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The other day we received this question from a reader about Mortgage Backed Securities from a reader:
I’ve been reading about these Mortgage Backed Securities that just became available in Canada. Should we invest in it?
So as a result today I thought I’d switch gears a bit and talk about the Canadian Housing Market. You American readers pull up a chair and grab some popcorn because for once you get to feel smug about US.
For about 10 years now, endless pundits and economists have looked at our housing market and predicted an imminent housing crash just like the one that happened in the US. In fact, I’ve been hearing “Housing Crash is coming! IT’S COMING!” every single year since I started working, and every single year they’ve been wrong. The housing market just romped higher fuelled by cheap money and stupid people getting into bidding wars for crappy houses that look like they’ve been condemned.
But the fact is, I never honestly believed that a US-style housing crash would ever happen. Under normal circumstances, when housing prices decline people don’t panic-sell like they do with stocks. Instead, they sit on their underwater houses, keep paying the mortgage, and wait it out for years (sometimes decades) for their home value to come back up. Rather than a crash, this creates a generation of miserable homeowners trapped in their houses, forced to trudge into work every day to keep paying off that giant mortgage forever and ever. They never manage to accumulate any money because it all goes to the bank, but at least everything stays relatively civil.
What happened in the US that pushed their housing market into full-on crash territory was, if you remember from the hazy distant days of 2008, sub-prime lending.
Specifically, sub-prime lending given to people who clearly couldn’t afford them. Banks would routinely give people with no job, no income, and no assets hundreds of thousands of dollars, sometimes falsifying their application paperwork so these bad borrowers would qualify.
They then turned around and sold these bad loans as Mortgage Backed Securities (or MBSs). These MBSs would then get sliced up and repackaged as Collateralized Debt Obligations (or CDOs), and in the process they’d get mixed in with higher-quality mortgages so they’d get re-stamped with an artificially high credit score and resold to mutual funds, pensions, and governments all around the world who thought they were owning stable, solid, low-risk fixed income assets.
This worked out great for those banks writing the mortgages because it was an easy way to get these bad loans off their books. They would simply issue the loan, never checking their applicant’s ability to pay, then sell it off to some poor sucker who would then take the fall if the borrower couldn’t make their payments and defaulted.
Well, lo and behold, those sub-prime borrowers defaulted. And because of MBSs and CDOs, those losses spread throughout the entire globe. Companies, governments and financial institutions who owned these mortgages thinking they were as safe as bonds wound up losing money, and in a panic, they started slashing jobs. Which made more people default on their mortgages. Which made more investors lose money. Which made them slash jobs even more. And on and on until everything was on fire.
Anyway, that’s my brief 5-minute overview of the 2008 US Housing Crash. Sub-prime mortgages were being handed out. MBSs made it possible. Then CDOs made the effects massively global.
So the reason why I never believed a US-style housing crash would happen in Canada is because we lacked those catalysts that the US had. We didn’t have sub-prime mortgages and we didn’t have MBSs.
Until now.
In the wake of the recent government intervention intended to cool off our housing market, there were a few bits of news that slipped past everyone’s radar. And they are…
Sub-Prime Lending Is Now In Canada
One of our mortgage lenders has just been accused by securities regulators of falsifying mortgage applications in order to get mortgages issued to…sub-prime borrowers.
Regulators have accused mortgage lender Home Capital Group Inc. of misleading disclosure after the company uncovered falsified income information on some loan applications and cut ties with dozens of brokers in 2014.
Well…that’s…not good.
Turns out about 45 brokers were caught making up income information about their clients so they could cram their mortgage application through even though they clearly didn’t qualify. And if these guys are doing it who knows how widespread this practice is. Home Capital was just the first ones to get caught.
Mortgage Backed Securities Are Now In Canada
And secondly, a major Canadian bank has announced they are bringing MBSs to the Canadian market.
Bank of Montreal is bundling nearly $2 billion of prime Canadian mortgages into securities, in a first-of-its-kind deal as the government looks to reduce support for the fast-growing housing sector.
The bonds are backed by prime residential mortgages that are not insured by the government. Canadian banks have historically packaged federally guaranteed loans into bonds, but last year the nation tightened access to taxpayer-backed mortgage backing, in an effort to help tamp down rapid home price growth in areas like Toronto and Vancouver. The mortgage-backed securities offering is the first from a major Canadian bank to bundle uninsured prime mortgages.
“Bank of Montreal bundles uninsured mortgages in a first for Canadian bonds”, Financial Post
Well, shit.
And to the breathless PR guys who point out that the bonds are specifically marked as “PRIME” mortgages, keep in mind this is exactly what CDOs were marked as. Who would create an investment and name it “Shitty Mortgage Fund”? But you have to ask yourself, if these mortgages are so great, why are you selling them? Wouldn’t you want to keep them for yourself?
Now to be clear, I’m not alleging any wrongdoing on the part of BMO. But this is how bad stuff starts.
So now for the first time ever, we have the two major catalysts that led to the US housing market meltdown present in Canada, when our housing market is already at nosebleed levels and everybody’s yelling about silly little things like rent controls and foreign buyer’s taxes. Rent control will not bring down our economy.
But this might.
Great, Now What?
I think we can all take a minute to appreciate the irony of the situation. Canadians LOVE to point out how we’re SO much smarter than Americans. WE would never have elected Trump. WE would never have gone into Iraq. And there’s definitely NO way that we would ever give out sub-prime loans to people who don’t deserve them.
Uh…yeah…about that.
So we are sitting at a bit of a crossroads here in Canada. If sub-prime lending continues to grow and MBSs get enthusiastically picked up by investors, we will see the situation deteriorate. A healthy appetite for MBSs will encourage more shady lending practices, and then we are officially making every stupid mistake the Americans made. Only, I’d argue that our fall from grace would be even STUPIDER, because we have the benefit of hindsight while they didn’t.
However, if they bring MBSs to market and nobody touches them, then we might be OK.
So to answer that reader question: “Should we buy Mortgage Backed Securities for our portfolio?”
FUCK. NO.
In fact, NOBODY should buy these things. If they were high-quality mortgages, they wouldn’t be for sale. And if the market starts eating this up, banks will stop giving a shit about who they lend to (since it’s not their problem if the mortgage defaults), and then bad things will happen.
So how about it? Canadian readers, are we truly smarter than Americans? Or are we going to go down the same stupid path they did? And American readers, does this sound eerily familiar to you? Or is it truly different up here in the Great White North?
And with that, on to our normally scheduled buys…
Canadian Portfolio
We begin, as always, with a snapshot of our current holdings…
| Asset | Ticker | Unit Price | Units | Market Value | Allocation | Target Allocation |
|---|---|---|---|---|---|---|
| Canadian Bonds | VAB | $25.70 | 80 | $2,056.00 | 36.01% | 40% |
| Canadian Index | VCN | $31.90 | 32 | $1,020.80 | 17.88% | 20% |
| US Index | VUN | $45.34 | 23 | $1,042.82 | 18.27% | 20% |
| EAFE Index | XEF | $29.79 | 29 | $863.91 | 15.13% | 16% |
| Emerging Markets | XEC | $25.80 | 8 | $206.40 | 3.62% | 4% |
| Cash | – | $1.00 | 522.14 | $518.86 | 9.09% | 0% |
We then figure out what our rebalancing transactions should be…
| Asset | Ticker | Target Allocation | Unit Price | Current Market Value | Target Market Value | Current Units | Target Units | Difference |
|---|---|---|---|---|---|---|---|---|
| Canadian Bonds | VAB | 40% | $25.70 | $2,056.00 | $2,284.83 | 80 | 88.9 | 8.9 |
| Canadian Index | VCN | 20% | $31.90 | $1,020.80 | $1,142.41 | 32 | 35.8 | 3.8 |
| US Index | VUN | 20% | $45.34 | $1,042.82 | $1,142.41 | 23 | 25.2 | 2.2 |
| EAFE Index | XEF | 16% | $29.79 | $863.91 | $913.93 | 29 | 30.7 | 1.7 |
| Emerging Markets | XEC | 4% | $25.80 | $206.40 | $228.48 | 8 | 8.9 | 0.9 |
| Cash | – | 0% | $1.00 | $522.14 | $0.00 | 522.14 | 0.0 | -522.1 |
And finally we round up/down our buy orders making sure not to go into margin…
| Asset | Ticker | Unit Price | Action | Fractional Units | Units | Proceeds |
|---|---|---|---|---|---|---|
| Canadian Bonds | VAB | $25.70 | BUY | 8.9 | 9 | $231.30 |
| Canadian Index | VCN | $31.90 | BUY | 3.8 | 4 | $127.60 |
| US Index | VUN | $45.34 | BUY | 2.2 | 2 | $90.68 |
| EAFE Index | XEF | $29.79 | BUY | 1.7 | 1 | $29.79 |
| Emerging Markets | XEC | $25.80 | BUY | 0.9 | 1 | $25.80 |
| Total | $505.17 |
American Portfolio
And on the US side, we also begin with a snapshot of our current holdings…
| Asset | Ticker | Unit Price | Units | Market Value | Allocation | Target Allocation |
|---|---|---|---|---|---|---|
| Bonds | BND | $81.31 | 25 | $2,032.75 | 35.89% | 40% |
| US Index | VTI | $123.00 | 12 | $1,476.00 | 26.06% | 30% |
| International Index | VEU | $48.97 | 32 | $1,567.04 | 27.67% | 30% |
| Cash | – | $1.00 | 587.74 | $587.74 | 10.38% | 0% |
We figure out what our rebalancing transactions should be…
| Asset | Ticker | Target Allocation | Unit Price | Current Market Value | Target Market Value | Current Units | Target Units | Difference | |
|---|---|---|---|---|---|---|---|---|---|
| Bonds | BND | 40% | $81.31 | $2,032.75 | $2,265.41 | 25 | 27.9 | 2.9 | |
| US Index | VTI | 30% | $123.00 | $1,476.00 | $1,699.06 | 12 | 13.8 | 1.8 | |
| International Index | VEU | 30% | $48.97 | $1,567.04 | $1,699.06 | 32 | 34.7 | 2.7 | |
| Cash | – | 0% | $1.00 | $587.74 | $0.00 | 587.74 | 0.0 | -587.7 |
And finally we decide on our transactions, once again being careful not to go into margin…
| Asset | Ticker | Unit Price | Action | Fractional Units | Units | Proceeds |
|---|---|---|---|---|---|---|
| Bonds | BND | $81.31 | BUY | 2.9 | 3 | $243.93 |
| US Index | VTI | $123.00 | BUY | 1.8 | 2 | $246.00 |
| International Index | VEU | $48.97 | BUY | 2.7 | 1 | $48.97 |
| Total | $538.90 |
This week, the rounding errors are especially irritating. I’m supposed to buy 2.7 units of VEU, but instead I can only buy 1. This is mostly due to VTI’s unit price being so high, so even a little rounding error means a surprisingly high dollar amount, and that screwed up my math. If I had picked up 2 units of VEU instead of 1, I would have juuuuust gone over my cash balance by $0.22 and I would have gone into margin.
Ya well. The nice thing about DCA-ing is that issues like this fix themselves when we do our next buys.
And with that, we’re done! See you next week everyone!
Continue onto the next article!
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“If they were high-quality mortgages, they wouldn’t be for sale.”
This deserves a megaphone and a busy corner. Preferably one right out front of First Canadian Place.
Vanguard has a mortgage backed security fund. The only reason I know this is TradeKing merged with Ally so my roboadvisor account was to be shifted to Ally’s platform. The listing of TK was pretty solid. The Ally listing included such gems as Mortgage Backed Security and Intermediate Credit Bond…… And mom no thank you and GTFOH. I guess the industry is banking on Americans having an extremely short memory….or people who use managed portfolios with Ally are too dumb to understand the securities invested in it. Either way I’m offended.
You should be. Though depending on what happens up here, extremely short memories may not be such a bad bet.
I’m not looking to defend this practice but I think there is a positive way to see the sale of high quality mortgages. It’s not necessarily bad, although its human nature to associate it as bad because of the 2008 crisis.
In general a bank makes a loan, lets say 30 years at today’s rate of 2.7% (I think the 4/2017 prime rate). Now the bank would collect on this over 30 years. Using the rule of 72 you see that the bank would collect roughly twice the principle amount over that period. Not too bad.
However, lets suppose that the bank can now sell the mortgage to an investor at 1.5 times its value. Now instead of waiting 30 years to collect the profit which would depreciate along the way at the rate of inflation, we have profit today. We can now re-invest the money in a new loan. Suppose my overhead and profit is 25%, then I now have 1.125 times the original loan amount to invest in new loans. Money now is better than money later, so your inflation adjusted profit over 30 years improves dramatically. Repeat this as long as there is a supply of high quality borrowers to keep taking out new loans. This is simply a way to maximize profits for the bank. Which some might say is bad, but as investors we should be happy about. After all, FIRE depends heavily on returns in the stock market.
Because the loans are spread out to investors who would normally not be able to invest in this type of security – in this case literally because of physical constraints, you are now creating more liquidity in the system. Providing more loans and improving access to housing for people.
Now again, I am not defending sub-prime lending OR buying over priced homes. Just doing the math on this process makes sense. What is insidious is the continued lending in a predatory way to people who cannot afford the loans. More simply, the pool of people who can afford the mortgages shrinks as the price of houses is bid up in a frenzy to make sure you are not the last person without a house.
When the pool of such high quality borrowers dries up (you can argue here these people are doing damage to themselves), unscrupulous lenders try to maintain their profits by lowering their lending standards and the spiral starts again.
MBS’s aren’t necessarily bad in and of themselves. It’s the fact that they encourage sub-prime lending that worries me. This could be the start of a very slippery slope.
Would the Canadian bonds fund all hold the MBS? I read RBC (https://www.bloomberg.com/news/articles/2017-04-20/rbc-seeks-to-join-canada-s-mortgage-bond-fray-with-nonprime-deal) is pushing their MBS into bonds. So I’m thinking they are headed this way to having everyone else hold their bad mortgages.
Could you do an article on what would happen if we go the way of subprime like the US? Like how many years of recovery we are looking at.
Good question. I would be interested in the answer to that as well.
Ah for FUCKS sake! RBC too?!? God DAMMIT!
Quick question, and sorry if it has been answered before on one of the other posts in the series. I assume you don’t have to pay commissions on the transactions. Unfortunately where I live no brokerage forms offer commission free access to the US markets, so there is a 1% (or 6.99USD). What would be your approach in that scenario to the buys? I have only VTI and BND in my portfolio. What I do when I buy is allocate the 500$ (ish) to the one that would bring my allocation the closest to the target. The other option would be to sit on the cash and buy in less frequent (which I don’t wanna do, given I’m buying monthly rather then every 2 weeks) increments. Any suggestions?
Use TD Ameritrade, they have a selection of commission free ETF’s (https://research.tdameritrade.com/grid/public/etfs/commissionfree/commissionfree.asp?fromSectionLeftNav=true) that Millennial Revolution use throughout this series.
If you have to pay a commission each time you buy, I wouldn’t even re-balance every month. Every 6 months is fine, even every year works.
I live in Europe, I thought TD Ameritrade require a social security number or permanent US address to open an account?
Aha, apologies I assumed you lived in the US since you quoted a USD commission fee. Yes you are probably correct that you can’t open an account on TD Ameritrade, but I can’t be certain on that.
In that case, I’d just re-balance less frequently. It kind of depends how much you’re investing and the size of your portfolio. If you’re investing $500 a month and your portfolio is a few grand, stomaching $15 in fees every month will dig into your profits. If you’re investing $5,000 a month with a few hundred grand in a portfolio, not such a big deal.
Thanks! That’s what I thought as well. Just started, so it’s only a couple of grand, and with the buys there can be about 10% deviation from the target allocation. That will reduce as the portfolio grows.
Does your brokerage give access to the equivalent mutual funds? If so, do those have a commission fee?
Baszu, TD Ameritrade offers commission free ETF buys, VTI and BND are on that list. I have both in my portfolio and never pay a cent.
Sorry for the stupid question but on your portfolio Market value, that’s times 100 (x100), right?
No, those are regular dollar amounts.
This is a portfolio I’m building from scratch to demonstrate how to build a low-cost Indexed ETF portfolio. The rest of my portfolio is sitting in another, already-established low-cost Indexed ETF portfolio.
Canadian banks don’t routinely give people with no job, no income, and no assets hundreds of thousands of dollars, sometimes falsifying their application paperwork so these bad borrowers would qualify like they did in the US.
The regulations governing Canada’s banks and mortgage loans are quite different than in the United States, and far more stringent and have become more so in the past couple of years. And only two provinces have non-recourse mortgages.
I have seen no evidence of lax Bank lending myself, and having qualified for several RBC mortgages, there was a thorough review of documentation and strict application of qualification criteria. Most recently in December I did this and it was even stricter than before.
I agree the Home Capital situation is not good and was caused by mortgage fraud by mortgage brokers, which is illegal in Canada. I’m not sure whether any other alternative lenders are guilty of the same practices. I’d agree there is risk in this, but am not sure to what degree. It seems that alternative lenders, given bank lending constriction, now provide 12.5% of mortgage financing and it appears that the % of these loans that are to subprime borrowers or are fraudulent is nowhere near what it was in the US during the boom.
In the US, mortgage underwriting standards declined precipitously during the boom period. The use of automated loan approvals allowed loans to be made without appropriate review and documentation. In 2007, 40% of all subprime loans resulted from automated underwriting. The U.S. was able to function with 5% of the market in sub prime loans for 40 years with no problem, but when it went to 33%, that was a problem.
I don’t really understand the exact degree of risk of a housing crash right due to bundling and subprime lending, but it seems much lower in Canada than it was in the US. However, the meteoric rise in prices in places like Vancouver and TO seem extremely unlikely to continue, and more likely that there will be a drop. When that happens there may well be a consumer crisis of confidence in the market that would cause a further fall even without the endemic subprime lending factor the US had to deal with.
All I know is that the conditions of a US-style housing crash were absent in the Great White North. Until now. Where we go from here will decide whether we truly are smarter than Americans.
Hey guys,
Thank you for your posts, you’re doing really good job educating people!
Quick question for you regarding your selection of a bond fund for your sample portfolio: VAB. Why did you guys pick VAB fund and not let’s say VSB or a mix of VSB/VSX?
Thank you in advance for sharing your insights/reasons for selecting VAB! Thank you
VAB is a more diversified bond index with a neutral duration (about 7-8 years). I don’t have strong opinion about the future direction of interest rates so that’s why I went neutral on the issue. VSB is fine if you’re believe interest rates will increase in the short term.
I see, got it. Thank you!
Small correction, in my previous comment I made a type about the mix
Instead of VSB/VSX mix of etfs I meant VSB/VSC mix
You don’t like MBS? Well, it’s a pick-your-poison situation. Either we pool mortgages and diversify the mortgage default risk. Or we keep all mortgages on the banks’ balance sheets. But then don’t be surprised if a) you won’t get a mortgage because banks are so risk averse today, or b) small local banks with concentrated default risk have a high chance of going under. I prefer the option with a well-functioning liquid MBS market.
We’d probably be better off with a bit more of (a), to be honest. If I was running a bank in Canada, I definitely wouldn’t want to be keeping mortgages on the balance sheet any longer than possible – especially mortgages in Toronto or Vancouver as there’s probably a significant default risk. Really, this is no different than using CMHC insurance to eliminate the risk to the mortgage issuer. As a bank shareholder, I’m certainly ok with them doing this, as I’ve come to enjoy the returns they give me. My point of view as a citizen is quite a bit different, however.
What?!?
I’d be fine with pooling our mortgage risk if I could vote on whether we give some shmuck half a million dollars. With MBSs, banks decide who gets to have a mortgage and then sells off the responsibility of their decision to some hapless retail investor.
The company signing the loan must have skin in the game. When they don’t, US-style crashes happen.
Why would you get a “vote” on who get’s a mortgage? Variations of MBS have existed for centuries. Yup, you read that right: Centuries. In Europe, the origin of the “Pfandbrief” goes back to the 1700s. Did you know that? It’s simply untrue that MBS have to lead to financial ruin. Otherwise, they wouldn’t have been so popular for so long.
Also: No retail investor is ever forced to buy an MBS. Quite the opposite: There’s a lot of demand for MBS from all investors, including sophisticated institutional investors. And you know what: they are all happy that sifting through the mortgage applications is outsourced to someone else.
I’m not sure about Canada, but one of the things that made the US crash extra special was actually credit default swaps. The combination of:
– pooled mortgages obscuring the actual risk of the individual constituent mortgages
– the ability to wager en masse on the those mortgages defaulting
made for chaos. I believe the underlying idea was that not everyone in the pool(s) would default at once, rendering them somewhat stable. This sort of fell apart when everyone did start to default at once and the resulting CDS’s had to pay off, as the CDS’s were priced with the assumption that en masse defaulting wouldn’t happen.
All this said, mortgage backed securities aren’t innately bad, but they’re not innately good either. Like anything else, I’d limit my portfolio exposure and try to diversify geographically.
Correct. MBSs aren’t innately good or bad, but when combined with banks issuing liar loans all willy-nilly, then bad things happen.
Dynamite and fire aren’t innately destructive either. Put them together though…
I have a newbie question here.
Can anyone recommend a good site where I can download historical stock/index data without any restrictions on how far back you can go?
Many sites are quite limited in their ability to provide long-term quotes. As an example, on Yahoo Finance, a search for DJIA shows that it only goes back to 1985. TD Ameritrade only allows you to go back 20 years. I really want the data to cover the *ENTIRE* history of any stock, any fund, any index I am looking for.
Thanks for your suggestions.
Thank you for calling attention to this madness and greed.
Indeed, the MBSs are of deep concern. Link this issue with the recent slew of news reports about unethical business practices at Canadian banks, where tellers and common bank employees aggressively foisted expensive products on their customers when they did not need them. This was a tactic to raise profits at any cost.
If banks engage in such practices, I suspect that they would also offer mortgages to less-than-ideal lenders as a means to boost short-term profits.
Hmmm, I think it’s time for an audit.
Wow, I cannot BELIEVE Canada is going to do that too. I really hope this doesn’t mean you’ll be electing orange-tinted politicians in ~7 years!
This American Life had an AMAZING episode on the US housing crash:
https://m.thisamericanlife.org/radio-archives/episode/355/the-giant-pool-of-money
Here is the transcript if you prefer to read:
https://m.thisamericanlife.org/radio-archives/episode/355/transcript
I lived through that time as a U.S. homeowner, and the main things that kept me sane:
1) We didn’t buy the biggest house we could afford (which lead directly to 2)
2) We always lived below our means
3) We didn’t watch our home value day-to-day
Side note, I’m really looking forward to meeting you two in the UK in a few months!
Eye-opening! Thanks for sharing those links. It’s perfect for our upcoming bus trip!
So happy you are coming to Chautauqua UK! We’re going to have a blast 🙂
What really concerns me is not the housing market but this threat
http://www.zerohedge.com/news/2017-04-27/etfs-are-weapons-mass-destruction-fpa-capital-warns-we-could-get-onslaught-selling
What’s your opinion about it?
This is a conspiracy theory fake news site. That’s my opinion.
I really hope so because I’m reading lots of things like that in reputable news vehicles like investing.com, financial times and son on. I hope this is just active managers complaints but lots of their points make total sense
To me, the interesting question is the potential cascading effect of the cumulative whole. So, yesterday was Ontario budget day…buried in Table 6.14 is an interesting story of increasing provincial dependence on the Land Transfer Tax revenue (almost 3% of total revenues and growing fast).
Yet that’s just one piece of the Province’s dependency. Add in the % of income tax revenues derived from all those real estate agents, mortgage brokers, house stagers, condo construction workers etc…and all the related sales tax…and the % corporate tax from real estate-related biz…and hey, even the extra booze tax raised from all those obligatory ‘house warming parties’…
And the Province is not alone. Toronto’s addicted too ($358M in LTT revenue in 2014…I’m sure much higher by now).
Then there’s the Fed’s exposure via not only their % take of the income tax, corporate tax and sales tax pies, but also CHMC, which plays the role of the ultimate backstop on mortgages they insure.
And let’s not forget exposure via savings held in Canadian stock, bond and REIT holdings…
Add up all that cumulative direct and indirect risk exposure for Joe & Jane average living in Canada…perhaps with a small mortgage and say one of which works in a real estate-related/indirectly-related industry…and it’s suddenly rather significant.
And chance are, they don’t have a clue.
Yep, totally. There’s a lot of speculators making a lot of money who are cheating the CRA without repercussions. Once the province/city gets a taste of that sweet sweet consequence-free money they can get by actually enforcing their own rules, look out.
…hmmm, I guess I wasn’t clear enough. Point is, no level of Canadian government is going to actually do that since they’re smart enough to be scared…If the bubble pops, they’re toast because the economy has become mainly a one-trick pony – housing. If housing implodes, not only does a significant chunk of government revenues evaporate overnight, but so does their re-election chances.
Oh, they’ll huff and they’ll puff and put on a grand show…but measures that will do more than play with the fringe of the margins? No way in heck they’re touching that kryptonite.
Hi, guys love the blog, have been reading for a while and usually dont have a question but I do have one now.
So like about 15 posts before you talked about withdrawing after retiring. So here is my hypothetical scenario and question:
– Im retired, transferred all our 401ks into IRAs, so now have 3 accounts, IRA, Roth IRA, Brokerage.
– Q: if I want to just pull the dividends (lets say 3%) and never touch principle, how do I do that before 59 1/2 years old. I understand the Roth conversion latter but even at year 5 I may not have enough in their to pull out 3% of my entire portfolio.
I must have missed something in your posts, I tried to search around but couldn’t find the answer.
Thanks
One way that you can avoid early withdrawal penalties before the age of 59 1/2 is to take ‘Substantially Equal Periodic Payments’ . Just type that into google and go to the IRS page and read all about it. This is how you retire early and access your IRA monies.
You can pull out as much as your standard deduction for free. If you’re married filing jointly that’s $12600. If you have kids that’s even more.
That being said, it may happen that you have too much money in your IRAs to completely avoid paying taxes. That’s not a bad problem to have, in which case you have to decide how much you’re willing to withdraw (and be taxed on) and therefore what effective tax rate you’re willing to accept. Again, not a bad problem to have.
I’d consult a tax professional to do a detailed plan for you.
Tax professionals here in the US know less than I do…they don’t even know how to properly declare foreign investments and things like that…outside the basic they know nothing and we get the fines
Didn’t Canada send troops into Iraq, or am I remembering things horribly wrong? Probably, as there hasn’t been any major terrorist attacks against Canada like there had been against Britain and Spain during the early-mid 2000’s.
My issue with the whole 2008 crash is with the ratings agencies and the bailouts. With the former, how is it that enough bad loans to CRASH THE GLOBAL ECONOMY flew past their radar? The ratings agencies are the ones that granted AAA status to CDOs filled with subprime mortgages. How could they fail so utterly? Nobody ever talks about that. If the CDOs and MBSs were properly rated, none of this would have happened.
With the latter, THAT’S what encouraged the banks to do all this. I’m not against subprime lending as long as the lender assumes all risk and can properly base that risk into the price (ie. higher interest rates on riskier loans). But that wasn’t the case. It was known well in advance that the government would bailout the banks if anything happened. Why do any sort of risk management if there’s literally no risk? I’m surprised the banks even had underwriters on payroll.
Sincerely,
ARB–Angry Retail Banker
The vast majority of mortgages that are underwritten in the United States are considered ‘conforming.’ Conforming loans can be sold to Fannie Mae or Freddie Mac, who then issues a MBS security that is sold to investors. Almost all conforming loans are sold to investors otherwise the bank has to reserve capital against the potential default by the borrower. The business plan is to write the mortgage and sell it to Fannie Mae while just earning the origination fees. Fannie Mae also pays banks to service (collect payments) the loans. There are thousands of investors that are willing to buy the MBS from Fannie Mae because they are high quality securities (guaranteed by the government) but offer higher yields than treasury bonds. In fact, the Vanguard Canadian Aggregate Bond Index Fund (VAB) that you invest in owns the Canadian equivalent of the government guaranteed MBS….so you own these bonds in your portfolio.
I agree with your assessment that the new bonds that are not guaranteed by the government are an issue as its the next logical step taken by banks to finance the housing boom. Lending standards do not matter in the non-guaranteed MBS because they can put whatever mortgages they want in to the pool with the proper disclosure. The major concern is that people will borrow more money than they can afford while pushing house prices higher; and when the bubble pops and home prices fall, Canada will experience its own housing crisis.