Consumer bankruptcies expected

Consumer bankruptcies in Canada spiked sharply in January, the beginning of what credit experts warn could be a wave of bankruptcies this year that are the inevitable result of rapidly rising unemployment.

"We're not even close to the filings we saw in 2004," said Bruce Alger, president of Alger & Associates, a bankruptcy trustee with several offices in Alberta. "We've got a ways to go yet."

More than 10,700 people in Canada declared themselves insolvent in January, an increase of 23.1% from the same month in 2008.

For the 12-month period ending on Jan. 31, 2009, 117,704 consumers had declared themselves insolvent, a 16% year-over-year jump.

Within minutes of publishing the latest bankruptcy statistics Tuesday morning, the federal government said the number of Canadians receiving employment insurance jumped to 560,400 recipients in January, up 22.8% from February, 2008.

Diane Finley, the Minister of Human Resources, said the federal government would spend an additional $60-million to process new claims more rapidly.

Although the Canadian economy created more than 163,000 new jobs between January and October last year, it has rapidly shed them since then. Between November and the end of February, more than 295,000 Canadians became unemployed.

By last summer, the steady work Daniel Asboth, 25, had as a drywaller in Toronto was all but gone.

But he still had to make payments on his "baby," an Acura automobile, and the rent, and credit-card bills that were piling up. "I was making $1,000 a week," Mr. Asboth said. "When you are used to getting that money, you don't think about saving, because you know you are going to be getting that money at the end of the week. Then, all of a sudden, it stopped."

Mr. Asboth admits he was "bad" with managing money, but said he felt blindsided when his work ran out and debt went up.

Finally, in October, owing more than $25,000, he decided that declaring bankruptcy was one of his few options.

Ian Lee, a former mortgage officer at one of Canada's banks and now a business professor at Ottawa's Carleton University, told a parliamentary committee Tuesday that, while the recession is the chief cause of what will be a rapidly rising bankruptcy rate this year, too-easy access to credit, and consumers who have become addicted to borrowing, are aggravating factors.

"There hasn't been a lack of access to consumer credit. Consumers are wildly over-leveraged. The problem isn't being able to get credit at the consumer side, it's they have too much credit in terms of what they carry," Mr. Lee told MPs.

"These numbers represent people who almost certainly will be unable to be part of the economic recovery," said Michel Arnold, executive director of Option consommateurs, a Montreal-based non-profit consumer advocacy group.

Mr. Lee noted household debt, as a percentage of household disposable income, had doubled in the last 25 years, from 15.7% in 1981 to 36.2%. At the same time, the savings rate plummeted to 0.5% in 2005, the lowest level recorded by Statistics Canada since the 1920s. In other words, for every $100 Canadians receive in income, they are saving, on average, 50 cents.

"One of the points that this recession is bringing out is the fact that people have been carrying a lot of debt, and this is an eye-opener, because when that job is lost or those hours are cut, it really sets off a panic," said Linda Stern, a Toronto-based bankruptcy trustee and vice-president with Deloitte and Touche Inc.

In Calgary, Mr. Alger said the recent layoffs in the oilpatch have yet to translate into higher bankruptcies, though he expects that to pick up in the next several weeks.

Many new bankrupts are connected in some way to the construction or housing markets, which were red-hot a year ago and have now cooled.

Mr. Alger said that, in Calgary, when house prices were soaring, many consumers borrowed against that new equity in their homes and now housing prices have tumbled back to earth, credit is no longer available, or is too pricey for those with outstanding second or third mortgages.

Others are tradespeople or contractors who are unable to make payments on equipment or tools bought during last year's boom.

"It's people that don't have a safety margin," said Mr. Alger. "If you're living paycheque-to-paycheque and the paycheque's gone, you're in trouble if you're servicing a bunch of debt."

Extending Mortgages

A Toronto-based company built on extending mortgages to people who don't qualify for a bank loan, but without the disastrous results experienced in the United States, is increasingly being viewed as a takeover target.

Home Capital Group Inc., whose shares are trading at decade-low earnings multiples, fuelled the speculation last week when it adopted a shareholder-rights plan, or poison pill, which gives a company more time to drum up offers if there is a hostile bid.

But the 20% gain since then may have more to do with Home Capital's successful pursuit of a slice of the insured Canada Mortgage and Housing Corp. business dominated by the big banks that takes advantage of government incentives put in place late last year to stimulate lending.

"The government has been boosting the level of mortgages taken in through the CMHC programs and Home Capital has been able to ramp up activity here - the yield is good and the government takes on all of the default risk," says Jeff Fenwick, an analyst at Cormark Securities Inc. "Meanwhile, Home purposely eased back on some of the other areas where they lend ... as they had been concerned about the housing downturn in Canada."

Tarred by the fallout from the subprime mortgage meltdown in the United States, Home Capital's shares were off nearly 60% from a 52-week high of $41 last June before the recent rally that took the shares back to $23.64 yesterday.

Gerald Soloway, chief executive, said in an interview the company decided the tweak the business model beginning in the late summer of 2007, when the subprime crisis took hold in the U.S. and Canada's non-bank asset-backed commercial paper market froze.

The company has reduced loans-to-value to take falling house prices into account and reduce the risk of losses from defaults, and ventured into the 80% insurable portion of the $800-billion Canadian mortgage market that is the territory of traditional banks.

This month, Home Capital's $200-million mortgage business will be evenly split between insured mortgages that take advantage of the spread between bonds yields and rates, and the company's traditional mainstay of uninsured loans for those that can't get them elsewhere, Mr. Soloway says.

"At this point, the margins of selling into the Canada bond program are very good... We don't apologize for being somewhat opportunistic and taking advantage of a market," he says.

CMHC insured mortgage pools are priced using Canadian government bonds and with bond yields being very low, the spread between the average mortgage rate in the pool and the rate paid on Home Capital's mortgage-backed securities has made it an attractive area for the company to be, analysts say.

It seems likely that the big banks will take notice, especially because they are touted as potential buyers of Home Capital and have historically coveted the firm's healthy margins derived from higher interest rates on the loans that are perceived to be riskier.

But Mr. Soloway says there have been no formal or informal approaches from suitors.

"I'm the wallflower. No one's asked me to dance," he said, adding that implementing the shareholder rights plan, which is to be voted on by investors at an annual meeting in May, had been under discussion for some time.

As for the $1-billion in insured mortgages Home Capital could take from the banks this year, Mr. Soloway maintains that it wouldn't rock the boat because it would be a small fraction of an estimated $640-billion pie.

"Nobody at any of the big banks wakes up and says, ‘I've got to get Home, they're eating my lunch,'" he says. "It is significant for my business, but it's not enough to bother anybody else."

Mr. Fenwick, the Cormark analyst, said he doesn't expect any would-be buyers will make a move on Home Capital in the near term.

"A bank would be a natural buyer but given the current climate right now, I think it would be challenging to sell the idea to shareholders given that the media would label Home as a sub-prime lender," he said. "However, Home Capital has recently been trading at decade lows... and they may have been concerned about an opportunistic bid."

With no takeover premium in mind, Mr. Fenwick has a target of $30.25 on the stock. The company expects to deliver earnings growth of 10% to 15% this year.

Canada’s proactive approach to financial stability will limit risk

The International Monetary Fund says that strong regulation helped Canada’s financial system hold up well amid the global financial crisis, but it still wants to see securities regulation rationalized.

In its latest report on Canada, the IMF says that the Canadian financial system “has displayed remarkable stability amid the global turbulence”, adding, “This outcome reflects strong regulation and supervision, along with structural factors in the Canadian financial market.”


That said, the organization cautions that “the coming credit cycle is likely to be challenging. The economic downturn will pressure bank credit quality.”

It notes that mortgage delinquencies are already rising, and household debt levels are a concern in an environment of rising unemployment and falling net wealth. “In this context, pressures on banks may feed back into tighter credit conditions, dampening growth. Meanwhile, major insurers and pension funds have been adversely affected by the stock market decline,” it says.

“Against this backdrop, the key policy priority remains forestalling an adverse macro-financial feedback loop. Along with the appropriately supportive stance of macroeconomic policies, the Canadian authorities’ proactive approach to financial stability will limit this risk,” it says.

Additionally, the IMF indicates that, “Consolidating and enhancing securities regulation would further strengthen the already robust financial stability framework. Over time, bringing a greater financial stability focus to securities regulation, and achieving greater national integration would provide a more holistic perspective to financial stability arrangements.” Therefore, it supports the federal government in following the recommendations of the Expert Panel on Securities Regulation.

On the macroeconomic front, the IMF sees further weakness in the short term. “Economic activity will likely decline further in the near term, before picking up on the back of the policy stimulus already in train,” said IMF mission chief, Charles Kramer, in a statement.

“Looking ahead, continued vigilance and readiness will be essential to respond to possible tail risks amid the economic downturn. With the global outlook marked by unusually high uncertainty, Canada has prudently taken proactive steps and should stand ready to act further in case downside risks appear,” Kramer added.

The IMF said it supports the “large, timely, and well-targeted fiscal stimulus” proposed in the latest federal budget. “The stimulus package is appropriately sized -- well above the Fund’s benchmark of 2% of GDP. It is also prudently based on a worse economic outturn than private sector forecasts. With sizeable infrastructure spending and permanent tax cuts, it is weighted toward items that are most effective in stimulating demand,” it added.

And, it approves of the Bank of Canada’s current monetary policy position, suggesting that, “maintaining an accommodative monetary stance will be appropriate given the disinflationary pressures associated with the recession.”

Federal finance minister Jim Flaherty welcomed the IMF's statement of support.
says that strong regulation helped Canada’s financial system hold up well amid the global financial crisis, but it still wants to see securities regulation rationalized.

In its latest report on Canada, the IMF says that the Canadian financial system “has displayed remarkable stability amid the global turbulence”, adding, “This outcome reflects strong regulation and supervision, along with structural factors in the Canadian financial market.”

That said, the organization cautions that “the coming credit cycle is likely to be challenging. The economic downturn will pressure bank credit quality.” It notes that mortgage delinquencies are already rising, and household debt levels are a concern in an environment of rising unemployment and falling net wealth. “In this context, pressures on banks may feed back into tighter credit conditions, dampening growth. Meanwhile, major insurers and pension funds have been adversely affected by the stock market decline,” it says.

“Against this backdrop, the key policy priority remains forestalling an adverse macro-financial feedback loop. Along with the appropriately supportive stance of macroeconomic policies, the Canadian authorities’ proactive approach to financial stability will limit this risk,” it says.

Additionally, the IMF indicates that, “Consolidating and enhancing securities regulation would further strengthen the already robust financial stability framework. Over time, bringing a greater financial stability focus to securities regulation, and achieving greater national integration would provide a more holistic perspective to financial stability arrangements.” Therefore, it supports the federal government in following the recommendations of the Expert Panel on Securities Regulation.

On the macroeconomic front, the IMF sees further weakness in the short term. “Economic activity will likely decline further in the near term, before picking up on the back of the policy stimulus already in train,” said IMF mission chief, Charles Kramer, in a statement.

“Looking ahead, continued vigilance and readiness will be essential to respond to possible tail risks amid the economic downturn. With the global outlook marked by unusually high uncertainty, Canada has prudently taken proactive steps and should stand ready to act further in case downside risks appear,” Kramer added.

The IMF said it supports the “large, timely, and well-targeted fiscal stimulus” proposed in the latest federal budget. “The stimulus package is appropriately sized -- well above the Fund’s benchmark of 2% of GDP. It is also prudently based on a worse economic outturn than private sector forecasts. With sizeable infrastructure spending and permanent tax cuts, it is weighted toward items that are most effective in stimulating demand,” it added.

And, it approves of the Bank of Canada’s current monetary policy position, suggesting that, “maintaining an accommodative monetary stance will be appropriate given the disinflationary pressures associated with the recession.”

Home Construction Will Continue To Drop

Home foundations poured in Calgary slowed to a mere trickle last month, says data released yesterday by the Canada Mortgage and Housing Corporation.

Housing starts in the Calgary census metropolitan area, including single- and multiple-family homes, totalled 206 units in February, compared to 877 units one year ago.

That's a decrease of 76.5% and a drop to levels not seen since January 1991, when foundations for 170 units were poured.

Year to date, total housing starts in Calgary are trailing last year by nearly 72%.

Condominiums led last month's downturn, plunging an eye-popping 96.3% to 22 units.

Single-family home starts decreased 36.1% to 184 units during the same period.

At least two indicators suggest it'll get worse before it gets better: Unemployment in Calgary, as well as the rest of the province, is predicted to continue rising.

Statistics Canada will release the most recent employment statistics Friday.

Also, Bonnie Wegerich, president of the Calgary Real Estate Board, said MLS listings will rise this spring, which means that competition from the re-sale market won't abate any time soon.

But, Lai Sing Louie, senior market analyst for the CMHC, argues lower mortgage rates and home prices point toward stronger demand.

"The real estate market is re-pricing right now, and at some point in time, that will bring back in demand," he said.

Prices for new homes have been declining steadily since peaking at an average of about $647,000 last September.

The February average price was $619,211. Sing said the CMHC predicts prices will continue sliding this year.

Moreover, mortgages are getting cheaper as Canada's financial institutions follow the Bank of Canada by lowering their lending rates.

Given January's rates, which don't take into account the central bank's most recent rate cut, the mortgage payment on an average condominium, with 10% down and a 25-year amortization, came to $1,538, compared to $1,946 one year ago.

The combined housing starts of Alberta's seven largest cities totalled 574 units in February, nearly 70% lower than one year ago.

Canada cuts rate

The Bank of Canada slashed its key short-term interest rate about as low as it can go Tuesday and said it may have to resort to extraordinary measures to stimulate the economy which, it acknowledged for the first time, is unlikely to recover this year.

The central bank did what most private-sector economists advised it to do, cut the trend-setting overnight rate to an all-time low of 0.5 per cent and Canada's commercial banks quickly followed, cutting their prime rate by half a percentage point.

The lower prime rate, which falls to 2.50 per cent on Wednesday, will benefit some mortgage holders but will have little or no immediate impact on many corporate borrowers or credit card holders and will further reduce some interest rates paid to savers.

Scotiabank chief executive Rick Waugh said at his bank's annual meeting in Halifax that the lower interest rates is "a step forward" for the economy but insisted that the No. 1 priority is to "stabilize the world financial system"

"There's a huge amount of incentives that the governments are putting in. But unless we get our financial sector stabilized, then all these incentives will not work as well," Waugh said.

Bank of Canada governor Mark Carney said earlier that even with the central bank's overnight rate at unheard-of lows, the stimulus provided by traditional monetary policy is likely not enough help for the economy.

And Carney said the bank now sees recovery coming later than it had last projected, possibly in early 2010 instead of the third quarter of this year.

"Given the low level of the target for the overnight rate, the bank is refining the approach it would take to provide additional monetary stimulus, if required, through credit and quantitative easing," Carney wrote in a statement.

From the outset, the central bank's January economic outlook had been described by many observers as overly optimistic but Carney has said since then that the outlook acknowledged both the potential upside and downside.

A lot depended on how the situation unfolded in the global financial system, Carney said at the previous rate setting on Jan. 20, coincidentally the same day Barack Obama officially became president of the United States.

Obama and his administration has been quick to push for several massive stimulus efforts, aimed at propping up the financial sector, the automotive sector and some hard-hit American consumers, such as homeowners who are unable to afford their mortgages.

While the Canadian economy as a whole has been shrinking dramatically, as a result of lower U.S. and world demand for oil, gas, minerals and manufacturing goods, the Canadian banking system continues to be solid and the five biggest banks remain profitable.

The Bank of Canada didn't give specific examples on Tuesday on what type what specific measures are available to provide monetary stimulus to the Canadian economy, which shrank by 3.4 per cent in the October-December quarter.

BMO deputy chief economist Doug Porter said the central bank is considering a process whereby it injects money into the financial system by buying up assets such as government bonds, asset-backed commercial paper and even corporate bonds directly.

"Simply put, the bank is preparing to pull out all the stops to support the economy," Porter said.

Canada's major banks appeared ready to play ball with Carney: shortly after the announcement, Royal Bank (TSX:RY), Bank of Montreal (TSX:BMO), TD Bank (TSX:TD), CIBC (TSX:CM) and Scotiabank (TSX:BNS) announced that they would cut their prime rates by half a percentage point, in step with the central bank.

But while variable mortgage rates tied to prime are being reduced, longer-term and fixed rates have not kept pace with the central bank's moves, partly because chartered banks are reluctant to lend into a recession for fear of failures and partly because their own borrowing costs are higher than would be expected.

Still, Jim Rawson, a regional manager Toronto-based mortgage firm Invis, says the most recent cut in combination with measures in the government's January budget will increase borrowing.

"A lot of people will be interested in re-financing mortgages and it will spur a lot of first-time buyers," Rawson predicted.

The federal budget, yet to make its way through Parliament, offers $750 in tax relief for first-time home buyers while increasing the limit that can be withdrawn from RRSPs for a down payment by $5,000.

"Quite honestly, people are saying nobody is buying, but there seems to be a lot activity right now. In my region, applications doubled in January from December," Rawson said.

By most measures, Canada's credit markets are in better shape than in most industrialized countries, although still far from normal.

Carney has noted that while Canada's chartered banks continue to lend, many other financial institutions have tightened their practices or shut down altogether, reducing the availability of credit as a whole.

His reference to non-traditional monetary measures confirms that the central banker knows he has exhausted interest rate cuts as a means of stimulating lending and borrowing in the economy.

Darcy Briggs of Bissell Investment Management in Calgary said the bank could trim rates to 0.25 per cent - and likely will, as the U.S. Federal Reserve has done - but "practically, what would that do?"

There are technical reasons why a zero interest rate is impractical, economists say.

The other surprise in Tuesday's statement was that Carney appeared to back off his relatively rosy forecast for the Canadian economy, which envisioned growth returning in the third quarter of this year and rebounding to 3.8 per cent next year.

"The outlook for the global economy has continued to deteriorate since the bank's January... update, with weaker-than-expected activity in major economies," Carney said Tuesday.

"National accounts data for the fourth quarter of 2008 and other indicators of aggregate demand point to a sharper decline in Canadian economic activity and a larger output gap through the first half of 2009 than projected in January."

Carney said potential delays in stabilizing the global financial system, along with low consumer confidence and larger hit on household wealth, "could mean that the output gap will not begin to close until early 2010."

Tuesday's statement does not officially alter the forecast, but strongly implies that both this year's 1.2 per cent contraction will be worse and that the recession may last until next year.

"Reading between the lines, it's a safe assumption that their (January) forecast has already gone out the window," said Porter.

Most economic indicators have come in far weaker since January's much-criticized bank outlook, including Monday's report that the Canadian economy has shrunk by 3.4 per cent in the last quarter of 2008, far worse than the bank's negative 2.3 per cent projections.

As well, Canada lost 129,000 jobs in January, a massive amount, which Carney did not know when he made his forecast.

But possibly the most critical factor is that the global economy, especially among industrialized nations, appears to be in free-fall.

The fourth quarter saw GDP fall by 6.2 per cent in the United States, six per cent in the United Kingdom, 5.7 per cent in the Eurozone, 10.3 per cent in Mexico and a massive 12.7 per cent in Japan.

And far from stabilizing, the U.S. financial system is lurching from crisis to crisis. On Monday, the U.S. government said it was adding another $30 billion to the bail-out package for the giant insurance company American International Group Inc. after it reported a staggering US$61.7-billion in quarterly losses.

"Stabilization of the global financial system remains a precondition for the global and Canadian economic recoveries," Carney noted in his statement.