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July 13, 2020 | Beware the Algo

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.

Roughly 2,000 people a week, every week, ask for their mortgage payments to be deferred. Yes, this is atop the 750,000 (or so) households who have already told their lenders they cannot/will not make the monthly. The banks continue to accept deferral applications, and will do so until September. As a certain pathetic blog reported last week, there may be a 4-month extension in the works that would boost the total deferral period to ten months. When it all ends, the market will be impacted.

Yikes. Mortgage debt now totals $1.68 trillion, which has more zeros than a Drake fan club. Despite the fact real estate sales have tanked since Covid came to town, this is about eleven billion higher than last year. In fact mortgage debt is rising by close to a billion a month now – because of deferrals.

Not only are hundreds of thousands of homeowners not paying down their principals each month through blended payments, they’re actually hiking their long-term debt as accumulated interest is added to the principal owing. Repeat after me: this is a really bad idea. Mortgage rates may never be this low again in your lifetime (these are pandemic levels, after all), so more amortized debt means the cost of repayment will inevitably shoot higher.

Lenders are being starved of this cash flow, but bankers play the long game. By increasing the mountain of outstanding mortgage debt they stand to make more down the road. Plus, by delaying repayment for a lot of it until rates start to inflate two or three years from now, spreads increase as does profitability.

As stated here with numbing, nauseating regularity, do not defer unless salivating wolves are at the door. You’re doing yourself no favour. And don’t be naïve. There could be consequences to deferring mortgage, loan or a credit card payments.

Here’s Philip to share his experience. “I own three profitable companies and when things hit the fan in March, two were mandated to suspend operations,” he tells me. “Out of an abundance of caution I contacted every bank with whom I have credit instruments and requested payment deferrals. I never used them. All accounts are paid and up to date. No payment has ever been missed, but when I checked my credit report, CIBC had reported a LOC and Visa account as DEFFERED.”

When I contacted customer service, they assured me this would not affect my credit score. I let the lovely call centre agent know that CIBC could not guarantee that, as CIBC does not write the FICO algorithm or control how Credit Scores are calculated. I also suggested that how scores are calculated could (will) change in the future. My call was escalated three times until finally I was informed that even though I had made all payments, payment deferral reporting to Credit Bureaus is not dependant on whether payments were made, but only dependant on whether there was a request for a deferral. I thought your blog dogs should know.”

By the way, here’s a screenshot of Phil’s credit card payment summary with the maroon penguins bank. Those little black arrows are not cool.

It’s a myth that deferrals will not be recorded internally by all lenders, nor find their way into credit reports that are written by algos based on bank uploads. Will this prevent you from having your mortgage renewed in 2022? Probably not. But you might end up paying a higher rate. Or being asked to provide proof of employment and income. Or being turned down for a refi or a HELOC. It only makes sense that people withholding payments will be flagged as less creditworthy. And end up owning more.

$     $     $

Do you use cash?

Probably not. A survey this week shows Canadians cut their use of paper (plastic) money in favour of card payment by a whopping 42%, thanks to Covid. That’s double the rate in the States, and reflects the fact a lot of retailers (like Longos and Best Buy) just refused to accept real currency (even though that was illegal).

But, but, but. The Bank of Canada also reports that besides bumwad people were hoarding fifty-buck bills back in March when the virus hit. Now there are untold numbers of homes with Ziploc baggies of fifties in the freezer and taped inside the toilet tank.

Meanwhile there are more dollars floating around than there used to be. Mr.Trudeau and his pal Bill will spend $343 billion new ones by the end of the year, money created by the Bank of Canada and emailed over to civil servants who then direct-deposit it into the accounts of CERB recipients and others. Some of it will be recouped through bond sales. Some, well, just faerie dust.

All this got Andrew (in Van) wondering what’s going on when he read of a new job posting at the central bank.  “Looks like the move to a cashless society is in the works,” he says. Sure does. The gig seems innocuous – ‘Research and Development Technologist, CBDC” – but it comes with a “Secret’ security classification and is designed to appeal to crypto, digital and privacy experts.

Read this:

The Project
The Bank of Canada is embarking on a program of major social significance to design a contingent system for a central bank digital currency (CBDC), which can be thought of as a banknote, but in digital form. This project will require us to break new ground. It will take into consideration a wide variety of factors, including policy considerations, diverse stakeholder needs, difficult technical challenges and the development of a technical architecture to realize a CBDC pilot system.

The Challenges
We aim to design a CBDC with cash-like properties in digital form:
* Private: While not aiming for cash-like anonymity, CBDC should be highly private yet meet the obligation to be compliant with anti-money laundering and other regulations.
* Universally accessible: Regardless of their circumstances, CBDC should be usable by all Canadians, even by those without a bank account or access to a cellular phone, in remote communities not well served by cellular networks, and/or those with sensory, motor and cognitive impairments.
* Resilient: CBDC should continue to work even during electrical power and network outages.
* Secure: CBDC must have the highest levels of security so Canadians can use it with confidence, as they do our banknotes.
* We will design an architecture into which these properties are coherently embedded, with a potentially multi-decade evolving lifespan, supporting a business model designed to achieve CBDC policy goals.

Yep, go throw that baggie of bills in the microwave. Cash will be trash when that Bank of Canada chip is soon implanted in your forehead.

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July 13th, 2020

Posted In: The Greater Fool

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