Canada universities financially failing

I'd missed the story a few weeks ago. Laurentian University is insolvent. I just heard about it from some who are close to the academic scene. I guess a factor was a dangerous reliance on foreign students. With Covid-19, apparently a lot of that dried up. Regional high school enrollment has been in decline for a number of years, so there are fewer grade 12s incoming each year. 

They were heavily in debt was well apparently from a construction spree. Still, I'd heard of Laurentian, it's a first-tier university in Canada. So to declare insolvency, with the future by definition in doubt, seems like an important story. 

One news story from the time mentioned 60 years of history at Laurentian. that's not that much actually for a university. there are plenty of people alive today who were there the day Laurentian opened. it's probably the case that the number of universities opened in Ontario in the baby boom years of the 1960s is more than are needed today. Really, if Laurentian just closed its doors in May after exams what difference would it make. Students who are mid-degree could be easily absorbed into the numerous other Ontario universities.

the academics mentioned that here in Nova Scotia, Cape Breton University (CBU), is also highly reliant on foreign students, and their tuition. I don't have any visibility into CBUs finances as a result of Covid and travel restrictions, what if any shortfall there may be.

for CBU though, and the rest of Nova Scotia's universities, if it came to it (again I have no visibility into their finances and there have been no news stories, as far as I know everything is fine), there is a well established tradition when universities get into financial trouble. 

in 2011 NSCAD was bailed out. they were facing closure apparently after a bad real estate deal. in 2017 alone Acadia University was bailed out for over $10 million after a mysterious, massive hole apparently appeared in their budget. the running total for Acadia is now over $24 million. I've never seen an explanation over the $10 million shortfall. I guess the taxpayers are supposed to just shrug and accept it.

the truth is both NSCAD and Acadia should have just been left to close their doors due to the financial mismanagement. As with Laurentian, there is plenty of capacity to absorb any displaced students. there have been too many universities in Nova Scotia for a very long time now. if some just closed by their own mismanagement then its for the best in the long term.

I remember the Dr. Janet Halliwell years, a generation ago now. A good and smart woman. She noted there were too many universities in Nova Scotia. Alas she had little success consolidating campuses or programs. As in Northern Ontario, there are fewer grade 12s every single year in Nova Scotia too.

Universities tend to be long-lived. They cost a lot to establish, and once there, there is a sense of community, of generational continuity, of permanence. But they don't necessarily have to live forever. Maybe the public universities in Canada should move toward a model similar to private institutions. They can run well for a while, when they are most useful, when there are lots of students and opportunities for grads. Though they don't have to last forever. We have to recognize that even long-lived institutions can run their course.

MNP Debt solutions ad

There was a comical ad running on ATV Live at 5 last week from MNP debt solutions. The close enough video is on YouTube

The commercial and YouTube claim that this is an Actual Client. I noticed comments are closed on the video, hmmm.

I found it amusing. I like how the heroine spoke of "unexpected bills" after a separation. Yes who knew that your husband had been paying the rent, power, cable, phone, cell phone, and internet all those years. I'd thought electricity was like sunshine, it was just something that we all get for free.

I couldn't help but notice heroine was well put together. Perhaps if she spent less on hair, makeup, and clothes she might not have ended up in such a financial bind.

Meh if she was so reliant upon her husbands paycheques then perhaps she might have acted differently to preserve the relationship and prevent it from failing. Oh well. She does come across as entitled an unlikeable in the video.

In the video she brags about being debt free now. Although she didn't actually say she paid off all her debts. I guess it's left as an exercise to the reader to determine how she became "debt free".

I suppose if you default on your debts via bankruptcy or proposal then you can say afterward that you are now "debt free", though it's nothing to be proud of. In a way it's, ahem, unfair to those who inherited a bad situation with debt due to the irresponsibility of another and made the sacrifice and effort to actually pay off their share of everything and become debt free through the honourable path.

misc

So it's 2012. I got thinking that means it's been 5 years now since 2007. That blip report that US subprime mortgages were defaulting at a 16% rate, way up from the usual 7%. Then the 2 bear stearns hedge funds blew up. and, well then everything else since then that happened. Still not back to normal or close to back to normal five years later now.

I remember sitting at Jack Astor's for a work lunch. SupportSoft was good for that. It was late spring or summer and we were outside on the patio. Real nice Nova Scotia day. Just shooting the breeze and making jokes about Alabama deadbeats. I'd never heard terms such as subprime, CDO, CDS and such. I had just discovered HousingPanic and was reading and absorbing so much. I wonder what Keith is up to these days and if he ever returns to USA and Phoenix.

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Speaking of subprime and trailer park trash. The lolsite of the day is liarscheatersrus. This is where people expose cheaters using their real names. Some of them with comments are entertaining like this one.

Flaherty please shut up about Europe

So recently some more finger wagging from Jim Flaherty about Europe debt. in addition to earlier comments [1] [2] and others.

What's the point of this anyway Jim? What are you trying to accomplish here. It's not like Canada with a $1 billion a week of federal borrowing and an irresponsible commitment to increase federal health spending by 6% per year forward as far as the eye can see is any kind of model of financial restraint or responsibility.

Canada has the same structural flaws as Europe including low birth rate, aging population, large public sector, high debt from previous governments, large segments of the population living off government cheques, political preference to borrow and spend today and deal with the financial side "in the future", lack of political will to make unpopular cuts, etc.

It makes me think of an apartment building. Two neighbours make $40k a year. Paul has $20k in credit card debt and is insolvent, unable to meet his commitments. His neighbour Jim has $15k in credit card debt, can only make minimum payments, and continues to spend more than he makes. This would be like Jim trying to shame and lecture Paul about personal financial responsibility.

Get your own financial house in order Jim. Canada's fate is Europe's fate is way things are going right now. You should be treating the European situation as a very clear warning to you.

TD visa limit increase

I got a periodic call from TD at work this week. They follow up a lot whenever you do anything in a branch or on the web site. My most recent activity was an address change to my new place off their website. It went fine.

So as usual the rep was going over products; suggesting I could switch my GM card to a travel plan or some cashback card or whatever. She also mentioned I could move my savings into some other products. I politely declined.

But while she was on the phone I remembered I had been meaning to ask for a limit increase on my GM card. The rules in Canada are different now. In the past the bank would just increase the card limit on their own once in a while. Which was convenient. Anyway now the rules are the customer has to seek and consent to a credit limit increase.

So I took the opportunity to ask for a limit increase. I thought it might go through they were calling to seek new business from me. I asked for $1000 more. After a few moments I guess the big mainframe computer said OK and now my limit on the card is up to $2500 from the previous $1500. Even after being approved the rep still had to ask and I had to consent to the limit increase.

So that's about right. It's kind of moot at the moment since I have no balance on that card or any credit card. But for whatever reason I like having it there. That should be good enough for now. Maybe around this time next year I'll seek another increase, see what happens between now and then.

Sears card

I now have a Sears card.

I didn't set out yesterday to get a new credit card. I was at Sears looking for a belt. I've needed a black belt for some time. I saw one I liked, two sided black and reddish brown. It was $30 with a 25% sale discount.

When I got to the cashier the clerk told me the discount is if you pay with your Sears card. I wasn't upset, I hadn't read the sale sign carefully. I just shrugged and paid cash. As I was leaving I mentioned I should get a card for these types of specials.

The clerk told me I could get a card right there at the customer service desk in just a few minutes. I figured if I could save $7.50 for a few minutes of my time that was a good investment. So I did the application which was very fast and virtually nothing to fill out. A few moments later it came back and I had a new card.

The clerk refunded the original cash purchase. When I re-bought the belt I got the $7.50 discount. Plus apparently there's a $10 discount on your initial Sears card purchase. So instead of paying around $34 for the belt I ended up spending $15. That was pretty good for just a few minutes of my time.

I was a bit surprised at the credit limit. I was expecting to get around $500 or $1000 perhaps. It instead came in at $4000. Either Sears thinks well of me or they are reckless and a bunch of fools. The $4K limit is more than my Visa and MasterCard limits combined. I don't anticipate I'll use it but I guess it's nice that it's there.

Although I've been meaning to ask Visa at least for a limit increase. I think the rules are different now they cannot auto increase credit limits; customers have to ask for an increase. Which is annoying and a hassle. I have to call them to register my upcoming address change so maybe I'll ask then.

Now I have to go through some steps to set up this new card with my President's Choice financial and epost. And of course pay the $15. It's a bit strange I never really thought I'd ever have a Sears card.

car is paid off

Some news in my recent bank statement. The last payment has been made on my 2005 Honda Civic. So I now properly own it. Another debt gone. The car has around 130,000 km on it and is running well; hardly any problems at all.

It's great to have it paid off. I've been thinking for a while about what to do after it was done. The payment was $175 every two weeks. Counting the occasional 3 payment months it averaged to $379 a month.

I'm pretty sure it would be a mistake to just pocket this $379 a month as new clear money. That would create a distortion in my finances where I have unnatural prosperity when payment free then followed by the shock of going back to making payments.

I see car ownership as an ongoing expense. I do expect and hope to be well enough physically and financially to own more cars after this Honda. So my plan is to enjoy some relief right now for paying off the vehicle while continuing to make payments for car ownership.

So I went to the Presidents Choice pavilion at the local Superstore and opened a savings account. My plan is to put what would have been car payments into this account. I think I'll put in around $340 a month or so. That way I see some new money now in the monthly budget while smoothing out the vehicle payments. Depending on how long the 2005 lasts I might be able to buy my next car outright with no financing. Or at least I should have some down payment that I can get a better car with financing for about the same amount per month.

I already use PC financial for my chequing account so it will be easy to deposit to the PC savings account. Basically one click from their well designed website.It was interesting at Superstore the PC financial rep told me after opening the savings account that I qualified for a low interest line of credit. Ah the life of the self cured. I politely declined his offer to go back into debt.

One other vehicle cost I want to look at is insurance. The car is basically old with high mileage. A quick kijiji search reveals 2005 Civics are selling for around $5k - $9k today. I suspect mine would be worth closer to 5 than 9. So I'm considering dropping my insurance back to PLPD. At some point the marginal cost of collision on the insurance vs. the amount they would pay out in a claim just isn't worth it. Especially since I could always get a new vehicle and just go back to paying $380 a month.

Is Canada the new Argentina?

Some troubling news on the web today. Canada is now issuing debt denominated in euros. Also earlier this year Canada borrowed money that must be paid back in US dollars.

This is terrible news. When a country starts issuing its debt in the currency of other nations it is basically screwed. This is what led Argentina and Weimar Germany to ruin.

It doesn't really surprise me though. I remarked on this earlier around Harper's visit to China. I am very concerned about Canada's ability for the federal government and the provinces to find lenders willing to lend us the money to finance the staggering federal and provincial defecits. Now the picture becomes a bit clearer. Foreign creditors are insisting on being paid back in their own currency.

There are so many problems with foreign denominated debt. The biggest of course is that we can't control future exchange rates. Today the CDN dollar is presently high. When it drops in the future the costs of making payments in US $ and euros will skyrocket; even though the principal is the same. This is the same disaster as the Halifax Mackay bridge fiasco which was financed in German marks. Now that disaster may play out on the entire nation.

Another big problem with foreign denominated debt is that the government in a pinch cannot just monetize it. For example if I am holding a Canada savings bond that matures in say 5 years. On that day the government could if it had to make good the amount by just printing the money and giving it to me hot off the printing press. That would be bad for the nation as a whole but at least we would be able to control our own fate. We can't print foreign currency.

Speaking of defecits today it came out that the Nova Scotia provincial government is presently running a defecit of around $1.5 million a day. Against this backdrop we are facing two major civil service strikes [health and education] next week. Great timing there government unions; way to help out your NDP friends now in power.

The insanity of a sovereign borrowing in other nations currency must end. It would be better just to bite the bullet and limit government borrowing to what we can raise in Canadian dollars. Cap the defecit at that amount; or print the difference and deal with the consequences. Foreign denominated national debt may be the greatest threat to the Canadian way of life as we know it.

American express credit card offer

I got an interesting letter in the mail this week. It was a credit card from American Express. It had a $3000 credit limit on it.

It seems to be linked to Costco. It's strange because I didn't apply for any credit card when I joined. They must have some agreement with Amex I guess. I noticed when I joined as part of the sign up they ask your approximate annual income. I guess Amex takes that stated income as close enough to truth when determining how much credit to offer.

I didn't have to accept the card since I didn't ask for it. So I had to make a decision. I thought about it for a bit and I threw out the card instead of activating it.

I already have a Visa and Mastercard. Although the credit limits are low relative to income and financial situation I imagine they'll increase on their own over time. If I wanted more I could just ask and they might increase it. But I don't want more right now. I have no balance and all the available credit card capacity I need at this time.

American Express is not what it used to be. I remember in the 70s when it was a charge card; a concept I still cannot fully grasp. Anyway back then it was prestigious to have the green American Express card. It was hard to get.

But then things changed with Amex. The charge card gave way to the common vulgar credit card. High income, sterling credit, rare default, classy clientele were largely displaced with pedestrian credit card people, the subprime sheeple.

Amex today with its credit cards is just another loser American wall street firm like MBNA. In fact they are today a "bank" who received TARP handouts from the US taxpayer to cover their losses on bad loans. I don't respect them any more. Speaking of being asked to cover for irresponsible loans they made in the past, the interest rate on the Amex card was a hefty 20%. Interesting since they borrow from the government at 0%.

So thanks but no thanks American express.

borrow today, sorrow tomorrow

I'd never heard that saying before but it is so true and relevant. Sadly the advice is too little too late for many; not that they would have heeded it anyway.

Here's some other mementos of the discarded past on the occasion of the elimination of the debt.

So long doughboy




Goodbye Edmund Andrews.

TD loan is paid off

Some good news on the bank statement this month. This was the final payment on the TD loan. It's good to have it now paid off. It took a while but now it's done. And with that I've now paid off all of the consumer debts.

It was about two years ago that I resolved to fix the debt situation and now I have. The job switch about a year ago helped a lot. I intend to be debt free for the long haul. It's a great way to be. As long as my employment remains stable it should be possible.

There's still some debt left around. There's about a year to go on the Honda loan. That's not a bad debt because I'm getting something for the payments, the car. Plus it's only 1.9% so I could find more profitable uses of any extra money than accelerating the payments on that. It will go away on its own in a few months anyway.

The TD bank watches what's going on. About a week after the final payment a rep called me. He asked if I had any plans for the $200 a month freed up by paying off the loan. He suggested I could put it into an auto deposit into my TD savings account. I think I can do better than a 1% savings account. Thanks for mentioning it anyway.

One thing I did was I canceled the overdraft on my chequing account. It was just a $200 overdraft and I keep a "floor" balance in the account anyway to cover occasional unexpected unbudgeted monthly expenses. So now I'm debt free the overdraft is a remnant of the financial past which can be discarded.

I don't have too much planned for the new $200 a month from paying this off. Like most people in Canada the $200 is nice but it isn't life changing money. I've allocated some of it already. I'll also make some modest lifestyle improvements. A bit of shopping and such. Maybe a little treat or two for myself to mark the milestone. Mostly it will just be absorbed into the existing budget. Now that I'm not putting extra money to accelerate the elimination of the debts, I have some other things I want to work on. Like getting a better place would be nice. That and some other bigger things.

Invited back to MBNA

I got an unexpected letter from MBNA this week. They have offered me a Premier Rewards MasterCard. This card offers 1% cash back and 7.96% interest.

Funny because when I canceled my old card it was 19% interest and no rewards. So they are rewarding people who cancel by offering them a better deal to return. Maybe there's a strategy there for the existing customers.

It might sound like a good deal but it isn't really. I get 1% cashback already on my National Bank card so there's nothing there. Plus the National Bank card will upgrade to 2% for large monthly purchasers if I really was interested in getting purchase cashback.

And is 7.96% interest really a good deal? MBNA borrows from the central banks at 0.25%. So they are making about 750 bps profit. That seems excessive to me. I feel they are trying to get the good customers to cover their losses on defaults from irresponsible loans they made to irresponsible customers. No thanks.

Plus since I have no balance I don't care if the interest is 8% or 28%. It's still $0 to me. Paying interest on credit cards is for fools and suckers.

I wouldn't be surprised if in the not too distant future the credit card schemes become more quantized. There will be 4-6% interest, no fees, longer grace period, cashback and other incentives for the best customers. Shaky customers will see the legal max interest 20-30%, annual fees, legal minimum grace period, no incentives. They may even have to post capital and partially secure their credit limit balances. Say put up $500 cash in order to receive a $2000 card balance. Maybe a level in between at around 12-15% interest with annual fees.

Plus if MBNA really wanted my business they should try to demonstrate good customer service. After I canceled my MBNA card there was a credit made to the account by a vendor. On April 28 I phoned MBNA and asked them to mail me a cheque. They said it would be sent within 10 business days. The cheque still hasn't arrived and now I have to phone them again to try to extract my money. Why would I want to go back with these people? So thanks but no thanks MBNA.

TD credit card is paid off

Some updates on the credit cards. In my latest TD visa statement the card is now paid off. That's good news to finally have that done. It took a while and it was hard but now it's done.

So that's the end of the "plastic" part of the credit cards. Unfortunately there's still some consumer debt still to be eliminated. There's about $5500 left on a TD loan which was transferred over from credit card. So that's credit card under a different label. I don't have a timetable for it to go away. The payment is $210 a month so it will be good for that to be done with. I can use the payments I was making on the plastic cards to help pay it off faster. Debt is slavery.

Still the elimination of the plastic card balances is an important milestone. I have a little treat in mind to mark the occasion. More on that when it happens.

With the TD emerald card paid off I have made a change. I've canceled the TD emerald card. I've replaced it with the GM Visa card. They gave me $1500 to start out. With the TD emerald card canceled they may increase the limit in the coming months, or whatever. By switching to the no fee GM card I skip the $25 annual fee on the other card. So it's a good move. I don't care about the 20% interest rate since I have no balance and no plans to carry a balance. I had a GM card long ago in the past so this is again a way to break from the old ways financially and move forward in a new positive direction. I'm still with TD though as they've always been good to work with over the years.

So I should be set for now with credit cards. Depending what happens to GM I guess. With the National Bank Mastercard and the TD GM card I don't expect to be adding or deleting any credit card accounts in the next while.

MBNA MasterCard and National Bank MasterCard

Some positive news credit card news lately in the mail. My MBNA Mastercard is now finally paid off. Whew! What a relief to be free of that card.

It was a tough go with much sacrifice to get there, but I'm glad it's now done. It won't make much difference in the short term monthly budget since the MBNA payment money will just be moved onto the TD visa. The TD visa is moving along pretty well so hopefully that will be wrestled to the ground sooner rather than later.

And after the TD visa there's still the TD loan. So a way to go still but this is a positive milestone along the way to being debt free. Debt is slavery.

With the MBNA paid off I wanted to get rid of it. I still use Mastercard and find it useful sometimes so I wanted to replace it with a new card. I'm now replacing the MBNA Mastercard with a National Bank Ultramar Mastercard.

With the Ultramar Mastercard I get an extra discount on gas. I generally go to Ultramar anyway and I'm already getting a 2 cents/litre discount using the Ultramar ValuMax card. So now I'll get an extra 2% discount on top of that on gas I was going to buy there anyway.

It was a bit of an adventure getting set up with National Bank. I applied through the mail back in November with a form they give out at all of the local Ultramar gas stations. I didn't think much more of it for a few weeks as I didn't hear anything of it. Then in late January I decided to call them and ask what the status was. The National Bank rep (who answered in French initially which was kind of amusing, but it's great he's Canadian) was helpful and said I needed to go to a local branch and present ID so they know that it was really me who applied for the card, and not someone posing as me.

The local "branch" as it turns out in Halifax is also the AltaMira office way downtown on Barrington Street. It wasn't too bad to get there for 8:30 AM opening and an occasional trip downtown is pleasant. The people there were more used to selling mutual funds and they are just learning the branch procedures. But they were helpful and enthusiastic. They took the information and my phone number and said they would follow up with head office and get back to me. Later that morning they did get back to me and it was all set up. After that I got the answer from National Bank in just a couple of weeks.

They ended up approving me and giving me a $1,000 balance on the card. I passed on paying $15 a year for 19% interest and instead went with no fee and 26% interest. I'm not really concerned about the interest rate since I plan to just pay as I go and use the card as a convenience and for the discounts on gas and other purchases such as Paypal and other online. This card is good if you never carry a balance because it's no fee and you even get a discount on purchases.

There's some other benefits to the National Bank Mastercard. They have epost billing so that's a good thing for convenience and to help the environment. Also they are Canadian, so whatever merchant fees come of my card purchases will stay in this country.


Although terminating with MBNA and starting fresh with a new Mastercard will scratch my credit rating a bit, I think it is a good move. I didn't have to cancel with MBNA but I chose to.

MBNA is an American company. A subsidiary of Bank of America. Which makes them also associated with Countrywide and Merrill Lynch. So right in there with the scummy subprime, predatory lending, alt-a, synthetic CDO, CDS, bailouts, fraud, TARP. I'm embarrassed to be associated with MBNA/Bank of America. Let the US taxpayer take care of MBNA/Bank of America because I don't want to.

The MBNA telemarketers are so offensive and they never go away. It helped when I changed phone numbers a few months ago. They haven't yet found my new number but I expect eventually they will and it will be back to MBNA telemarketer harassment. I don't want your stupid travel insurance, or disability insurance or balance protection insurance, or whatever other worthless garbage your MBNA telemarketers keep pestering me about. Just go away and never come back. By canceling it might help get rid of the MBNA telemarketers.

The thing about the MBNA card is what it represents. The MBNA represents the past. The lost financial years. The old ways. This is about severing another link to the past. Making a clean break and a new start.

So the MBNA card is now canceled and cut up. It was a small bit of work to switch over the automatic billing for macpass and paypal to the National Bank card but now that's done.

Goodbye and good riddance MBNA mastercard. You brought nothing but misery and hard times into my life. I look forward to never interacting with you again!

TD Visa limit increase

There was some news in my most recent statement from TD Visa. They have lowered the rate on the card. Also they have increased my credit limit by $1000 to $4500 now.

It's been around a year since they increased it to $3500. I never used the additional balance above $2500 they granted. I don't use the TD visa or any credit card very much. I mostly just use cash and sometimes debit card. There's something highly satisfying and powerful about paying cash.

Mostly with TD visa I just pay a bit more than the minimum each month. I've been using a win-hold strategy between the TD visa and MBNA mastercard. I've been pretty much minpay the visa while putting more payments onto the MBNA. That makes sense when the MBNA interest is over 20% and the TD interest is around 12%.

Still it's nice to get recognized for the ongoing progress with the debt situation. I don't really plan to use this newly available balance but it's there I guess for some unexpected thing.

I know some people are interested in getting a credit limit increase. Here are some tips for how to TD visa credit limit increase.

Don't call the bank, they'll call you. They have a big mainframe computer which runs a big batch job once a month to determine who gets credit limit increases. They'll know about you soon enough when they decide you're ready for a higher limit.


Be a customer. If your only product with the TD bank is the credit card then you're not really a first class customer. They don't really care much about you [except they care that you stay always current on the card] and will be not inclined to do anything for you. For myself I have a small savings account with TD and a personal loan. I've been with the bank in one way or another all my life. If you have some accounts, investments, a TD green card, etc. and set foot in a branch once in a while then they will look at you more holistically as a customer when determining to grant additional credit card limit.


An importanct concept to the bank is capacity. They want people who have the capacity to service higher debt or make higher payments. So you need to demonstrate capacity to the bank. These are some ways to help the banks computer recognize you have the capacity for an increased credit card limit.

• greater than minimum payment. If you only make the mininum payment then you're telling the bank you are stretched to your limits financially. The bank will be risk averse and will not grant you new credit. You are barely able to service your existing loans, borderline delinquent. Even if you just take the minimum payment and round it up to the next multiple of $10 then you are showing the bank you have additional money to spare and you can service a higher limit
• steadily decreasing balance. If your outstanding balance declines six months in a row this is an important thing the bank's computer will notice. It's OK to have a balance and make new purchases on the card. However your overall balance owed must decline each month. By doing that you are showing you have the capacity to service your balance and things are well in hand. Thus you are low risk for an increased limit.
  
  Conversely if your balance is rising month over month then that is a red flag to the bank. You are demonstrating you probably spend more than you make and are higher risk for eventual default. The bank will be much less likely to risk putting a higher credit limit at risk.
  
  Of course if you want to go south this winter and use credit card to pay for the trip [although you should either pay cash or stay home]; then pay it down smartly over the next 6 months then that's OK with the bank. A balance increase due to a big spike purchase is one thing. The bad type of balance increase is when the purchases are for gas, groceries, gifts, entertainment, etc. They know what you're buying and pay attention to why your balance may be increasing.
• unused capacity. This is a bit of a paradox in that the bank tends to give credit card limit increases to those who don't seem to "need" it because their available unused balance is already pretty high. But that's the thing. By keeping unused balance you are demonstrating the capacity to properly manage that amount of available credit. You are a good candidate to be trusted to manage more available credit; even if the bank expects you likely won't use it.
  
  On the other hand if you are at or near your credit limit then you are demonstrating poor credit management skills. Although you would very likely spend the newly granted credit on your card, the bank has to be concerned if you have the capacity [either income stream or personal financial skills] to service an increased credit limit and actually repay it. A wise bank would be very cautious about letting these people extend themselves any further until they can demonstrate some capacity to service their existing debt load.

Canada government mortgage purchase

You may have heard the story recently the government of Canada is buying $75 billion in insured mortgages.

In a way that seems strange. After all if the mortgages are insured then what's the worry? It's hard to make sense of what's happening here.

I have a theory on it. The problem is the insurance. Not that they are insured, but the quality of the insurance itself is dubious.

It is a fact that many mortgages in Canada are insured by AIG. You may have heard of AIG, that's the large American insurance company that is insolvent and was nationalized by the US government.

The reason AIG is insolvent [i.e. unable to pay claims] is largely because of financial insurance. That would include mortgage default insurance, bond insurance, CDO insurance, credit default swaps. AIG miscalculated the risks and when these financial objects went bad at an unexpected rate [including an ongoing tidal wave of mortgage foreclosures] then AIG did not have enough reserves set aside to pay out the claims.

So here in Canada any lender holding an AIG insured mortgage is in trouble because they can't count on the insurance being any good when some percentage of the mortgages default. And mortgage defaults in Canada will be increasing steadily for the next while.

If the insurance is no good then the owner of the loan is facing raw exposure to the loss on the defaults. That would force the lenders to reduce the value of those assets if they have unreliable default insurance protection. Such an asset loss could well leave the lenders insolvent or forced to raise capital in an unfavorable market.

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I think it works something like this. Suppose I loan Andy $3000 unsecured. In return Andy agrees to pay me $100 a month for 3 years. So far so good. Then as a precaution I purchase insurance on this loan from AIG for say $200. The insurance is good for the remaining unpaid principal up to $3000.

So I can rest easy knowing that the loan is worth at least $3000 on my books because even if Andy defaults AIG will cover me up to $3000.

Now suppose with recent events I'm no longer confident AIG is good for the money if Andy defaults. This is really bad for me. Now I have to worry about Andy defaulting because I will lose the full outstanding amount of payments owed. I have to reduce the book value of the loan to Andy because it is not worth minimum $3000 any more since if Andy defaults I now have to eat the loss, not AIG.

It could cause other problems. Suppose I have made two other such loans. And I used the loans as collateral on a $9000 line of credit for myself [since the loans with the insurance were worth a minimum of $3000 each]. Now I can be in even more trouble if my line of credit holder sees his collateral is impaired he could cut off or call the LOC; and he has to reduce the value of his asset which is now no longer fully secured. So any other debts using these assets as collateral are now also impaired and would need to be written down.

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So instead the government of Canada is absorbing the mortages with questionable insurance, and unfortunately quietly eating the losses when the defaults occur. It's too bad really. The truth is the mortgages the government is buying are basically subprime [although it is taboo to use that word in Canada]. AIG or whoever if they had done due diligence would not have insured them. Of course without the insurance the mortgages would not have been approved by the lenders due to the risks.

I suspect a lot of these mortgages are no money down mortgages, 40 year mortgages, mortages where people have refinanced credit card and other consumer debts onto the mortgage [perhaps multiple times], mortgages given to people with questionable credit history.

How bad will the losses be to the taxpayers of Canada on this $75 billion portfolio? That's a good question. 10%, 20%, 50%? Since the door is now open for a deficit the government may just allocate for a large loss (like 35%) on these mortgages this year and pile it onto the deficit we're going to have anyway.

Some subprime links

If you're new to the housing and credit crisis, where have you been the last 16 months! Hopefully not buying a house. Anyway here's some background stuff you might like.


comical cartoon describing subprime securitization


hilarious British take on subprime





and of course the infamous Century21 commercial featuring doughboy and harpie

MBNA bait and switch balance transfer scam

I got a surprise in my MBNA statement today. Some stuff that I had balance transferred at their offered rate of 5% is now at 21%.

Say what?? I'm not a deadbeat, I've been making all of the required payments properly, and more. So what happened? Well it turns out in the fine print that the limited time offer on the balance transfer also applies to the amount transferred, not just being able to do the transfers.

So after a couple of months the 5% becomes a regular 21%. Nice. How can this be legal in Canada? The best thing that could happen to Canada would be for MBNA (plus their dirty incessant telemarketers) and the rest of their trash American ilk to take your Indymac/ Countrywide/ subprime/ alt-a/ foreclosure act back to the United States and leave our good country alone.

Anyway it is what it is. I'll have to rearrange my priorities to pay off the now 21% MBNA balance first, then I can finally be free of them forever. And be careful of offers from credit cards about low rate balance transfers. Read the fine print and be on the lookout for scams like this.

Real estate in Canada

I read with interest the recent Canadian Press article on housing in Canada. It shows that housing prices have increased by too much in recent years. The inevitable result of this is that prices are now set to either stagnate or tumble.

I was surprised to find the Greater Fool site. I can't believe someone prominent is finally publicly telling the truth about real estate in Canada. Thank you Garth Turner, always a straight shooter from the old Mulroney days.

Typically the media like the Halifax Comical Herald just publish breathless articles bragging that house prices have doubled in the last 7 years. Of course the realtor they quote tells you that it's not yet too late to get in on housing if you haven't been suckered in yet.

Tell me, have wages doubled in the last 7 years? Has the economy doubled? Have rents doubled? No, No and No!

Who can possibly buy these houses? Housing prices have risen in a way detached from the underlying economy. As evidenced by the appearance of 40 year mortgages, no money down mortgages, and cashback mortgages we have predictably reached a point where increases in house prices have made the average house unaffordable for the average buyer.

After years of growing at an unsustainable rate, housing prices are set to stagnate or tumble until wages and the economy can catch up. The no down, cashback, 40 year mortgage is Canada's version of subprime. The people taking out these mortgages cannot afford the houses and will be unable (or just unwilling) to service the massive debt they have foolishly saddled themselves with.

It's too bad about housing really. Historically the ability to get a respectable house in a respectable neighborhood for an affordable price that left enough money over to actually live was the foundation of the middle class.

That's no longer the case today. People are overstretched financially. In the past the way to make money from buying a house was by getting an affordable house and having enough left over to get other investments and when the house was paid off you would have that too.

The dirty secret of Canada's middle class is that most people can't afford their lives. Look at the record debt levels reported in the CP article. What happens is that people overpay for houses too far from where they work. Then they get killed on gas money driving two vehicles all over everywhere. Because they spend more than they make they end up with high consumer debt in credit cards and line of credit.

What then happens is they refinance their consumer debt onto their mortgage. While they get short term relief from creditors by doing this they also wipe out their home equity and whatever paper wealth they accumulated. Some people refinance their debts onto their mortgage multiple times and even reset their mortgage term back to 25 years after paying it down for several years.

I don't have the exact numbers, but just talking to people it seems a lot of people quietly admit they have refinanced their personal debt onto their mortgage at least once. The question really is who hasn't refinanced their mortgage into a higher amount than it was originally. Buying a house is only financially sensible if you can pay it off in 25 years or less. Refinancing a mortgage to a higher amount or longer term destroys any financial reason to purchase a house.

Up until now the banks have been willing to let people refinance their debts onto their mortgage because as long as the houses increased in value the bank felt the loan was secured in case of default. However if the economy falters at all, or when housing prices start to stagnate and tumble it will be like in the US. The banks will not be willing to refinance because the loan amount is larger than the value of the house backing it. Then there will be real trouble and a spike in foreclosures, which will accelerate the price declines to proper levels.

A realtor, banker, broker, inspector, CMHC employee, city tax collector, builder, lawyer or anyone else who makes a living suckering people into buying houses will say the renter is throwing money out the window. Many people who overpaid for the house they occupy while they pay off the bank who owns it will insist on the same thing. Bet let's look at that.

If you take out a 40 year mortgage you are throwing money out the window.

If you purchase a house in a neighborhood where you could rent an equivalent house in the same neighbourhood for less than half the mortgage cost you are throwing money out the window.

If you spend hundreds of dollars a month servicing consumer debt you are throwing money out the window.

If you refinance your debts onto your mortgage you are throwing money out the window.

If you spend $300-$400 or more per month on gas money you are throwing money out the window.

If you buy a house and then have to move and sell it at a large loss shortly after you are throwing money out the window.

Debt inventory

This is a good time to go over my debts. Currently I have four consumer loans outstanding.

• TD Emerald Visa about half paid off. Around 12% interest.
  
• MBNA MasterCard around maxed. Mostly balance transfer around 5% interest.
  
• TD Bank personal loan 4 years to go. Around 12% interest.
  
• Car loan on my 2005 Honda Civic around 2 ½ years to go. Only around 2% interest.
  

So four loans to go. That's about four too many for my liking. Debt is slavery. I've done fairly well the last few months getting a handle on the debt and stopping the increase and starting to decrease the total amount. My goal is to be debt free eventually.

It will take a while to get there. The debt is the result of of bad life choices over many years. It can't be wiped out in six months. The positive news is that I'm solvent today. With no new borrowing the legacy debts will eventually be retired. As long as my income can remain steady then hopefully I should be OK.

My goal is to pay off the TD Visa by the end of this year. That account has the lowest outstanding balance and the highest interest rate. If all goes well that should be possible.

I'll be glad when the debts are gone. There's lots of stuff I want to do and get. But those things are not necessities so they can wait a little while.