To coin a common expression of today, SERIOUSLY?

Who thought this brilliant idea up? And is anyone seriously considering taking this action? They must be kidding.

Then again we are talking about politics and politicians that are trying to quell the media storm that’s hot to trott on the current country wide economic housing bubble and how Canadians are at serious risk if CMHC is insuring all these mortgages and they suddenly collapse.

Further bolstered by the reporting that CMHC has had to effectively double the ceiling limit in recent years to $600B and how we are rapidly approaching that new level and they wont be able to survive a major economic down turn.

Poppycock.

CMHC has to be one of THE best run government agencies in this country (I can’t believe I just wrote that about a government agency). I know everyone likes to complain about the “high” CMHC “tax” that they have to pay in order to get a mortgage. I guess 3% seems high when you compare it with todays continuously record breaking low interest rates.

Lets look at a few stats. Default rates for CANADA are in the 0.5% range. The words LOW and STABLE come to mind. If you disagree, then just look south of the boarder to the default rates of 8%. Considering how upside down the US housing market is in spots, this number seems low as well. I saw charts a few years back that put it closer to the 12% mark, so things are improving there as well. SLOWLY.

Now in Canada banks are required to hold a certain amount of cash on hand in proportion to the amount of loans or mortgages given out. There were a few lenders in Canada who exited our market when the rules changed a couple years back to increase this amount in light of the global economic downturn. These lenders figured the government was asking for “too much” cash to be on deposit (i.e. not being lent out making gobs of interest). Simply put, the government didn’t want a Lehman Brothers kind of collapse and seemed the simplest way to ensure this kind of thing wouldn’t happen.

Guess what? The fine folks at CMHC liked this idea very much. They took this standard and set themselves a higher internal standard of 150% of this minimum.  Currently they are at 200% of this minimum requirement.

Let me simplify this for you. CMHC is LOADED with cash. Not only are they prepared to weather any economic storm that may (and likely will) come, but they are pretty much prepared for the worst possible scenario of that storm.

The cry out in the media I hear is the government shouldn’t be in the business of insuring mortgages. Why should Canadian tax dollars be going into bailing out CMHC (I think there will be bigger issues to solve if we get anywhere near this level)?

Please understand that CMHC is COMPLETELY self-funded through the premiums that everyone has been and continues to pay on a regular basis. There are no TAX DOLLARS being funnelled into CMHC. In fact, one stat put the surplus that CMHC contributes BACK to the Federal government of $14B over the last decade.

The talk is about selling off CMHC. Who or what mega corporation is going to have enough cash to cover the cash on hand AND purchase an extremely large corporation attached in this current economic climate? Lehman Brothers? JP Morgan?

I think there is likely WAY more temptation on the political side of the equation to look at CMHC and say, hm…. large pot of available cash… housing market it stable, what else could we use that for? We’ll pay it back… eventually. No one will notice.

I’m going to file this one under, ain’t gonna happen anytime soon, but a way to deflect attention away from the finance minister and the Bank of Canada who are desperately trying to find an alternative to increasing rates as a way to control economic growth. Raising rates will only cause us to stand out on the world stage. The kind of attention we probably don’t need during this economic uncertainty.

At LONG last the final post in this series.

A few other posts on topics that had to be addressed in-between & general spring business.

The final step… what could it be? We’re now at zero debt. Have a cushion or margin account in case something goes wrong. Working on a retirement plan and planning for your kids educational future. What’s left?

Actually two items remain. Build wealth for future generations and teach them about the struggles you went through. (Some will listen, some wont.)

In this area I will include things like owning assets (rental properties) or automated businesses that generate income (i.e. websites as the simplest example). If you do well enough with both of these, then you can also look at that last quadrant that Kiyosaki calls the I-quadrant or investments. If you know enough about the markets and how to truly have a balanced portfolio across sectors (not just mutual funds), then there is a way to live off these investments.

The second item, which I will personally state is probably much more important for many reasons is giving. I’ll even go so far as to say that if you don’t somehow figure out a way to GIVE somewhere near the very start of these 7 steps, then this entire process will take even longer.

There are lots of “new” names within the “new age” thinking. I wont get into any of those, but instead point back to the very old practice called tithing.

At this stage, if you are anywhere near completing the 6 previous steps, then you’ve already shown that you can live on less… much less… than 100% of your income. After you have covered off your own basic necessities, why not consider giving someone else a hand? I’m thinking in terms of a hand up, not a hand out.

You can start with your favourite charity and simply donate cash. Another possibility is donating something much more valuable, your time. Help someone else through with the 7 steps. Volunteer with your favourite charity. Give something meaningful back to your community.

This reminds me of a quote from a very famous investor turned philanthropist, John Templeton. After giving a talk to a group of investors was asked at the end what he thought the greatest investment was that he ever made. I’m sure the questioner was looking to find out what key investment propelled  his investments to great wealth and abundance. His response was simple. The single best investment everyone can make is tithing. The one thing that gives the best and most satisfying returns of anything.

The sooner you start tithing, the sooner you’ll see the return on your investment. It rarely comes back in the same form as you invest, but the return is always so much greater than expected.

How much should you tithe? That’s entirely up to you. I will suggest the minimum is 10% as a rule of thumb. If you have to, turn it into a “credit card” payment that never ends with a points reward system unmatched by any other.

Cash is no longer King?

I’ve come across what I have to term and unusual trend recently. In reviewing peoples applications, I take a quick look at their credit score and if it’s 700 or above I don’t pay much attention to it but scan it for things I’ve been hit with by lenders in the past.

In the last little while, I’ve come across 3 different clients who simply STOPPED using their credit cards. I don’t mean stopped paying, but rather paid them off and stopped buying anything on credit.

Now I understand that 40 years ago, almost no one had a credit card and this kind of behaviour was the norm, only a select few had credit cards, so it gives you some kind of perspective of what’s happened to our cultural norms. Today EVERYONE has a credit card. They hand them out like candy. There’s points systems, reward cards, affiliate cards, etc. etc. To the point where if you don’t have at least 1 credit card, you are very clearly in the minority.

I’m sure some of you are thinking, well these people probably got into trouble and were forced to stop using their cards. In conversations with them all, they all had different stories. Bottom line, they all made a conscious decision to stop using credit and paying for things using… wait what’s that word again… oh yeah, CASH. That old fashioned thing called currency that you traded for goods. It’s become a novelty.

We have these people who at first blush look like they are ready and qualified to purchase a home. Unfortunately once any of the lenders digs a little deeper into their credit history, they’ll discover that they haven’t used ANY credit for a couple years. The lenders, being a very pessimistic bunch, assume the worst that they’ve run into some kind of financial trouble and wont be able to pay their mortgage next and decline the deal. In the world of credit, they are considered a non-entity or high risk.

I don’t want to come out as an advocate for any of the credit card companies, but in today’s realistic world of credit and mortgages if you plan on buying or refinancing, you have to maintain at least one credit card, so that the lenders will see that you are at least able to managed some form of credit.

The most common suggestion is to simply buy gas for you car and pay it off each month (in person with cash if you must). Even if you only do this once every six months, at the very least it keeps your credit active.

Cashflow is still king, but the lenders want to see it “flowing” through your credit cards.

And if you are self-employed… well that’s an entirely different post.