EXECUTIVES SHOULD MONITOR HOUSEHOLD DEBT

Synergy Debt Group

From the Ivey Business Journal
Improving the practic of management

EXECUTIVES SHOULD MONITOR HOUSEHOLD DEBT
by John S. McCallum
From Viewpoint | May / June 2011
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Executives closely monitor the course of high-profile economic variables like growth, unemployment, inflation, the stock market, interest rates and exchange rates.  They do so because there is a direct connection to running a business successfully.  It is time to add a not so high-profile variable to the list for executive monitoring:  household debt.  Household debt should be on the front burner in the Canadian executive suite.
Household debt is the personal and mortgage debt of Canadian consumers.  It has been on a tear.  According to Statistics Canada, Canadian household debt reached a record 148 percent of disposable income in the third quarter of 2010 before closing the year at 147 percent.  It was 50 percent in 1990 and 110 percent in 2000.
One aspect of Canadian household debt is particularly noteworthy.  The Bank of Canada estimates home equity lines of credit and loans may be up as much as 170 percent in the last decade while mortgage debt at is about half that rate.  Home-equity lines of credit and loans are now about 12 percent of household debt and often end up financing non-housing related purchases like vacations and vehicles.  At the margin, too many Canadians are living off their homes.

U.S. households get the headlines for debt imprudence but their household debt to GDP ratio has now been surpassed by Canada.  Incredibly, the Canadian household debt to GDP ratio was 130 percent versus 160 percent in the U.S. only four years ago.

The other side of debt is savings.  It will come as no surprise that the run up in Canadian household debt has been accompanied by a corresponding decline in savings.  Big savers do not tend to be big borrowers.  In the 1980s, the Canadian personal savings rate was about 15 percent; today it is under 5 percent.
It is important to note what, at the moment anyway, is a mitigating factor in the level of household debt in Canada.  While household debt relative to disposable income is in record territory, interest on consumer debt and interest on mortgage debt relative to disposable income have remained stable and are not particularly alarming.
The reason is that while household debt has taken off, the interest rate on it is very low.  But much of that debt is either variable interest rate or short term, leaving the question of what happens in even a modest interest rate run up or rise in the unemployment rate.  Interest cost to household debt ratios can get very unpleasant, very quickly.
The finances of many Canadian households can be summed up as follows:  Up to their ears in debt with little savings and going deeper faster than their incomes are growing.  An interesting logic seems to have taken hold in Canadian homes:  Financial institutions would not lend to us if they did not think us creditworthy, so why should we dispute the judgement of financial experts.

Mark Carney, Governor of the Bank of Canada, summed up the reality of Canadian household finances up in a December 13, 2010 speech to the Economic Club of Canada:  “The proportion of households with stretched financial positions has grown significantly.  In a series of analyses over the past year the Bank has found that Canadian households are increasingly vulnerable to an adverse shock and that this vulnerability is rising more quickly than had been previously anticipated …  Without a significant change in behaviour, the proportion of households that would be susceptible to serious financial stress from an adverse shock will continue to grow”.
The federal government’s move in January of this year to toughen mortgage regulations illustrates just how concerned government is with Canadian household debt.  Minority governments getting old in the tooth do not take the punch bowl away from the voters unless they are really worried.  Specifically, the maximum government-backed insured mortgage amortization period goes from 35 to 30 years, home secured lines of credit will no longer be guaranteed by government, and the limits on mortgage refinancing drop from 90 percent to 85 percent of home value.  This is the third effort in three years by government to cool household debt growth.

Of course, price is dominant in most economic matters, so really cooling Canadian household debt growth will await seriously rising interest rates.  The reason Canadians have borrowed so much, so fast has more to do with record low borrowing costs than anything else.  The trouble for government is, as much as they know, that Canadians are way over their heads financially; they also know that those low interest rates are driving consumer spending that is crucial to sustaining the recovery.  This is not an environment for faint-hearted policymakers.
For executives, household debt may be coming into its own as a barometer for the course of the economy going forward.  If you know the course of the economy, many business decisions that keep executives up at night all of a sudden become easier.  For example, investment, acquisition, financing, compensation and hiring decisions all look a lot different if you are headed into strong growth versus major slowdown.  A genie that could give an executive a peak now at the GDP accounts for the next three years is a genie whose services would be well worth retaining.

The link between household debt and the course of the economy is straightforward.  The consumer is about 60 percent of the economy, so where the consumer is going tells you a lot about where the economy will go.  The more household debt, the less willing lenders are to keep lending to households and the more nervous households get about taking on more debt.  It is not a long step from there to a slowdown in consumer spending, which becomes a slowdown in the economy.

Investment spending on plant, equipment, machinery, inventories and housing, plus government spending and exports, make up the other 40 percent of the economy.  These, however, just do not have the scale to offset the effect of a serious pullback in consumer spending on the whole economy.

Ernest Hemingway in The Sun Also Rises (1926) offers important insight into debt that executives should heed.  Bill and Mike are talking:

Mike:  “Frightful blow … when I went bankrupt.”
Bill: “How did you go bankrupt?”
Mike:  “Two ways.  Gradually and then suddenly.”

The rise in Canadian household debt relative to disposable income has been a gradual but accelerating process.  It did not happen overnight.  It seems a benign process that can always accommodate the next dollar of debt with no noticeable adverse consequences.

That is not always the way things work with debt.  Suddenly, for reasons that will be hard to pinpoint, lenders and borrowers may decide enough is enough.  Specifically, borrowers may suddenly greatly reduce their borrowing and spending; lenders may suddenly greatly reduce their lending.  It can happen literally overnight.
If “gradually” becomes “suddenly” with household debt, the effects on the economy will be bigger and faster than most think possible.  At 60 percent of GDP, consumer spending does not have to suddenly slow all that much to trip the economy back into major slowdown.  Slowdowns are always difficult for executives to manage; slowdowns that seemingly come right out of the blue are the worst kind.

Executives should watch household debt closely.  The more it grows, the greater the risk of an abrupt hiccup in the economy.  This is one hiccup that executives should be thinking about now.  Most of the time there is probably not much upside for executives in monitoring household debt.  This is not one of those times.  Household debt may be the canary in the economy’s coalmine.

End of Article

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About Synergy Debt Group
Synergy Debt Group enables consumers caught in the, "Minimum Monthly Payment Trap" to become debt free, providing an alternative to bankruptcy and the damages that come with it.

At Synergy Debt Group, we make it possible for our customers to achieve their financial
goals and gain independence from creditors quickly. If you are serious about getting out
of debt, preserving your credit, and saving money; give Synergy Debt Group a call today for
a free consultation.

Synergy Debt Group and More On Your Credit

Synergy Debt Group -- More On Credit

There are the three reporting credit bureaus: Trans Union, Experian, and Equifax. Each has their own method to calculate your credit score, and that’s why the scores usually differ from one to the other. Credit reports contain your basic information such as social insurance number, birth date, employment information and employment history, but none of that is considered when calculating credit scores, although it is updated whenever you officially apply for credit.

As previously stated, the credit score has already dropped due to high balances to limit ratios, maxed out limits, and over limit balances. We’ll use an actual case study to illustrate how Synergy Debt Group’s debt management program can help a person’s credit, and their score.

A single mother of two had three credit cards, all of which had reached their maximum limit with a combined balance of $8,0692. The interest rate on two of those cards was a high 25.99 percent, the fourth was a staggering 35 percent., with a combined minimum monthly payment of C$424.

After enrolling in its debt management program, Synergy Debt Group opened a “special service account” into which every month funds from her regular checking were withdrawn and automatically deposited. From that account the funds were then dispersed proportionately to her four creditors. So instead of juggling three payments on her own, she only had to make one, and that was done automatically on her behalf.

Synergy Debt Group’s negotiators then managed to lower the rates for all three cards down to zero percent.

What does this ultimately mean? If she maintained the minimum payment of C$424, it would have taken her 32 years to pay them all off at a total cost of C$31,285.

In the debt management program at zero percent, her monthly payment dropped to only C$207 (more than half) and will be all paid off in only 46 months with a cost of only $9,522.

Debt management saved her 28 years and C$21,763.

Trade Lines

These are your credit accounts, such as auto loans, bank cards, mortgages, store cards, and so on. It reports the date you opened the account, credit limit or loan amount, the account balance and payment history.

Credit Inquiries

When you apply for a loan, you authorize your lender to access and copy your credit report. This is how inquiries appear on your credit report. The inquiries section contains a list of everyone who accessed your credit report within the past two years. The report you see lists both "voluntary" inquiries, spurred by your own requests for credit, and "involuntary" inquires, such as when lenders order your report so as to make you a pre-approved credit offer in the mail.

Public Record and Collection Items.

Credit reporting agencies also collect public record information from state and county courts, and information on overdue debt from collection agencies. Public record information includes bankruptcies, foreclosures, suits, wage attachments, liens and judgments.

There was a client who had five credit cards with a combined balance totaling $25,000—each was maxed to the limit. And although he never fell behind on any of his minimum payments, nor his auto loans, or his current mortgage, his scores nonetheless had tanked due to having attained their maximum limit. Because of this he could not get his mortgage renewed under the terms that would have done him any good.

Synergy Debt Group helps people get out from under the burden of credit card debt by helping to get their interest rates down to zero percent, and putting them into an automatic monthly payment program that disburses their payments to each of the clients creditors. This way they can be debt free in a matter of 36 to 48 months instead of a decade, or even more, and saving them thousands of dollars in interest.

To Much Debt -- Not Enough Income

Right now the average household in Toronto carries around $40,000 in debt outside of their mortgage. A staggering amount since we’re facing the worst economic times since the Great Depression. With the average annual salary in Canada at roughly $38,150 means we’re spending more than we make. You don’t have to be a rocket scientist to know where that will eventually end up.

If you have to borrow money to keep afloat and make ends meet, then you might already be in trouble. But to borrow money in order finance a lifestyle you simply can’t afford is crazy. Each time you whip out that credit card for a purchase you must yourself, do I really need this?

Instant gratification and the inability to differentiate between needs and wants are the two biggest contributing factors. We are all human with desires, but desire often leads us to dire consequences down the line, particularly when that credit card bill comes.

Every time you make a purchase ask yourself: “Is this something I absolutely need?” An effective method is to tape the words “Do I really need this” to the front of your debit and credit cards. The second step is to establish a program to eliminate your current debt.  You can never truly be free unless you owe nothing, and being debt free is the first step towards becoming financially free.

But what if you’re already beyond that stage, and standing on the brink of financial ruin and so overwhelmed you believe there is no place to go for help? That’s where synergy Debt Group’s debt management steps in.

Synergy Debt Group of Ottawa and Scarborough has debt management programs that enable consumers caught in the “minimum monthly payment” trap to become debt free within 36 to 48 months instead of decades. At Synergy Debt Group, we designed debt management programs to help our clients achieve their financial goals and quickly gain independence from creditors. If you are truly serious about getting out of debt, preserving your credit, and saving money with a higher degree of financial literacy, then whether Synergy Debt Group, or another debt service company, take that first essential step.

Synergy Debt Group -- Get Debt Free and Gain Financial Literacy

According to a story by Jane Taber in her column,  “Jane Tabor’s Ottawa” in The Globe and Mail, because a 17-year-old Albertan girl worked 10 hours a week at a local McDonald’s, she was sent her first credit card with a $5,000 limit. To a 17 year old, that could be the same as winning the lottery, free money. And unless she reads the fine print about the interest rate and her responsibility of paying off the balance, she’ll find herself way underwater. And since she’s a minor, her parents would ultimately be on the hook.

Jane Tabor also told the story of a senior citizen living on a $30,000 pension. His credit card limit was bumped from $5,000 to $30,000! And when he was told by the credit card company to take it or leave it, he left it.

This only one reason why James Rajotte, a Conservative MP from Edmonton, is pressing his government to take measures to  increase the financial literacy of Canadians, beginning in elementary schools, and getting progressively more sophisticated as the grades increase. He’s calling it the Task force on financial Literacy

Right now the average Canadian owes $1.51 for every dollar they earn--a rather precarious debt to income ratio, and one that, if it increases, could find Canadians buried under rocks so heavy they may never be able to pull themselvel out from under it.

Synergy Debt Group of Ottawa and Scarborough enables consumers caught in the, minimum monthly payment trap  to become debt free. At Synergy Debt Group, we make it possible for our customers to achieve their financial goals and quickly gain independence from creditors. If you are serious about getting out of debt, preserving your credit, save money with a higher degree of financial literacy.

Occupy Wall Street -- Part One

[The original motivation behind this post was the Occupy Wall Street movement, and how I felt it needed a clearer, more focused agenda to accomplish the change it envisioned. I thought providing a better understanding of the events that led to the global meltdown of 2008 that is still affecting us today would help. What I did nt count on was the more I looked into things, the more inspired I became to present a factual narrative on the primary elements that contributed to the crash. Hence, this one simple post evolved into a series.]

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Leading Up to the Crisis

I promised I would not address politics on this site. And I wont. However, I do feel compelled to comment on the “Occupy Wall Street” (OWS) movement that is rising around the country, and now even around the world. Not from a political, but a businessman’s point of view.

After more than 20 successful years in the debt management and settlement industries I have seen first hand what the economic crisis has wrought on so many. And no one empathizes with those facing financial uncertainty or struggling to meet their basic needs more than I. It is just another of the many reasons my wife, Jeannie, and I donate our time, efforts, and money to charities. There are a number of ways to spread the wealth, and when you have it, it is a human being’s responsibility to do so.

To protest is our right, and God bless America as around the world we cheer for those with the courage to rise against tyranny. I believe our system’s peaceful transference of power from George Bush to Barack Obama is what ultimately inspired and motivated the people of Chad to overthrow decades of totalitarian rule. Watching the American democratic process at work, how then could any with less liberties not demand, “Why can it not be the same here?” Their raised fists clenched a clear, definable agenda. As a consequence, Chad’s success led to Egypt’s, and now (finally) Libya. Unfortunately, the jury is still out on Syria, and I’m constantly looking over my shoulder at Iran. Yet, when an autocracy imposes violence and murder against the will and spirit of its own people, history proves it is only a matter of time before it, too, becomes a footnote in history.

To accomplish the same result, the OWS movement has to now take all that pent up frustration and emotion and focus it on making real changes in our legislative policies. Some rallies drew as many as 2,500 people, but then what? You can't have a concert every weekend.

I support their right to protest, even understand and agree with the frustration that created and motivates it. But to bring about the real change it envisions needs more than the nebulous “Corporate greed,” and “against the rich” rhetoric. It needs a clear agenda, even more important, it needs a true understanding of how the crisis really occurred in the first place in order for it to be addressed to keep from happening again. The on-going economic crisis is not just the result of corporate greed and “fat cat bankers,” but a cumulative tsunami set in motion decades ago that ultimately inundated our landscape. Interestingly enough, what caused the current mortgage and economic crisis is a near exact model of what led to the stock market crash of 1929 and the Great Depression.

It is said the crash of '29 and the ensuing depression were caused by commercial banks underwriting stocks and bonds with their depositors’ savings, and then promoting only those stocks of interest and benefit to the banks, rather than to the benefit of the individual investors; a serious conflict of interest. So in 1933, President Roosevelt enacted the Glass-Steagall Act. This law forbid banks, insurance companies, and brokerages from consolidating and operating under one corporate umbrella. It also stipulated that commercial banks had to be separate from investment banks to protect depositors’ money from being invested in high risk securities. Glass-Steagall also established the Federal Deposit Insurance Company (FDIC). Sure makes sense to me, and it withstood the legislative passage of time for nearly seven decades.

Then in 1938, the Federal National Mortgage Association (FNMA)--Fannie Mae--was established. Simply put, the more mortgage loans the banks gave, the less capital they had to lend. Fannie Mae bought those mortgages to free up the banks’ capital and liquidity so they could turn around and make more loans, and the cycle continued. Fannie Mae created the first secondary market, and post WWII was a prosperous time.

For 30 years after its inception, Fannie monopolized the secondary mortgage market, and its profits were astounding. Then in 1970, the government authorized Fannie to purchase private mortgages--mortgages not insured by the FHA, VA, or FmHA--while it also established the Federal Home Loan Mortgage Corporation (FHLMC)-- Freddie Mac--to compete with Fannie and create a more dynamic secondary mortgage market.

To conform with Fannie’s guidelines, loans had to be insurable by the FHA, that is they had to be for owner-occupied, single family residences only, with a maximum of 80 percent loan to the property’s value (LTV), and borrowers’ debt to income ratios could not exceed 36 percent. That left neighborhoods of low- and moderate-income families without much hope of ever owning a home.

So in 1977, Jimmy Carter enacted the Community Reinvestment Act (CRA), to encourage local commercial banks and savings associations to meet the needs of low- and moderate-income borrowers in their communities, and reduce or eliminate “redlining,” a practice the banks used to discriminate against lower-income neighborhoods they considered to be higher risks.

Then mortgage-backed securities came into play.

Mortgage-backed securities (MBS) are mortgage loans, and other contractual debt, such as commercial loans and auto loans, that are consolidated and sold as bonds, allowing the bondholders to participate in the cash flows generated by the payments made on those loans. Fannie Mae sold its first MBS in 1981.

When the Match Was First Struck

What launched sub prime mortgages? Basically, they became legal. The Depository Institutions Deregulation and Monetary Control Act (DIDMCA) of 1980 allowed banks to charge fees and high interest rates to their borrowers. Then in 1982, The Alternative Mortgage Transaction Parity Act (AMTPA) enabled banks to charge variable interest rates and balloon payments. But what really boosted it was the Tax Reform Act (TRA) of 1986. Under the TRA you couldn’t deduct the interest paid on consumer loans, but you could on mortgages for primary residences and one additional home, such as a vacation home, which, for a lot of people, made high-cost mortgage debt a lot cheaper than consumer debt.

Six years later, in 1992, President George H.W. Bush enacted the Housing and Community Development Act (HCDA), amending Fannie and Freddie’s charter to "have an affirmative obligation to facilitate the financing of affordable housing for low- and moderate-income families." It wasn’t just the local community banks that were required to make loans in those communities, now Fannie and Freddie had to carry some of that responsibility as well. For the first time in their history, Fannie and Freddie were required to meet affordable housing goals, of which the first annual goal for each was 30 percent of their portfolios.

When the Match Lit the Fuse

It's 1998 when we have to revisit the Glass-Steagall Act of 1933, the law that forbid banks, insurance companies, and brokerages from consolidating and operating under one corporate umbrella, which was said to have caused the crash and Great Depression.

In April of that year, Travelers’ Insurance, Salomon Smith Barney, and Citibank, one of the largest insurance companies, one of the largest investment banks, and the largest commercial bank in America respectively, merged to form Citigroup. This deliberately defied the law under Glass-Steagall to form the largest financial service institution in the world valued at $140 billion.

Citicorp and Travelers were deemed so big they could pull off the largest financial merging of banking, insurance, and securities when legislation was still on the books saying it  was illegal. And they pulled it off with the blessings of President Clinton; the chairman of the Federal Reserve, Alan Greenspan; and the secretary of the treasury, Robert Rubin. Then, interestingly enough, after it’s all over and done, Robert Rubin, now the former secretary of the treasury, became the vice chairman of the newly formed Citigroup. [source]

Corrupt politicians? Perish the thought.

However, Glass-Steagall did provide a grace period of two to five years to divest the assets that were prohibited by law to ensure there would be no conflict of interest, and here it gets even more interesting. When asked how Citigroup planned to stay within the law as regarding the assets, Sanford (Sandy) Weill, the Chairman of Travelers’ Insurance, and the now chairman of the newly formed Citigroup, said, “Over that time the legislation will change. We have had enough discussions to believe this will not be a problem.”

Throughout the 1990s, Citibank spent $100 million lobbying Congress to repeal Glass-Steagall. Combined with the resources of other financial institutions hell-bent on accomplishing the same goal, the total lobbying dollars were closer to $200 million. [source] Imagine, $200 million spread across how many lawmakers?

Sandy Weill was quite the prophet, for in October, 1999, President Clinton enacted the Gramm-Leach-Bliley Act (GLBA), aka the Financial Services Modernization Act. Thereafter, commercial banking, investment banking, insurance underwriting, and securities brokerage were allowed to consolidate under one very big roof. Essentially and very effectively taking the Glass-Steagall Act  and throwing it right out the window--the same law  that for 70 years outlawed the practices that led  the to the '29 crash and depression. Afterward, it is purported that President Clinton gave the pen he used to sign GLBA into law to Sandy Weill.[source]

Meanwhile, back at the White House, the Clinton administration was pressuring Fannie and Freddie to increase the ratios of loans to low- and moderate-income borrowers. But this also increased the community banks’ ratio requirements as set by the CRA of 1977. So the banks and mortgage lenders pressured Fannie and Freddie to ease the credit requirements on the mortgages they were willing to purchase, enable them to make loans to borrowers with sub prime credit at interest rates higher than conventional loans. This increased Fannie’s risk exposure while at the same time its shareholders were expecting, and pressuring it, to maintain its record profits.

I’ve worked with many low- and moderate-income families who paid their bills on time and lived responsibly within their means, which therefore made them good credit risks. It was lowering the credit criteria that was the big game changer here. Now it’s not the amount of income or type of neighborhood, but the borrower’s credit profile, and the pressure put on Fannie and Freddie to purchase loans made to those with questionable credit histories.

The sub prime mortgage market was set to explode.

Steve Jobs - My Reflections

There can never be enough written or said about Steve Jobs.  Millions of words far more eloquent than mine extol the maverick, visionary, pioneer, genius, and mentor loved  and admired the world over.

Yet, there is one word that all the others allude to, but one which I have yet to specifically read or hear, and one that I think fully epitomizes Steve Jobs, and particularly how his persona affected me, my entrepreneurial pursuits, and ultimately my businesses. That word is “Inspiring.”

Steve Jobs reached the highest echelons without any formal education in business or engineering, nor in graphic arts and design. His genius was his instinct, intuitively feeling the pulse of humanity by not necessarily knowing what it wanted, but in taking what was already accepted and putting it into a different package, giving a different presentation that changed the “accepting” mindset, to a wanting, needing, and demanding one. There were other electronic music devices on the market before the iPod came along. Jobs’ genius was ignoring the adage “form follows function” and putting function into form. In November, 2003  The Guts of a New Machine quoted him saying, “The [designers aren’t] handed this box and told, 'Make it look good!' That's not what we think design is. It's not just what it looks like and feels like. Design is how it works.”

In February 1982, Jobs made the cover of Time magazine for the first time. I was 15 years old, and  the man and his story had such an impact on me I remember it as though it were yesterday. I was reading about a guy who, at only 26 years old, was already a successful businessman worth millions. I read it over and over, reading his words and getting ideas about how he did it. What was his secret? I decided then and there to follow his example, and from that day on watched his career as closely as any rock band.

I looked forward with my own vision, and used his example by taking my vision and expanding it to create the same for my teams. He inspired me to build out resources to support the vision, then lead the team to attain the goal. To build maximum value, create strong company cultures and expand growth, reward employees and earn loyalties. I took it a step further by believing in my heart of hearts that  to give back to the communities that supported and helped me achieve my  success is one of a successful person’s greatest responsibilities.  My wife, Jeanne, and I are involved with many charitable causes, and are proud to have earned the accolades and  awards for the charitable work we’ve done. We’re especially proud of our contributions to Toys For Tots, and of our association with the  Education & Assistance Corporation and its Meals-on-Wheels program.

In 2005, Steve Jobs gave the commencement speech at Stanford University in which he said,

“Don’t let the noise of others’ opinions drown out your own inner voice. And most important, have the courage to follow your heart and intuition.”    

Thank you, Steve, for inspiring my success.