Thursday, June 28, 2012

Obama 5 Public 4

The US Supreme Court ruled in Obama’s favour today by endorsing his controversial Health Care Bill.

The Court’s Ruling has 4 major implications:

First, it represents a major victory for this Democratic President – one that will rejuvenate his campaign in regard to the coming November Election. It could even propel him into office for another four (4) years;

Second, it will launch an avalanche of expenditure at a time when the United States of America does not have a spare penny to spend. Its economy will suffer even more.

Third, it represents another example of the Courts’ progressive bent. Simply stated, the hard issues are being dealt with by a small select group of judges and not by the peoples’ elected representatives. - and -

Fourth, the decision will place American Health Care on the same road as followed by we Canadians. In other words, on the road of middling care.

The Health Care Law will now become the major issue for this fall’s election and in that regard, I would like to deal with implications numbers two and three.

We are all familiar with what is transpiring in Europe and things there continue to worsen given the fact that France just elected a Socialist President. His motto for Europe is to spend its way out of the economic crisis. Germany, in contrast, wants to proceed frugally and move toward balancing the European Books. Until the recent French Election, both France and Germany stood together in that, in a common front. Now they are at odds with one another and the chances of success have greatly diminished even though they were never all that great to begin with.

And we here, across the pond, are not immune from the European contagion.

The United States has been propped up by investors fleeing Europe and looking for a safe haven. They may think that they have found one in America and yet that is only an illusion. Their last two Presidents have piled on the debt to the extreme and the new American Health Care Law will greatly add to it. It will also result in greater unemployment as employers cut their workforces to avoid the new steep health care levies.

The day is quickly coming when it will be evident, even to those panicking Europeans, that there is no safe place to hide their money.

My advice, stay clear of Stock Markets.

The other implication I would like to spend a few words on is number 3 – the rising power of the Courts. It is not just in the USA that this is happening – it is, as you know, also going on big time here at home. Politicians like to deal with trivial matters and leave the heavy lifting to the Courts.

The Courts should occupy themselves with interpreting the Law as produced by the Legislators rather they use their powers interpretation to extend the Law beyond its intended meaning e.g. expand the definition of marriage to include gays.

There is another way they can extend the Law and that was evidenced in today’s decision. The Court endorsed Obama’s Health Care Bill which was clearly Unconstitutional, especially as it pertained to the Bill’s requirement that all Americans must take out mandatory health care coverage or face sanctions. If government / courts can order individuals to contract for health care – what is left that cannot be imposed upon the hapless? Forced purchase of broccoli?

That said, it is most sad to see that the American Courts – once the guardians of fundamental freedom – have also been drinking the progressive cool aid. I have said on earlier occasions that the USA is our last hope to see freedom prevail. Canada I believe is split one third true conservative and two thirds leftist. The US is in my opinion is split right down the middle – 50/50.

But sadly, I think the pendulum is ever moving toward the progressives. Today’s Supreme Court Decision is but another indicator of this gradual movement left.

As I see it…

‘K.D. Galagher’

Monday, June 25, 2012

THE CULPRIT IS NOT AMORTIZATION …

 

Rather it is interest ratesthey are too low- but due to the fact that Western Nations find themselves on life-support – interest rates are untouchable.

In the face of this reality though, Finance Minister Flaherty has done it again – he has dropped the amortization period for residential mortgages in Canada from 30 years to 25 years having just recently reduced it down from 40 years.

It gives the impression that the Government is serious about tackling a perceived housing bubble and dealing with the issue of too much household debt.

It does neither.

In the past, when governments needed to deal with these issues they simply raised interest rates. I am in an exclusive class in that I can not only recall, but dealt with, rates that reached a staggering 22% back in the 1970s.  Can you younger ones just imagine – on your $300,000 to $400,000 residence - you would be expected to pay over $60 to $80 thousand just in annual interest charges alone.  Makes one pale – n’cest pas?

But as I said at the beginning, rates are untouchable due to the fragile state of Western Economies – Canada’s included. So you can relax.

Maybe?   You need only look to Europe where rates are rising despite the best efforts of their elected officials.

But rates aside, Governments cannot help themselves – they must be seen to do something even if the “something” makes little or no sense.  So in our case, Canada reduces the amortization period from 40 years to 25 years.

And all that does it adversely affect affordability.  In other words, it prevents prudent folks from qualifying for mortgages they would otherwise be able to manage.  And, in the case of the less wealthy, reduced amortization periods can shut the door entirely on home ownership.

I can hear you now –” Galagher isn’t that exactly what happened in the real estate meltdown south of the border – poor people qualifying for mortgages they could not afford and this resulted in the house of cards collapsing”?  Pardon the pun – but no, it is not the same thing.

In the States you are correct in saying that mortgages were given to those who should not have qualified for them in the first place. On top of this, these deadbeat mortgages were then securitized and sold as valuable bonds which greatly exacerbated the problem.  The Rule of Thumb was that if a prospective Mortgagor could ‘fog a mirror’ – then he or she qualified for a mortgage.

But I am not talking about deadbeat mortgagors – I am speaking about those folks, like you and me – rich and poor who have good credit ratings, a regular income and can well afford a house purchase if provided the right conditions.

So let’s look at an example, beginning with a quick review of the 30% Mortgage Rule – i.e. that principal, interest, and realty taxes should be no more than 30% of one’s gross income – 35% tops.  Banks use this Rule in deciding who can qualify for a mortgage. 

So we have Mr. and Mrs. Smith applying for a mortgage.  Their combined gross annual income is $100,000.  The 30% Rule indicates that they can afford mortgage payments upwards of between $30k and $35k per year.

They find a home costing $350,000 which by the way is the average cost of a home in Canada.  They are able to contribute a down payment of $50,000 which means they are in the market for a $300,000 Mortgage.  Given the Smiths’ good credit rating and steady annual earnings, the Bank qualifies them for a five year fixed interest rate of 5% calculated over an amortization period 25 years. (the 5% rate is the rate currently offered by the big 6 Banks in Canada)

Their annual payments will be $20,937.72 for principal and interest plus an additional $3,500 for realty taxes for a grand total of $24,437.72 per year. This amounts to 24.43% of the Smiths’ gross annual income,well within the 30% Guideline.

But the Smiths decide they want to pay off their mortgage more quickly and opt for a 15 year amortization – increasing their annual payment to $31,872.44 which is slightly above the 30% rule but still below the 35% maximum. They are happy with their choice since it allows them to save thousands in interest payments.

Conversely, the Smiths want to have oodles of children and decide to go with with a 40 year amortization which means their annual payments for Principal, Interest and Taxes will be only $20,736.92 – some $11,135.52 less than the 15 year amortization and $3,700.80 less than the 25 year amortization which is now legislated by the Federal Government.  

I can hear some of you saying that 40 year amortization periods increase the mortgagor’s exposure to interest rate increases.  Well so do 15 and 25 year amortization rates – all leave plenty of time for rates to increase, decrease or stay steady.

So dear reader, what amortization periods do, is provide consumers with choices in affordability. 

They do not increase debt nor do they contribute to a housing bubble.

Interest rates do both.

As I see it…

‘K.D. Galagher’