find people have then relied on credit to bridge their income,” he said. “People finally get to the boiling point where they’ve exhausted their credit and they can’t afford to keep making the monthly payments.”

More than half of the roughly 9,360 Canadians who filed their third bankruptcy between 2011 and 2018 lived in Quebec. For fourth-time bankruptcies, Quebec’s portion climbs to 74 per cent.

And of the 88 Canadians who declared bankruptcy for a fifth time, almost all of them — 90 percent — lived in Quebec.

Insolvency experts within Quebec say they are stunned by the numbers but offer a variety of possible reasons.

Quebec is the only province going back to the late 1980s that has consistently had higher rates of consumer bankruptcy per capita than the national average.

The province has among the lowest rates of disposable income per resident in the country, which could mean fewer Quebec debtors can afford to settle their debts through scheduled payments under a consumer proposal and instead opt for bankruptcy. A consumer proposal, another form of insolvency, is a settlement in which a debtor repays a percentage of what is owed and is an alternative to bankruptcy.

Research has found French-speaking Canadians scored lower on financial literacy than their English counterparts.

The Quebec numbers are also partially due to inconsistencies in the sanctions imposed on bankrupts from courthouse to courthouse and province to province.

How it is supposed to work is spelled out in the Bankruptcy and Insolvency Act. A first-time bankrupt will be automatically discharged after nine or 21 months, unless there is opposition. Changes introduced in 2009 allow for automatic discharges for unopposed second bankruptcies with a waiting time of two or three years. Subsequent bankruptcies must go to court where a judge decides on sanctions.

This is where the system’s consistency unspools.

In Toronto, trustees say the court will postpone the discharge hearing of a third-time bankrupt for at least three years, then delay a discharge for another nine or 12 months.

“The court is of the opinion that a third-time bankrupt shouldn’t be able to get out faster than a second-time bankrupt,” said trustee Mark Morgan from David Sklar & Associates.

But that’s not how it works across the country. In 2018, a labourer living in small-town Quebec was discharged from her third bankruptcy just two years after she filed it. A year later, she again declared insolvency, this time filing a consumer proposal.

Consumer proposals have overtaken bankruptcies as a preferred way to handle debt, particularly in provinces such as Ontario. However, the federal government says it does not track repeat proposals, meaning the rate of repeat insolvencies may be much higher than the data suggests.

The government’s 2009 changes also inadvertently softened oversight, shielding debtors from the scrutiny of the courts until they arrive before it for a third time, according to some trustees and one former registrar.

“This may signal that going bankrupt twice is not as serious as it is. This may be in part what’s led to an increase in recidivism,” Morgan said.

Joseph Cloutier is a 48-year-old drywaller in Toronto who, at his peak, could bring in $4,000 a week. But he never put money aside for taxes. When he filed his first bankruptcy in 2008, he owed the CRA $22,000; during his second, in 2011, he owed $60,000. He received automatic discharges both times.

In 2016, Cloutier again filed for bankruptcy. His CRA debt: $124,000.

“I’m terrible at managing money. I’ve been terrible all my life,” Cloutier said. “I’m one of these people with an addictive personality. If you’re going to give me a million dollars, I’ll spend it all by next week.”

Joseph Cloutier is a 48-year-old drywaller in Toronto who, at his peak, could bring in $4,000 a week. But he never put money aside for taxes. Tax debt drove all three of his bankruptcies.

In November, a Toronto court ruled that Cloutier could be discharged from his third bankruptcy in 15 months with conditions, including that he first pay the CRA debt that had been mounting since he filed his latest bankruptcy.

Law professor Thomas Telfer said the law should be tightened so cases like this, in which a second bankruptcy is filed within three years of the first one being discharged, do not qualify for automatic discharge. Instead, the debtor would go to court where a registrar can determine whether the debtor is honest but unfortunate or abusing the system.

A decade ago, trustee Mark Morgan co-wrote an article about “the revolving door of bankruptcy” and the rising rates of recidivism. Still, he says it “blows his mind” to learn from the Star and La Presse that 88 Canadians have declared bankruptcy five times since 2011.

“It shouldn’t be that easy,” Morgan said. “They’re basically thumbing their noses at the system. I know you can’t do anything to me because you haven’t the first, second, third or fourth time.”

His article outlined strategies to stem what he saw as a growing problem. They included more financial education for youth and new Canadians, more consistent sanctions and expanded counselling, as the two sessions required under the Act aren’t enough to fix “a lifetime of bad” financial behaviour, he said.

“Recidivism will continue to be a problem as long as society, creditors, the courts and the insolvency community allow it to be,” Morgan warned.

In May 2016, seven years after Morgan’s call to action, Kenneth Nantel was again seeking to get liberated from more debt.

It was Nantel’s fifth bankruptcy in 16 years, filed just eight days after he was discharged from his fourth. Much of the $37,000 he owed was to the government, and he blamed his money problems on a loss of income.

He was earning roughly $3,300 a month as a mechanic, enough for him to make surplus income payments to increase the amount of money his creditors would receive.

“If it was his second bankruptcy, the debtor would have to pay a total of $17,748 over 36 months,” Nantel’s trustee noted in his submissions.

Even though it was his fifth bankruptcy, the registrar ordered Nantel to pay only $5,916.

When reached by phone, Nantel refused to comment. “I’m not really interested in talking about what happened in the past,” he said before hanging up.

Nantel can be discharged from his fifth bankruptcy as early as September 2020.

Source: Toronto Star – JESSE MCLEAN DECEMBER 09, 2019

This investigation was done in partnership with Katia Gagnon and Marie-Eve Fournier of La Presse.Data analysis by Andrew Bailey.With reporting contributions from Bryan Meler and Jaye Williams of the Ryerson School of Journalism

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Don’t-pay-til-you-die reverse mortgages are booming in Canada as seniors binge on debt

Don’t-pay-til-you-die reverse mortgages are booming in Canada as seniors binge on debt

Already carrying debt, many seniors can’t downsize because they can’t afford high rents, so turn to reverse mortgages for a new source of income

If you’re 55 or older, you can borrow as much as 55 per cent of the value of your home. Principal and compound interest don’t have to be paid back until you sell the home or die.Getty Images/iStockphoto

Reverse mortgages are surging in Canada as more older people join the country’s debt bandwagon.

If you’re 55 or older, you can borrow as much as 55 per cent of the value of your home. Principal and compound interest don’t have to be paid back until you sell the home or die. To keep the loan in good standing, homeowners only need to pay property tax and insurance, and maintain the home in good repair.

“We’ve only been in this market for 18 months, but applications are jumping,” and have tripled over the past year, Andrew Moor, chief executive officer at Equitable Group Inc., said in an interview. The company, which operates Equitable Bank, sees the reverse mortgage sector expanding by about 25 per cent a year. “Canadians are getting older and there is an opportunity there.”

Outstanding balances on reverse mortgages have more than doubled in less than four years to $3.12 billion (US$2.37 billion), excluding foreign currency amounts, according to June data from the country’s banking regulator. Although they represent less than one percentage point of the $1.2 trillion of residential mortgages issued by chartered banks, they’re growing at a much faster pace. Reverse mortgages rose 22 per cent in June from the same month a year earlier, versus 4.8 per cent for the total market.

The fact that these niche products are growing so quickly offers a glimpse into how some seniors are becoming part of Canada’s new debt reality. After a decades-long housing boom, the nation has the highest household debt load in the Group of Seven, one reason Bank of Canada Governor Stephen Poloz may be reluctant to join the global monetary-policy easing trend.

More seniors are entering retirement with debt and the cost of rent has shot up in many cities, making downsizing difficult amid hot real estate markets. Reverse mortgages offer a new source of income.

Canada’s big five banks have so far shied away from the product. Only two lenders offer them in Canada. HomeEquity Bank, whose reverse mortgage has been on the market for 30 years, dominates the space with $3.11 billion on its books. Equitable Bank, a relatively new player, has $10.1 million. Shares in parent Equitable Group have surged 75 per cent to a record this year.

Critics say reverse mortgages are a high-cost solution that should only be used as a last resort.

“When they think of their cash flow, they’re not going to get kicked out of their house, but in reality, it really has the ability to erode the asset of the borrower,” Shawn Stillman, a broker at Mortgage Outlet, said by phone from Toronto.

HIGHER RATES

Interest rates are typically much higher than those for conventional mortgages. For example, HomeEquity Bank and Equitable Bank charge 5.74 per cent for a five-year fixed mortgage. Conventional five-year fixed mortgages are currently being offered online for as low as 2.4 per cent.

Atul Chandra, chief financial officer at HomeEquity Bank, said the higher rates are justified because the lender doesn’t receive any payments over the course of the loan.

“Our time horizon for getting the cash is much longer, and generally the longer you wait for your cash to come back to you, the more you need to charge,” Chandra said in a telephone interview.

MOST DELINQUENT

Executives at HomeEquity Bank and Equitable say they are focusing on educating people about reverse mortgages to avoid mistakes that were made in the U.S. during the housing crisis — including aggressive sales tactics.

While delinquency rates on regular mortgages are still low for seniors, they were the highest among all age groups in the first quarter, at 0.36 per cent, according to data from the federal housing agency. The 65-plus demographic took over as the most delinquent group at the end of 2015. For non-mortgage debt, delinquency rates in the 65-plus category have seen the biggest increases over the past several quarters, Equifax data show.

Reverse mortgages aren’t included in typical delinquency rate measures — borrowers can’t be late on payments because there are no payments — but they can be in default if they fail to pay taxes or insurance, or let the home fall into disrepair. However default rates for reverse mortgages have remained stable, even with the strong growth in volumes, said HomeEquity’s Chandra.

According to a scenario provided by HomeEquity Bank, a borrower who took out a reverse mortgage of $150,000 at an interest rate of 5.74 per cent would owe $199,058 five years later. A home worth $750,000 when the reverse mortgage was taken out would be worth $869,456 five years later, assuming 3 per cent annual home price appreciation, meaning total equity would have grown by about $70,000.

Source: Financial Post – Bloomberg News 

Chris Fournier and Paula Sambo 

September 16, 2019

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Acceptable debt versus bad debt

Not all consumer debt is bad but it’s wise to be cautious: expert

Increasing the amount of consumer debt isn’t necessarily bad as long as it’s affordable, according to Matt Fabian, director, research and industry analysis, at credit research company TransUnion.

TransUnion studies Canadian debt and produces a report every quarter. Their latest report is for the second quarter, ending June 30. In an interview, Fabian said the study is providing an overview of debt in relation to how fast income rates are rising and household net worth is increasing.

“Our study this quarter suggests that Canadians are still increasing their debt, up 3.9 per cent in the second quarter, compared to the same quarter a year ago,” he said.

“A couple of things that we note are, although debt continued to go up, the rate with which it increased has started to slow for the past couple of quarters, when you compare it annually,” said Fabian.

“It might be too early to say we’re at … an inflection  point but the combination of interest rates increasing and some economic uncertainty in different regions of Canada are giving people pause and maybe they may not be accumulating as much debt as they were, at the rate they were,” he said.

There is some good news coming from the Atlantic region, Fabian said of the quarterly study.

Although the economy can be volatile in the Atlantic region, he said, TransUnion sees provinces like Nova Scotia performing much better than the national average.

The average non-mortgage consumer debt in Nova Scotia is about $28,400 and only went up about 1.24 per cent on a year-over-year basis, said Fabian. New Brunswick is similar, even slightly less, at $27,300 and it went up about 2.37 per cent. Prince Edward Island had average non-mortgage consumer debt of $28,426, which is up 2.16 per cent in the second quarter, compared to the same quarter in 2017.

Newfoundland and Labrador came in under the national average in the second quarter as well, he said, with average non-mortgage consumer debt landing at $30,169, up 2.16 per cent when compared to the second quarter of 2017.

Generally, the Atlantic provinces are well below the national average non-mortgage debt, which increased by 3.87 per cent in the second quarter, said Fabian.  From a delinquency perspective, however, the region scored “a little bit higher” than the second quarter national average of 5.33 per cent.

New Brunswick’s consumer delinquency rates on non-mortgage debt in the second quarter – 90 days past due – was 8.37 per cent, the highest in the region.

According to TransUnion, Newfoundland and Labrador’s consumer delinquency rate was 6.88 per cent, Nova Scotia’s delinquencies were 6.87 per cent and P.E.I. had a consumer delinquency rate in the second quarter of 5.74 per cent.

“Newfoundland (delinquency rate) trended up .32 per cent while Nova Scotia went down about 0.7 per cent,” Fabian said. “Halifax among the major cities has amongst the lowest consumer debt, about $26,000, and it was the only major city in Canada that had negative consumer debt growth (in the second quarter).”

When one takes into context growing household net worth consumer debt is not necessarily a bad thing, Fabian said. “I think the fact that delinquency rates are a little bit higher might be a little bit concerning from a risk perspective but they’re not way out of whack and delinquency rates tend to have a long tail. So, some of the Atlantic provinces for sure are coming out of a little bit of a slump economically and it takes, sometimes, 12 to 24 months to manifest itself in delinquency rates.”

Fabian said as the economy bounces back it leads to jobs and increased salaries, so it seems reasonable to be optimistic about the debt situation.

“We tell people, generally, there’s two things to keep in mind. Understand how much you can afford. So, from a delinquency perspective there’s the notion of stress testing and you should kind of stress test yourself.

“When you’re looking to take out debt or increasing your credit card payments, by putting something on your credit card or taking out a line of credit for a renovation, or whatever it might be, don’t just consider the position you’re in right now and say, ‘Yeah, I can afford that $300 monthly payment.’ But kind of consider your cash flow and maybe, take into account your circumstance to say: ‘Could I cover that payment in the event that I lose my job.’ Or, ‘Can I cover that payment for three months while I’m looking for another job.’ This is what we call … stress testing yourself to see if you can absorb that shock should there be some unforeseen event.”

By taking a realistic view of debt and one’s ability to manage it, Fabian says it will provide a little bit of comfort for an individual to realize they really are comfortable taking on some additional debt, he said.

“From a balance perspective, as long as you feel like you can take that on, I don’t know if taking on credit debt is necessarily a bad thing, it depends on what you’re doing it for. If it’s a mortgage or a line of credit to renovate your home or something like to improve the value of an asset or property for investing then that might be a good use of your debt. If it’s to buy new shoes or go on a vacation because you just want to, might not be the best use of your debt,” Fabian concluded.

Source: Cape Breton Post –  
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How reverse mortgages staged a comeback

Professor Chris Mayer has a lesson for ­homeowners: Reverse mortgages, which let older Americans tap their home equity without selling or moving, aren’t as risky as some say. In an online video, he brushes aside “common misconceptions,” including fears about losing your home.

Mayer, a real estate professor at Columbia Business School, isn’t an impartial observer. He’s chief executive officer of a company that sells reverse mortgages. He’s trying to rehabilitate one of the U.S.’s most-­reviled financial products—part of a broader push that relies in part on academics with interests in the mortgage industry.

The host of Mayer’s talk was the American College of Financial Services, a school that trains financial planners and insurance agents. Until recently, it had a task force funded by reverse mortgage companies, which each contribute $40,000 a year. They include Mayer’s firm, Longbridge Financial, and Quicken Loans’ One Reverse Mortgage.

To show the need for reverse mortgages, industry websites cite a Boston College retirement research center run by Alicia Munnell, a professor and former assistant secretary of the Treasury Department in the Clinton administration. She once invested $150,000 in Mayer’s company, though she’s since sold her stake.

The six-year-old task force cites key successes. Mainstream publications have run articles quoting positive research on the loans, and financial planners are growing more comfortable recommending them. The Financial Industry Regulatory Authority, the securities industry’s self-regulatory agency, in 2014 withdrew its warning that reverse mortgages should generally be used as “a last resort.”

Mayer and Munnell said they’ve fully disclosed, in research, appearances, and interviews, their financial interest in the lender. Columbia and Boston College both said they approved the arrangements.

The professors and industry officials say these government-backed mortgages deserve a second look, partly because of a series of federal reforms in recent years designed to protect taxpayers and consumers.

“We are looking to help people responsibly incorporate home equity in their retirement planning,” Mayer said of Longbridge.

Reverse mortgages let homeowners draw down their equity in monthly installments, lines of credit or lump sums. The balance grows over time and comes due on the borrower’s death, at which point their heirs may pay off the loan when they sell the house. Borrowers must keep paying taxes, insurance, maintenance and utilities—and could face foreclosure if they don’t.

While even critics say the mortgages can make sense for some customers, they say the loans are still too expensive and can tempt seniors to spend their home equity early, before they might need it for health expenses.

Fees on a $100,000 loan, based on a $200,000 home, can total $10,000. Because the fees are typically wrapped into the mortgage, they compound at interest rates that can rise over time. Homeowners who need cash could be better off selling and moving to less expensive quarters.

“The profits are significant, the oversight is minimal, and greed could work to the disadvantage of seniors who should be protected by government programs and not targeted as prey,” said Dave Stevens, CEO of the Mortgage Bankers Association until last year and a commissioner for the Federal Housing Administration in the Obama administration.

Academics represent a new face for an industry that’s long relied on aging celebrity pitchmen. The late Fred Thompson, a U.S. senator and Law & Order actor, represented American Advisors Group, the industry’s biggest player. These days, the same company leans on actor Tom Selleck.

“Just like you, I thought reverse mortgages had to have some catch,” Selleck says in an online video. “Then I did some homework and found out it’s not any of that. It’s not another way for a bank to get your house.”

Michael Douglas, in his Golden Globe-winning performance on the Netflix series The Kominsky Method, satirizes such pitches. His financially desperate character, an acting teacher, quits filming a reverse mortgage commercial because he can’t stomach the script.

In 2016 administrative proceedings, the U.S. Consumer Financial Protection Bureau accused American Advisors, as well as two other companies, of running deceptive ads. Without admitting or denying the allegations, American Advisors agreed to add more caveats to its advertising and pay a $400,000 fine.

Company spokesman Ryan Whittington said the company has since made “significant investments” in compliance. Reverse mortgages are “highly regulated, viable financial tools,” and all customers must undergo third-party counseling before buying one, he said.

The FHA has backed more than 1 million such reverse mortgages. Homeowners pay into an insurance fund an upfront fee equal to 2 percent of a home’s value, as well as an additional half a percentage point every year.

After the last housing crash, taxpayers had to make up a $1.7 billion shortfall because of reverse mortgage losses. Over the past five years, the government has been tightening rules, such as requiring homeowners to show they can afford tax and insurance payments.

In response to public concerns, Shelley Giordino, then an executive at reverse mortgage company Security 1 Lending, co-founded the Funding Longevity Task Force in 2012. It later became affiliated with the Bryn Mawr, Pennsylvania-based American College of Financial Services.

Giordino, who now works for Mutual of Omaha’s reverse mortgage division, described her role as “head cheerleader” for positive reverse mortgages research. Gregg Smith, CEO of One Reverse Mortgage, said the group is promoting “true academic research,” including work by professors with no industry ties.

In January, the American College cut its ties with the task force because the school, as a nonprofit institution, wasn’t comfortable being affiliated with an organization endorsing products, according to Vice President James N. Katsaounis. “A proper retirement portfolio is one that is well-balanced and diversified, which may or may not include reverse mortgages,” he said.

Mayer, the Columbia professor and reverse mortgage company CEO, said many older consumers could benefit from the loans because they can never owe more than their house is worth even if real estate prices plunge.

A former economist at the Federal Reserve of Boston with a Ph.D. from the Massachusetts Institute of Technology, Mayer joined the Columbia faculty in 2004 and currently co-­directs Columbia’s Paul Milstein Center for Real Estate. He wrote his first paper on reverse mortgages in 1994, when the FHA product was five years old.

In 2012, Mayer co-founded Longbridge, based in Mahwah, New Jersey, and in 2013 became CEO. He’s on the board of the National Reverse Mortgage Lenders Association. He said his company, which services 10,000 loans, hasn’t had a single completed foreclosure because of failure to pay property taxes or insurance.

While many colleges let professors engage in outside business activities, Gerald Epstein, a University of Massachusetts economics professor who’s studied academic conflicts of interest, said Columbia may need to scrutinize Mayer’s arrangement closely.

“They really should be careful when people have this kind of dual loyalty,” he said.

Columbia said it monitors Mayer’s employment as CEO of the mortgage company to ensure compliance with its policies. “Professor Mayer has demonstrated a commitment to openness and transparency by disclosing outside affiliations,” said Chris Cashman, a spokesman for the business school. Mayer has a “special appointment,” which reduces his salary and teaching load and also caps his hours at Longbridge, Cashman said.

Likewise, Boston College said it reviewed Professor Munnell’s investment in Mayer’s company, on whose board she served from 2012 through 2014. Munnell said another round of investors in 2016 bought out her $150,000 stake in Longbridge for an additional $4,000 in interest.

She said she now prefers another approach: States allowing seniors to defer property tax payments. The advantages include “no fee, no paperwork and no salespeople,” she said. In one way, she’s glad she exited her reverse mortgage investments.

“Anytime I had a conversation like this, I had to say at the beginning that I have $150,000 in Longbridge,” she said. “I had to do it all the time. I’m just as happy to be out, for my academic life.”

 

Source: Copyright Bloomberg News – Business News 13 Mar 2019

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A first-time homebuyer’s guide to avoiding the house poor trap

Photo: James Bombales

Life likes to deal us surprises from time to time — a job loss, a chronic illness, an unfortunate fender bender. As a homeowner, any one of these sudden changes can throw you off your game, financially speaking, but if you’re house poor, even a minor expense change can have catastrophic consequences.

House poorness occurs when a large portion of your income goes towards your housing expenses, leaving little leftover for savings, discretionary spending or emergency funds. House poorness is not uncommon; an Ipsos poll by MNP published in January found that nearly half of Canadians are $200 or less away from being unable to pay their bills. A fluctuation in interest rates or a sudden expense can bring a house poor owner to their knees, Laurie Campbell, CEO of Credit Canada Debt Solutions explains.

“You’re really fighting a situation where anything that happens becomes too much,” she says.

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House poorness falls on a spectrum of intensity. For some, not having much financial wiggle room means no vacations or new cars. For others, it’s the difference between paying the mortgage and saving for retirement.

“The more serious version of house poor that I think people are just starting to see, and possibly for a couple more years, is people who not only can’t afford to do those discretionary spending types of things, but who also cannot save for retirement, save for children’s education, other things that are really important to do as well,” says Jason Heath, managing director of Objective Financial Partners Inc.

While the prospect of house poorness is frightening, it can be prevented through detailed planning, budgeting and thinking into the future. Campbell and Heath share how you can avoid house poorness, even before you sign those mortgage documents.

Want to retire? Buy from the bottom

While it’s expected that Canada’s hottest housing markets won’t cool off entirely this year, affordable housing remains inaccessible for many. Campbell is concerned that in the current market conditions, some new buyers are still purchasing above what they can afford. In the event of a interest rate rise, she says that those who’ve bought beyond their means could be on a course for financial hardship.

Photo: James Bombales

“Even a quarter point could result in immediate financial discord for a family that has really bought at the top of their income,” says Campbell.

Heath has worked with a number of clients, who, after several years of house poorness, have not been able to efficiently save for retirement. In order to recoup their losses, Heath says that house poorness has forced some homeowners to make downsizing an inevitable part of their financial plan. He fears that those overpaying in today’s market will follow the same fate.

“Particularly if and when home interest rates rise, mortgages payments will rise accordingly,” says Heath. “I worry that you’ve got a whole generation of young people who may be putting a lot of their retirement plans into their home as opposed to saving in a traditional manner.”

Preventing house poorness starts with buying at the bottom of the market, where the prices are the lowest, but Campbell adds that it also requires ignoring the pressures of needing to buy right now — home prices may decline further yet. By monitoring the price of homes in the markets in which you want to buy, you’ll build your knowledge of a fair evaluation of prices in your desired area and skip overpaying, Campbell explains.

“Even if you want to buy a house a year from now, start doing your research now,” she says. “Know what the real cost of housing in the area you want to buy is so you can make sure you’re evaluating the houses that are up for sale with experience.”

Taking on a smaller mortgage loan may also prevent house poorness, especially in the event of an unexpected income change. Borrowing under the maximum amount a mortgage lender approves you for, Heath says, leaves a good buffer in your financial budget in case any unanticipated changes should occur.

“I think it’s a really good lesson to people before they buy to appreciate that job loss happens, health issues happen,” says Heath. “There are extraordinary financial situations that you may not be able to anticipate that could put you into difficulty if you bite off more than you can chew in the first place.”

Skip the McMansion — think long term

Like we keep a spare tire in the event of a flat, or a box of bandaids for those little accidents, avoiding house poorness requires establishing some safeguards in case of unforeseen circumstances. This means having a well thought out financial budget, and a good cushion of emergency funds.

When it comes to budgets, Heath says it takes a very personalized approach to get it right. The mortgage stress test does not factor in personal spending, so financial budgets for homeownership should reflect your own spending habits and expenses.

“The mortgage qualification process does not take into account things like your discretionary spending or the activities that your children are enrolled in, for example,” says Heath. “You can have two families with the same income and the same mortgage approval, but spend very different amounts of money month to month on housing related stuff.”

Photo: CafeCreditFlickr

Beyond budgets, Campbell says it’s also important to account for the long-term lifestyle you’ll want under your mortgage. Owning a home in your early thirties with no children will mean different financial priorities compared to your late forties with post-secondary education fees and retirement in mind. It’s important that your mortgage accommodates your long-term savings and planned changes to family and income. Campbell says this starts with sticking to a budget.

“You don’t need the McMansion,” she says. “A lot of people think the bigger the house, the better it is and a lot of people regret that. So make sure that it’s within the budget that you have within an emergency fund that you need to develop around that budget and you’re able to do the things that you’ve wanted to do over time that won’t be impacted by the decisions you make with that home.”

Don’t give up everything

Owning a home ain’t cheap: there’s renovations, regular maintenance, seasonal upkeep and at least one emergency repair that you’ll need to fork out for at some point. Heath says that new home buyers tend to overlook these expenses — but they are critical to account for in any homeowner budget.

“I think it’s really important to, either on your own or with a professional, to try to assess what the true homeownership cost is going to be in that home,” says Heath. “Particularly, if you’re moving from a condo into a house, or from a rental into a homeownership position.”

Failing to accommodate regular home upkeep and extra costs in the budget can skew the true cost of homeownership. It can also be a drain on your finances. House poorness is marked by a lack of disposable income, which not only leads to skipping those needed repairs, but also the inability to go out and enjoy living life.

“People will often say, ‘We’ll give up everything to buy this house,’ but everything gets really boring very fast to have given up everything,” says Campbell.

Heath recommends making a detailed budget for the medium- to long-term financial outcomes of buying a home in order to assess true ownership costs.

Breaking up is hard to do

If you’re in a position of house poorness, don’t give up — there are options.

Campbell says that boosting your income is a good first step. You can do this by getting a part-time job, or creating side hustle from your home by renting out your extra rooms on Airbnb. But, if your mortgage payments have simply become too much, Heath says that you may need to consider selling and downsizing.

“There are situations where people need to consider the home that they own and whether it is too expensive,” he says.

If selling is the last resort, Campbell advises not to do so hastily. While there could be a mounting urge to get cash — and fast — selling quickly could cost you value in your home.

“Don’t wait until you really hit the dirt, and then try to sell your house, because chances are you’re going to have to sell it very quickly, and if you need to sell it very quickly, you’ll probably going to sell at a lower rate than you wanted to get,” says Campbell.

Source: Livabl.com –   

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Mark Cuban Says the Best Investment Is Paying Off Your Debt — Is He Right?

Mark Cuban Says the Best Investment Is Paying Off Your Debt -- Is He Right?

Image credit: Invision/AP/REX/Shutterstock via GOBankingRates

Billionaire investor and Shark Tank star Mark Cuban said that the safest investment you can make right now is to pay off your debt, according to an interview with Kitco News earlier this year.

 

“The reason for that is whatever interest you have — it might be a student loan with a 7 percent interest rate — if you pay off that loan, you’re making 7 percent,” said Cuban. “And so that’s your immediate return, which is a lot safer than trying to pick a stock, or trying to pick real estate or whatever it may be.”

Cuban is mostly right: More often than not, paying down debt as fast as possible is going to provide the most value in the long run. And perhaps more importantly, it will do so without any real risk that comes with most investing. That said, each person’s financial situation is different, so it is worth a closer look at when it’s better to pay off debt or invest.

Debt is like investing but in reverse.

One important thing to note is that the same principals that make investing so important also make paying off your debt similarly crucial. As Cuban points out, the interest rate on your loan is essentially like the rate of return on your investments but backward. In fact, many investments are simply ways you’re letting your money get loaned out to others in exchange for them paying interest.

As such, it’s important to keep in mind that as satisfying as it might be to watch your money grow in investments, it’s doing just the opposite when you have debt.

Every loan is different.

Although debt chips away at your net worth through interest, it’s important to note that different types of borrowing do so in very different ways. Every loan is different, with some offering terms that are actually quite favorable and others that can be excessively costly.

An overdue payday loan can lay waste to your financial health in no time, but a 30-year fixed-rate mortgage with a competitive rate can be relatively easy to manage with good planning. Borrowers should be sure they understand what kind of debt they have and how it’s affecting their finances.

 

Focus on the interest rate.

The key factor to take note of when considering how to allocate funds is the interest rate — usually expressed as your APR. Debt with a high APR is almost always going to be better to pay down before you focus on any other financial priorities beyond the most basic necessities.

The average APR on credit cards as of August 2018 was 14.38 percent. That’s well in excess of what anyone can reasonably expect to sustain as a return on most investments, so it shouldn’t be hard to see that investing instead of paying down your credit card is almost always going to cost you money in the long run.

Does your interest compound?

Another crucial factor in understanding how your debts and your investments differ is whether or not your interest is compounding. Compounding interest — like that on most credit cards — means that the money you pay in interest is added to the amount due and you’ll then have to pay interest on it in the future. That can lead to debt snowballing and growing exponentially. So, not only do credit cards have high interest rates, but they also make for debt that’s growing faster and faster unless you take action to pay it down.

However, that same principle can work in reverse. Gains on something like stocks will also compound over time, so there’s a similar dynamic at work when comparing your investment returns to fixed interest costs.

Know your risk tolerance.

Another factor that plays a big part in the conversation is your level of risk tolerance. Note that the question Cuban was responding to earlier was about what the “safest” investment was. For most people, erring well on the side of caution when it comes to something like personal finance just makes sense, and in that case, focusing on paying off debt is pretty crucial.

However, others might decide that the long-term payoffs that are possible make it worth rolling the dice on their future. Borrowing money for investments is common despite the risks associated, with everyone from massive investment banks to investors with margin accounts opting to take a calculated risk that their returns will ultimately outpace the cost of borrowing.

 

Costs of debt are set, investment returns often are not.

One important aspect of understanding the risks involved is that the cost of your debt is usually set and predictable, but the returns on your investments are not. It might be easy to look at the historical returns of the S&P 500 at just under 10 percent a year and assume that it’s worth it to put off paying down debt for an S&P 500 ETF or index fund as long as your APR is under 10 percent.

However, that long-term average does not reflect just how chaotic the markets really are. Sure, it might average out to about 10 percent, but some years will be in the negative — sometimes over 30 percent into the red. Even with bonds — where your rate of return is fixed — there is always a chance that the borrower will default and leave you with nothing.

If you have a variable rate loan

Of course, if your loan has variable interest rates, the equation changes yet again. You could see your interest rate rise or fall depending on what the Federal Reserve does, adding another layer of uncertainty to the decision — especially when it’s impossible to say with certainty which direction interest rates are headed in for the long run.

So, although debt will typically have more certainty associated with its costs than investing, that’s not always the case and variable rate loans could change things for some borrowers.

Don’t forget taxes.

You should also remember that the tax code includes a number of provisions that promote investment, and those can boost the value of investing. In particular, contributions to a 401(k) or traditional IRA are made with before-tax income, meaning that you can invest much more of that money than you would have with your after-tax income that would be used to pay down debt.

That’s especially true when you have an employer who matches your 401(k) contributions. If your employer matches, you’re essentially getting a chance to not just avoid paying taxes on that income, but you’re doubling its value the moment you invest — before it’s even started to accrue returns.

 

Some opportunities are unique.

Another important factor to consider is what type of investments you can make. In some very specific cases, you might have access to an investment opportunity that brings with it huge potential returns that could tip the scale. Maybe a specific local real estate investment you’re particularly familiar with or a startup company run by a family member where you can get in on the ground floor.

Opportunities like this usually come with enormous risks, but they can also create transformational shifts in wealth when they pay off. Obviously, you have to gauge each opportunity very carefully and make some hard choices, but if you do feel like it’s a truly unique chance to get the sort of returns that just don’t exist with publicly-traded stocks or bonds, it might be worth putting off paying down debt — especially if those debts have fixed rates and a reasonable APR.

What really matters with debt and investments

At the end of the day, you certainly shouldn’t opt to invest money that could be used to pay down debt unless the expectation for your returns is greater than the interest rate on your debt. If your personal loan has an APR of 15 percent, investing in stocks is probably not going to return enough to make it worthwhile. If that rate is 5 percent, though, you could very well do better with certain investments, especially if that’s a fixed rate that doesn’t compound.

But, even in circumstances where you might have reasonable expectations for returns higher than your APR, you might still want to take the definite benefits of paying down debt instead of the uncertain benefits associated with investments. When a wrong move might mean having to delay retirement or delay buying a home, opting for the sure thing is hard to argue with.

Which decision is right for you?

Unfortunately, there’s no magic bullet for knowing whether your specific circumstances call for you to prioritize paying down debt over everything else. Although paying down debt is typically going to be the smartest use for your money, that doesn’t mean you should do so blindly.

Putting off paying down your credit card balance to try your hand at picking some winning stocks is a (really) bad idea, but failing to make regular 401(k) contributions in an effort to pay off your fixed-rate mortgage a couple of years early is probably going to cost you in the long run — especially if you’re missing out on matching funds from your employer by doing so.

So, in a certain sense, Mark Cuban is right: Paying down debt is very rarely going to be a bad idea, and it’s almost always the safest choice. But that said, it’s still worth taking the time to examine the circumstances of your specific situation to be sure you’re not the exception that proves the rule.

Source: Entrepreneur – Joel Anderson , 

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