Canadians Tops In Household Debt

[Moonbox]

What I do know is that I have many self-employed clients who have mortgage balances that are easily 6-8 times their gross income and I know they used mortgage brokers who helped them get such loans.

That's not necessarily a bad deal. 6-8x their gross income would mean TDSR/GDSR's of +40%, which means that CMHC wouldn't even look at the mortgage, which means that your self-employed clients have 20% equity in the property. With 20% equity, the banks are much more willing to make income exceptions, because housing prices would have to go down 20+% for the banks to be screwed. Someone with 20% down payment is also likely to be a much better borrower in the first place.

My clients then informed me that they got a "no doc" (i.e. no documents) mortgage.

As a fellow professional, you might also be aware of the fact that many clients bullshit and lie to you all the time, or have no idea what they're talking about.

This means they got their high mortgages by not having to submit the documentation that regular folks use to get mortgages. The mortgage broker will see the tax returns but the lender doesn't.

Mortgage brokers have to send copies to the lender.

I also had a recent encounter where a mortgage broker phoned me up to convince me to pad the income on my client's income tax return. My client needed higher income since he was now under the new rules (post April/10) and had to show his tax return. I haven't seen this client since that time since I refused to take part in padding his income so I don't know what happened.

This is more a question of fraud than anything. Good on you for not doing it. Unfortunately the majority of mortgage brokers are both stupid and unprincipled.

I have had many discussions over the years about the stupidity of paying more income taxes in order to get a higher mortgage. Such people are truly stupid for taking on more debt than they should while also paying more income taxes - but these people exist.

My experience (work as an FA) is that most self-employed individuals have their tax returns prepared in such a way that they declare FAR less income than they're actually living on. Sometimes that's because accountants work their magic but most of the time it's because CRA is practically impotent and most self-employed people are brutally ripping off the system.

I've had clients in $500,000 (mortgage-free) houses bitch me out because I won't lend (unsecured) to them with $17,000/year income on their tax returns. You'd think that CRA would get wise to this but unfortunately this is a COMMON problem in Canada.

I'd probably have been able to convince the bank to give them a $200,000 mortgage, however, because there's sufficient equity in the house to cover the mortgage and thus the potential loss is limited. The bank would also probably understand that the dude is a tax cheat. Not their problem though, that's CRA's.

[msj]

That's not necessarily a bad deal. 6-8x their gross income would mean TDSR/GDSR's of +40%, which means that CMHC wouldn't even look at the mortgage, which means that your self-employed clients have 20% equity in the property. With 20% equity, the banks are much more willing to make income exceptions, because housing prices would have to go down 20+% for the banks to be screwed. Someone with 20% down payment is also likely to be a much better borrower in the first place.

I know people are getting loans at +40% TDSR.

Just look up housing affordability in Vancouver, for example.

As a fellow professional, you might also be aware of the fact that many clients bullshit and lie to you all the time, or have no idea what they're talking about.

Yeah, they do.

But I also know their income for the past x years, their ages, and the balances of their mortgages which are facts.

Mortgage brokers have to send copies to the lender.

I can always ask some mortgage brokers I know.... strange how many people in Vancouver have mortgages above 40% though....

This is more a question of fraud than anything. Good on you for not doing it. Unfortunately the majority of mortgage brokers are both stupid and unprincipled.

Some are, some aren't.

My experience (work as an FA) is that most self-employed individuals have their tax returns prepared in such a way that they declare FAR less income than they're actually living on. Sometimes that's because accountants work their magic but most of the time it's because CRA is practically impotent and most self-employed people are brutally ripping off the system.

Sure, there are those who do. Recently, however, those who are desperate to enter the housing market because they have to get in now or never get in at all (yes, some people think this way) they over report and/or under report expenses.

Most people are smart enough to pad their revenues or adjust their expenses and not bother to tell me - all I can do is suspect this has happened.

Those who have enough equity, don't have a mortgage renewal coming up etc... will be more aggressive and try to deduct anything they can.

Some get away with it and others get screwed over, eventually, with a nasty audit.

I've had clients in $500,000 (mortgage-free) houses bitch me out because I won't lend (unsecured) to them with $17,000/year income on their tax returns. You'd think that CRA would get wise to this but unfortunately this is a COMMON problem in Canada.

I'd probably have been able to convince the bank to give them a $200,000 mortgage, however, because there's sufficient equity in the house to cover the mortgage and thus the potential loss is limited. The bank would also probably understand that the dude is a tax cheat. Not their problem though, that's CRA's.

Sure, I have had a client who had mortgage interest more than their net income. I decided to raise his bill so that he would go elsewhere the next year.

He came back the next year and I saw an improvement in his business and a large LOC balance that he had been living off of.

I felt stupid for assuming the worst - sometimes sh!t does happen.

Edited May 19, 2010 by msj

[Shwa]

You can't walk away from a mortgage in Canada.

How about in the US?

[Smallc]

How about in the US?

Apparently you can.

[Shwa]

Apparently you can.

So if millions of people walk away from their mortgages and car payments that would lower the household debt levels, this would skew the overall comparatives between the average in Canada and the US over the past 2-3 years would it not?

I read some statistic that some 11% of Floridians were foreclosed. If that much household debt was wiped out, I would imagine that the overall household debt of the average Floridian would actually be lower than prior to that 11% being foreclosed.

Would you agree?

But I don't know if Americans - or some States in particular - simply allow the foreclosure process to absolve someone of the debt. BC - can you provide some insight into this?

Edited May 19, 2010 by Shwa

[bush_cheney2004]

....But I don't know if Americans - or some States in particular - simply allow the foreclosure process to absolve someone of the debt. BC - can you provide some insight into this?

It varies by state and circumstances. Depending on how/where the debt cancellation is discharged, someone may still be on the hook for the taxes on the cancelled debt, because it is still considered income. Bankruptcy fully discharges such debt cancellation "phantom income" as will legitimate insolvency (in most cases). Anyone walking away from a mortgage with substantial assets and/or income can be liable for taxes and debt unless fully discharged through bankruptcy....banks and creditors will chase them down if the amount is worth going after.

For this reason, a "short sale" is preferable to foreclosure because of the lower debt cancellation amount that is taxable and the general impact on credit worthiness. So the pecking order (best to worst) in most cases goes like this:

1) Short sale with bank

2) Foreclosure

3) Bankruptcy

Edited May 19, 2010 by bush_cheney2004

[Moonbox]

I know people are getting loans at +40% TDSR.

I know that. I've written mortgage deals with close to 50% TDSR's and GDSR above 40%. There was enough equity in a good looking property to do it. The clients' credit history was great and they have a proven record of responsibility.

40% TDSR is no problem, even CMHC insured. 42%+ however and the mortgage app is dead on arrival at CMHC if it's high ratio. This was not the case in the USA and that's why so far we're looking a lot better than them.

But I also know their income for the past x years, their ages, and the balances of their mortgages which are facts.

That's fine, but that doesn't really account for all the other factors that help decide a mortgage application.

I can always ask some mortgage brokers I know.... strange how many people in Vancouver have mortgages above 40% though....

Not really. It happens in Guelph as well. If you can find a CMHC-insured mortgage with a +45% TDSR then I'd be impressed, because it's not allowed.

[msj]

I know that. I've written mortgage deals with close to 50% TDSR's and GDSR above 40%. There was enough equity in a good looking property to do it. The clients' credit history was great and they have a proven record of responsibility.

40% TDSR is no problem, even CMHC insured. 42%+ however and the mortgage app is dead on arrival at CMHC if it's high ratio. This was not the case in the USA and that's why so far we're looking a lot better than them.

Fair enough.

I just find it amazing the Canada has debt levels (at the individual level) similar to what Americans had in 2007 (i.e. prior to their RE bubble bursting).

Perhaps mortgages are not the problem and it is unsecured debt, credit cards etc...

I do find it strange how lenders in this country treat "gifts", unsecured LOC's and RRSP home buyer plans in this country.

That's fine, but that doesn't really account for all the other factors that help decide a mortgage application.

Sure, I don't have all of the factors. But with these people I have enough factors to know that they did not get an inheritance, had no savings (unless they are evading taxes) and have relatively low incomes. Yet, they got a nice sized mortgage. Hmmm....

Not really. It happens in Guelph as well. If you can find a CMHC-insured mortgage with a +45% TDSR then I'd be impressed, because it's not allowed.

Well, I wonder how Canadians can have similar debt to income levels as Americans did in 2007, how people in Vancouver can manage mortgages that obviously are greater than CMHC limits, etc....

Most people should be scratching their heads and wonder how a system that supposedly doesn't allow such things to happen does allow such things to happen.

Instead, we have the usual suspects claiming that Canada is different and better etc. Well, we'll see how much better Canada is when the RE bubble pops. Thankfully we have recourse mortgages and I think that helps a bit, at least.

Let's hope that Euroland doesn't drag China (and commodity prices) down the drain because, barring an economic recovery of epic proportions in the US, that could be the final domino to fall that brings 10% unemployment to Canada.

Then Canada will see what it's like having 10% unemployment and 144% debt to income at the same time.

But who knows - maybe Canadians will turn into Americans and start to save again?

Edited May 19, 2010 by msj

[msj]

Well, I talked to a guy in the business (not anymore, he switched out to investments).

According to him, some employees, at a bank that will remain nameless, were audited by their bank and fired.

Why?

Well, the documentation that they entered into the system (the "black box" he called it) didn't have any backup to support it. IOW, the numbers were, lets say, conveniently adjusted.

It seems that it is possible for a bank employee (or even a mortgage broker) to input the data and the data may not be confirmed or cross-referenced to actual documents since, supposedly, the employee or mortgage broker has the documents on file.

I wonder what the audit requirements are for mortgage brokers? Does someone come in to review the loan documentation to see that everything that should be done is being done?

Anyway, to be fair, this likely doesn't happen too often since the result is a loss of ones' job and Canada does not seem to have the incentives to encourage this kind of cheating (I should have asked my contact about this specifically so I could be wrong).

[Moonlight Graham]

I just don't understand how someone can go crazy on their credit cards and rack up so much debt. It's really quite stupid, since in the end you will lose money bigtime on the interest and destroy your credit rating if not your entire financial situation.

If so many online merchants didn't require the use of credit cards i would never have even applied for one in the first place.

[Moonlight Graham]

delete

Edited May 19, 2010 by Moonlight Graham

[sharkman]

MSJk, would it be right to say that an upward trend in interest rates(like the one we are expecting) could push some of these high debt loaders into bankruptcy?

Would any other factors have this effect?

[msj]

MSJk, would it be right to say that an upward trend in interest rates(like the one we are expecting) could push some of these high debt loaders into bankruptcy?

Would any other factors have this effect?

The problem with carrying too much debt is that you expose yourself to interest rate fluctuations.

Canadians are going to be very sensitive to increases in interest rates going forward (as the report states if anyone cares to actually read the link in post #2 above).

So, if rates increase unexpectedly then certainly we will see more bankruptcies than we already have.

The other issue is jobs. If Canadians are already surviving through the recession and the recovery by increasing their debt load then what happens when a spouse loses a job?

Add to this an increase in the savings rate when Canadians finally pull their collective heads out of the sand and realize that most do not have a pension, nor enough savings, to retire on.

Then add to this the tax increase to consumers from HST in BC/Ontario and we could see a decline in retail (or at least subdued retail sales) later this year. Also add on top of this tax increases that are likely to come from structural deficits at the federal and provincial levels which only makes things worse (this might not rear its head for another 10 years).

If Euroland/China have their reckoning then kiss the price of oil and commodities goodbye.

Alberta is already having its share of problems but Saskatchewan and Manitoba and BC could see less demand for their commodities (BC's forest industry is already so far down the tubes that sector may not see much difference).

Add to this the fact that Canada now has more houses than people (according to thestreet.com) and one wonders at which direction house prices will go.

Does this mean massive foreclosures for Canada?

Compared to the US, no way. Relative to Canada's historical record? We'll have to wait and see.

Recourse mortgages mean that it will be the consumer debt Canadians will walk away from.

Yes, it is possible to declare bankruptcy and keep your house in Canada. This will likely be the approach taken by hundreds of thousands of Canadians over the next 5 or more years.

Hopefully I'm wrong: the US has a miraculous recovery, Euroland's banks get back to business within the next year, and China isn't lying as badly as many think they are. Could happen and Canadians real incomes could increase and their relative debt levels fall while savings rates increase.

That would be really nice but it is looking more and more like some kind of utopia at this point.

[sharkman]

Wow, I am in the middle of selling a home to buy a bigger one. Maybe now is not the best time...

[Moonbox]

Hopefully I'm wrong: the US has a miraculous recovery, Euroland's banks get back to business within the next year, and China isn't lying as badly as many think they are. Could happen and Canadians real incomes could increase and their relative debt levels fall while savings rates increase.

The China bubble will burst. The rate of growth there can't continue forever. Eventually they'll be the next Japan.

[msj]

The China bubble will burst. The rate of growth there can't continue forever. Eventually they'll be the next Japan.

Here I thought that the US is the next Japan so that would make China the next US.

[msj]

Looks like Canada should really be a member of the PIIGS:

Net debt to GDP

Gross debt to GDP

I would rather have more public debt than more private debt, if given the choice.

Private debt tends to hurt more when the debt hits the fan.

[dre]

b_c, your link doesn't seem to work. Here is the Toronto Star link.

msj is right however to link to the originating CGA research report.

Keep in mind that "household debt" includes both mortgages and consumer debt. As the CGA report makes plain, about 70% of consumer debt is in mortgages and about 30% in consumer debt (probably cars). These numbers have not changed dramatically over the past few years.

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Unlike msj, I happen to see debt as a good thing for society.

Unless we have discovered a way to borrow from Martians, for everyone on Earth in debt, there is necessarily someone else on Earth who is saving. IOW, to say that someone is in debt is to say that someone else is saving. Debt (saving) is a measure of confidence between indiviudals. It is a measure of the sophistication of financial markets, and of social trust.

Canada (America in general) is a civilized society in part because young poor people can borrow anonymously from older rich people and buy a house to live decently while they raise their family. Elsewhere in the world, such anonymous borrowing is impossible or difficult and so young people are forced to rely on older family members - often with strings attached.

To give a small practical example, nowadays in Canada, a young gay couple can borrow money from a bank, from anonymous savers, based on their combined income. The couple can purchase a place to live, and in effect save for their retirement by acquiring a real asset of substantial value. Elsewhere in the world, such an anonymous bank loan is impossible and moreover, the families would more likely banish their gay offspring.

----

Debt is one of those curious variables that we should measure differently for society and for individuals, or where the advice for individuals and society is different. If you have debt, pay it off. But if you hear that society has debt, don't worry.

Style is another such variable. Most young women want to wear what is in style, but not so much that everyone is wearing it.

to say that someone is in debt is to say that someone else is saving

Actually if you go the bank and borrow money most of what you get isnt peoples savings... its entirely ficticious money thats created out of thin air. And the real beauty of it is that the banks are charging interest on money they dont even have, even though the taxpayer is the one thats on the hook for the cost of creating that ficticious money, and pay interest on all the bonds the government has to sell to keep our currency stable.

Its really nothing more than legalized fraud.

Having said that in general debt is neither good or bad. It really depends what you spend the money on.