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February 10, 2016 | The Crunch

A best-selling Canadian author of 14 books on economic trends, real estate, the financial crisis, personal finance strategies, taxation and politics. Nationally-known speaker and lecturer on macroeconomics, the housing market and investment techniques. He is a licensed Investment Advisor with a fee-based, no-commission Toronto-based practice serving clients across Canada.


If you think a dank economy, job stress, oilageddon and stupid house prices make your life a challenge, imagine if you were a bank. Like with 1,200 branches and 74,000 employees. Plus millions of investors who expect your dividends to (like me) swell routinely.

Given their exposure to (a) energy and (b) your debt load, the banks are a tad nervous these days. A 20% drop in their share values doesn’t help much. And so Bay Street’s fighting back after seven years of handing out money to anyone with a pulse. More on that in a moment.

First, let me bring Alan into the conversation. By all measures, he’s a successful dude. Big cheese at a national corporation headquartered in Toronto. Income of $350,000. Net worth almost $900,000 (all liquid – he rents). Four kids, fortyish, insignificant debt (a car loan, mostly), stable job, over 25 years as a customer at a major bank that will go unnamed (but it’s green).

“Here is my recent experience,” he tells me. “I have two small, unsecured lines of credit with TD Bank ($15K each) dating to my days as a student in the early 90s.  I’ve had the Canada Trust LOC for 26 years and the TD LOC for 22 years.  They are rarely utilized, but I kept them as a backup.

“I approached the bank to consolidate the two lines and the total increase to $40K.  I was also hoping to negotiate a better rate.  A week later I was shocked when a TD rep called me back to let me know that my request was declined – because I was living abroad for 6 years and haven’t displayed enough income in Canada since moving back in 2014.  I reminded the young fella about my impeccable credit history, 26 year banking history with TD, strong liquid personal net worth and average income of $300k over the last 7 years.  I was staggered. “

Us, too, Alan. Weasels. Don’t they shower mortgages on moisters without any savings who want to buy condos with huge odds  of devaluing like miserable Kias? He continues…

“I turned the tables and indicated we were house shopping and looking to buy a $2MM home with 80% financing.  The TD rep could barely contain his excitement at the thought of landing a $1.6MM mortgage and winning employee of the month and getting a pat on the head for enslaving another poor slob.  He went to explain I would easily qualify for the mortgage based on my credit profile, income, down payment and net worth.  I wanted to string him along a little longer, but I was flabbergasted by the hypocrisy of his about face.  I asked him to explain how a $40K unsecured LOC is riskier than a $1.6MM mortgage.  His only response was that the mortgage was fully secured and real estate doesn’t lose value.  At this point, I politely invited him to have sex with himself and explained how ridiculous this sounded.  Obviously, this young fella never lived through the high rate environment of the 80s and the real estate melt down in the 90s.

“After this call I was so angry that I was going to email various TD executives to express my dismay, etc.  But then I reflected on what just happened and remembered reading about the ticking time bomb of unsecured lines of credit within the Canadian banks.  It became crystal clear to me that TD bank wants to get rid of unsecured personal lines of credit.”

A telling tale, for sure. But it gets worse. Last week our executive blog dog received two letters from the bank telling him that effective Monday his loan rate will move from prime +3% to prime +6%. Yep, that’s a withering 8.7% to use the unsecured line, when his high-interest savings account is paying 0.55%.

Says Alan: “HOLY $hitballs! It won’t impact me at all because I won’t use the LOCs, but what about the hordes of debt slaves out there that are using their LOCs to make mortgage payments, credit card payments etc. This is very scary.”

You bet. Given the insane price of real estate in Van and the GTA, for example, subprime lending is now the fastest growing segment of the mortgage market – people borrowing at high rates, often double digit, to secure the down payment needed on a CMHC-ineligible property listed over a million. Likewise, moisters routinely use credit cards for the 5% needed to secure a condo, then make the minimum monthly payment (which means it never gets paid off). And ‘traditional’ household debt – the kind actually measured, as opposed to revolving and subprime loans, sits at an historic high of 171% of income. Those with 400% and 500% debt-to-income ratios have exploded in numbers.

Currently Canadians have about $280 billion in outstanding personal lines of credit (Al’s two don’t count because they’re not extended). This equals 60% of non-mortgage debt, and virtually all of it sits on the books of the Big Five chartered banks. A substantial amount is like Alan’s – unsecured. In other words, these are lines backed by the credit worthiness of a customer (based on income and assets), and not by a claim upon the title to a hunk of property.

Bankers, as you know, are astute, with finely honed defensive instincts and well-tuned blood funnels. Banks have been relentlessly profitable in good times and bad, regularly upping dividends even when that pass-through to shareholders means less overhead (called ‘employees’) and lousy client relations (like Alan). Bankers know consumers are hitting the wall now and real estate’s hitting the ceiling. Meanwhile consistently low rates have squeezed loan margins, and 2016 looks like it will deliver even worse conditions.

The bottom line: substantially higher borrowing costs, whatever the Bank of Canada decides. LOC rate-hike letters will be going out by the truckload. Unsecured lines will be squished. Demand loans called. In every way possible, risk will be contained at the same time bank expenses are pared.

As for the offer to give Al a $1.6 million mortgage while denying his $40,000 line, well, draw your own conclusions. Invest accordingly.

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February 10th, 2016

Posted In: The Greater Fool

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