Gails Blog

So I’m sitting in the airport reading the Post yesterday when I come upon an article that says that “the federal government has cracked down on the mortgage industry.” What a bunch of hypocrites! Wasn’t it CMHC who thought it would be just fine to let people buy homes with zero down payment? Yup. But now that their insurance fund could suffer some defaults, they’re “cracking down”. A little late, dontcha thing? I’m with Mr. T on this: they’re a bunch of FOOLS. Oh, and they’re “cracking down” on the 40-year mortgage. Hmmm. Guess that wasn’t such a good idea either.

And the great reporters at the Post who are telling the story, don’t even bother to put in any really useful data such as how many zero-down mortgages had been issued, or how many people had gone with the 40-year cement shoes. Nooo. They focus instead on the fact that “the amortization rules will only slightly affect monthly carrying costs.” The diff on a $200K mortgage between a 35-year amortization and a 40-year amortization at 6% is just $41. I think they’re missing the point too.

The maximum standard amortization before crazy married insane was 25 years. The difference between a 25-year amortization and a 40-year amortization is the cost of the house in interest. Yup. If you take a 25-year amortization, you’ll pay for your house, and pay for it again in interest. Do it for 40 years and you’ll PAY FOR IT TWICE in interest. That’s the real story.

So I love how the Fed’s press release says that their announcement marks a “responsible and measured approach” to making sure the Canadian housing market remains strong. Really? Responsible? Isn’t it really to correct their previous irresponsibility in letting people who didn’t have the good sense to save a downpayment take on the huge responsibility of home ownership and a cumbersome mortgage? FOOLS!

And apparently the government will now require anybody with a insured mortgage to have a minimum credit sore. You mean we didn’t have to have a minimum credit score before? Any old doofus could get a mortgage? What ever happened to the idea of responsible lending? Where did fiduciary responsibility go? (Fiduciary responsibility is the responsibility of a financial organization to inform you of the UP and DOWNsides of your decisions, and ensure you aren’t going to get yourself into a whole heap of a trouble.)

Two years ago the head of the Bank of Canada said that the zero-down mortgage was overheating the real estate market. The guy was smart enough to run the Bank of Canada, but not smart enough to get the zero-down mortgages pulled. Now that the R-word is being banded about and the U.S. housing crisis has the world in a tailspin, suddenly we see our “leaders” being “responsible.” Hmmm.

If you think that allowing people to borrow 100% of their home purchase is FOOLish, then you have another surprise coming. We’ve been borrowing MORE since often lenders will let buyers add their closing costs to their mortgage. OMG!

I’ve heard from lots of people who are telling me that lenders are offering them mortgage amounts they are not comfortable with. Just last weekend at a wedding shower, the bride-to-be was asking me questions about how much was a reasonable amount for a mortgage based on her family income because she was uncomfortable with the amount the lender was saying she could have for a mortgage. So much for fiduciary responsibility.

This is an appeal to the rational people who have some sway with their children, siblings, and dear friends. Spread the word about how dangerous these mortgages are. Just because the Feds have finally come to their senses and CMHC won’t be about to act quite so FOOLishly (they can still do 5% down over 35 years, so it’s only a small step) doesn’t mean there won’t be other organizations stepping in to make the zero-down-40-year-mortgage available.

Sad to say we live in a world where people who are desperate to buy a home can be caught in a trap like this. Because that’s what it is. The “advisors” who say this is a great way to get into a home and build equity aren’t doing it to be noble. They’re in it for the profit. If a body can’t afford to come up with even the minimum downpayment on a home, it shouldn’t be taking on the responsibility. If a body doesn’t have the money to cover closing costs, it shouldn’t be taking on the responsibility. If it can’t afford the 25-year amortization (or less), it shouldn’t… now I’m sounding like a broken record.

You know what really ticks me off? Although they won’t admit they’ve been FOOLS, won’t accept that they were largely responsible for people feeling safe taking a STUPID mortgage, the feds still don’t have the gumption to Just Say No. The new rules don’t take effect until the middle of October. So there’s still plenty of time for Fools to rush in.

Last chance! Get your STUPID mortgage today! Limited time offer!

I’m all for novel ideas. And I’m all for creative ways to save. But I’m a little put off by the new concept, imported from the U.S., that has people fooling themselves into saving. Called the Bank The Rest® savings program, Scotiabank proposes that each time you use your debit card to make a purchase, you round up to the nearest dollar or $5 and put the rest in their high-interest savings account so you “save while you spend.”

Okay, so let’s go through the “offer” one piece at a time.

Bank of America came up with the idea and called it Keep the Change®. But their offer is way sweeter. Bank of America not only let’s you round up, but promises to match your Keep the Change savings at 100% for the first three months. After that they’ll continue contributing 5% a year, every year to a maximum of $250 per year. So Scotiabank imported the idea and then watered it down.

So why is the U.S. bank more willing to cough up some dough to get and keep their customers’ biz. Simple. It’s good business. Since clients must have both their transaction and savings accounts in the same place, and since they’ll use their debit card for all transactions (remember, the merchant pays every time you debit), they are very profitable clients. So why isn’t Scotiabank offering the same benefits to its clients? That’s a good question.

Now, let’s turn to the “high-interest” savings account. Sure, it’s High Interest if you compare it to the other savings account Scotiabank offers. But, let’s face it, at 2.25% on June 10, 2008, is less than…

• 3.60% offered at ICICI Bank*
• 3.50% offered at Citizens Bank
• 3.35% offered at Canadian Tire Bank
• 3.30% offered at HSBC Bank and ING Bank
• 3.20% offered at Dundee Bank
• 3.05% offered at Manulife Bank
• 3.00% offered at Royal Bank

*interest rates from FCAD 

So what if you can’t earn an extra 1.35% on your money in a true high-interest savings account? On your pathetic $500 in savings, that would amount to a whopping $6.75 . Yeah, but it would be YOUR $6.75.

The BIGGEST problem I have with this savings account isn’t that Scotiabank has wussed out on the savings-matching program, or that they’re positioning their savings account as high-interest when it’s way down the line, or even that they’ll be able to consolidate your business in one place. It’s the idea behind the round up.

Here I am telling y’all you have to be on a budget, you have to plan your spending, you have to be aware of every penny you’re spending. Then along comes The Banker to tell you, “Nah, you just have to round up.” So how are you going to get to the end of the month on that budget of $130 for gas if every time you pay for your gas you’re adding up to $4.99 to your transaction. Do that on every transaction you make with your debit card in a month and you’re budget will be out of whack and you’ll be wondering why.

Why do we have to FOOL ourselves into saving anyway? Are we children, or are we grow-ups? Are we so unaware of what our goals are that we need a TRICK to get us to save? Really?

If y ‘all think this is a good product, I’ve FAILED in my quest to get you to take control of your money.

If y’all think this is a great way for Scotiabank to use a terrific marketing idea to capture more business, then maybe, just maybe, you’re on the road to becoming savvy consumers. I’m proud of ya!

I got a letter the other day from a young lass who wrote:

My sister and I are adults that still live at home because of student debt. How can we pay off our student loans and still save to get out of our parent’s house? How much should we salt away in our “move out jar” when we only make $19000/year at a call center?

So here’s what I don’t get: Why are some people dotty enough to go to school and rack up student debt if they’re going to settle for a job that pays $9.50 an hour?

I meet people who won’t do certain kinds of jobs, and are willing to settle for making way less money because the job they have is “cleaner.” That’s fine if you’re happy. But if you’re not happy, why are you sitting on your duff, whining about your lack of cash, when you could be out working your buns off?

I also meet people who believe because they’ve got an education - an expensive education - that they should be able to get their dream job right off the bat. Really? What ever happened to the concept of paying your dues? And if paying your dues means you aren’t making tons of money right away you can either live a simple life, or GET ANOTHER JOB… a second job, a third job, a better job.

And then there are the people who pay a whopping amount for their education, with no plan for how they will use that education. A case in point: A woman wrote to me for advice on how to deal with her $45,000 student loan. She’s working as a waitress.

You’re kidding me, right? Why would anyone be daft enough to rack up $45,000 in student loans only to become a waitress?

Then there are the people who know what they’re doing wrong and just keep doing it anyway. Here’s a case in point:

I am 54 and shop because I am depressed and when I feel I have no money. I am in debt and don’t seem to get ahead just keep afloat. Is there a way I can pay you to help me get myself together and on the road to financial freedom?

So here’s what I don’t get: If you know you have a shopping problem, why do you go where you can spend money?

Sure, you have to go into a grocery store from time to time for food, but if you only take the $100 you plan to spend in cash you can’t do too much damage. Every other trip you make to the grocery store, to your local fashion haunt, to the mall, to the drugstore, to the dollar store, is just an excuse to scratch your shopping itch. Are you so addled that you just keep on whacking your head against the wall, no matter how much it hurts? And how would paying me … are you shopping again?! … get you out of this habit?

And then we come to the people who are spending money like there’s no tomorrow and scratching their heads about how to pay off their debt. To my point:

How do you start nipping away at debt when you have debt of about $75,000, rent at $3200 a month, 3 kids 11/16/18 (in university) and payout about 16,000 a month to live (includes rent)?

So here’s what I don’t get: Why would anyone pay $3,200 a month in rent? Since this person did not mention her income, I can’t know if she’s within the 35% range on the “Life Pie”, but I suspect from the amount of debt she has that she’s a tad over. And, while I know life is expensive, where exactly is the other $12,800 a month going? Is this a case of spending money on “needs” or on “wants”? If you’re really serious about paying off your $75,000 in debt, what are you prepared to give up to do so? And would you like to come on my show? I’d love to make you over.

I know some of what I say may sound harsh. But you know what? There are a lot of people witlessly racking up debt as if it is never going to catch up with them. Whether it’s student loan debt, credit card debt, line of credit debt or buy-now-pay-later debt, it’s not going to stay quiet forever. It’ll want to be fed. And if you’re the goose who thinks the debt is just going to magically disappear one day, might I point out that you’ll very likely get eaten.

There’s an old saying in Jamaica - I’m sure every culture has it’s own version: If you lay down with dogs, you get up with fleas.

I was more than a little surprised when I found out that a Toronto-based credit counseling service, recently renamed Credit Canada, had teamed up with Capital One to sponsor “the first ever Credit Education Week.” Hmmm.

According to Credit Canada’s website, ninety percent of Canadians say they have more debt today than five years ago. The site goes on to say, that eighty percent of us don’t know our credit score and that, “A credit score can be one of the most significant numbers in consumers’ lives.”

Only if you want to acquire credit. And since the credit counseling mandate is to help dopes who couldn’t handle their credit get out from under, it seems odd that they are focusing on helping people understand how to better their credit scores. So they can get more credit? Or so they understand that your level of indebtedness isn’t really the issue, it’s your ability to keep up with your minimum payments. Hmmm.

One little-known fact of the quirky credit scoring system is that if I pay my balance off every month in full, I will have a lower score than someone who makes all their minimum payments on time. Yup, that’s right. The credit score not only reflects how I handle my credit (kinda), but also whether I’m someone worth lending to. And clearly, if they can make money off me because I only make my minimum payments, then I score higher than if I make my payments in full every month - which is what we’re supposed to do.

Capital One also seems to be a strange choice of partner for a credit counseling company. I’m wondering why Credit Canada couldn’t talk a Canadian bank/credit card company into their plot to educate the masses. Could it be some residual fiduciary responsibility rearing it’s guilty head amongst our national banks? Hmmm.

According to Credit Canada’s website, “Capital One is committed to building awareness on all issues related to personal finance. We are proud to partner with Credit Canada, and we hope Canadians will take advantage of Credit Education Week events and resources to build their credit wisdom.”

I wonder if they’ve seen my episode with Corrina and Jay where their November credit card statement showed the following charges

Previous balance…$797.92

Finance charges…$14.45

Monthly member fee…$6.00

Overlimit fee…$29.00

Account balance premium…$8.27

That finance charge represents a fee of 21.9%, the monthly member fee another 9%, the over-limit fee a whopping 43.6% and the account balance premium another 12.44%. WOW!

Corrina and Jay certainly did have someone’s hands in their pockets, dontcha think?

Hey, I’m all for educating consumers about debt and how not to get into it. But I’m also all for telling people the truth about how credit works and the risk you put yourself in when you spend money you haven’t yet earned.

I’ve never been a big fan of credit counseling. It does work for some people, but for many more it’s not the right choice. The right choice is to recognize that the use of credit for the wrong reasons (more shoes, more furniture, more entertainment, more anything that doesn’t meet your basic needs) is dumb, dumb, dumb. And if you’ve bitten of more than you can chew debt-wise, then it’s time to cut back and pay off. Whether it takes a second job and not going ANYWHERE until you’re done with the debt, if you’re committed to getting out of debt, you have to feel the pain. It’s part of the process. Just getting your payments in line with your existing budget isn’t enough.

Besides, going the route of credit counseling leaves you with a crappy credit rating (yes, the very thing they’re trying to educate you about) for a long, long, long time.

Want to get out of debt? Bit the bullet. Make a budget. Create a debt-repayment plan. Then just do it!

It’s your life. It’s your money. Take control. And don’t take any wooden nickels along the way.