Toxic Assets, The Family Home and Credit

by Douglas P. Welbanks, May 29, 2009

Wikipedia defines toxic assets as ‘ a nontechnical term used to describe certain financial assets when their value has fallen significantly and when there is no longer a functioning market for these assets, so that they cannot be reasonably sold. ’’

Great media attention has been placed on toxic assets. So much so they have assumed the inflated role of causing the financial collapse in the US and the global recession. It is somewhat baffling that hardly anything has been said about the millions of debtors who are stuck up to their depreciated assets in what may be appropriately described as toxic debt.

One reason for this may be the focus on investor losses, high risk bonds, overzealous speculation, and the gratuitous lending practices of a wide spectrum of financial institutions (including Canadian banks) that brought the toxic realities of debt to the forefront. Something urgent had to be done to prevent the collapse of the American financial system. Generous rescue packages for lenders and a long list of financial groups were legislated and duly presented to the wounded financial giants of American finance, including General Motors and Chrysler. Occasionally, some faint reference could be heard about people, real wage-earners with families, losing their homes and how something should be done ‘to help these poor people.’

The spectre of families losing their homes is frightening. A family home normally qualifies as the largest and most significant family asset of all. Purchasing a home has a long historical past as a fundamental financial planning concept. Statistics Canada reported in a 2006 that the single most important asset for Canadians was their principal residence, which accounted for one-third of the $5.6-trillion total. The prospect of losing this central family asset contradicts the philosophy, the great promise of the ownership of private property for middle and lower income groups. The family home is at the centre of their financial universe and it is no less catastrophic for their world to collapse due to forces beyond their control, ability to plan for and ultimately to recover from.

When the credit crunch first arrived in the US in 2008 a cavalier attitude was prevalent with many commentators and pundits. They criticized and ridiculed the stupid lenders who lent to all of these unworthy, tainted borrowers who should never have been lent the money to start with. Soon after, ‘toxic assets’ became a convenient label used to leave the less than favourable impression that this was some sort of rare disease that government should fix. If you were a lender and had a toxic asset, you should try and get rid of it. Meanwhile, very little was said about job loss, the mass devaluation of middle class families’ single biggest asset, or that the wage-earning debtor was not stupid or financially irresponsible.

Today, the casualties of a deep, global recession are more conspicuous particularly
with respect to job loss in the auto sector and how this will effect a co-mingled network
of numerous, subsidiary business interests. However, only their status as workers is
highlighted. Very little is said about their role as debtors.

Over the last thirty-five years, it has become commonplace to avoid public attention
to debtors and the consistent, unstoppable dependency of individuals and families upon
credit. In Canada individuals and families have been sinking into a troublesome morass
of debt for the last 35 years as the following chart illustrates:

Consumer Credit (excluding Mortgages) Statistics; source: Bank of Canada

1975 $23-billion
1985 $58-billion
1990 $98-billion
1995 $116-billion
2000 $187-billion
March 2009 $ 416-Bllion

There is much more than a mortgage payment on the list of family bills. It’s not
quite so simple to narrow everything down to toxic assets either.

In the same report in 2005, Statistics Canada categorized the debt loads/increases of
Canadians as follows:

Between 1999 and 2005:

Total debt in Canada increased by 47.5%. This was largely due to two factors: the
increase in the cost of purchasing a home and the increase in the proportion of
families who owned a home with a mortgage.

The second largest contributor to the increase in debt load was lines of credit, at $68 billion. About 3.3 million families, one-quarter (24.9%) of the total, reported having a line of credit debt in 2005, up from only 15.4% in 1999.

Families reported holding about $46 billion in loans on owned vehicles, a 41.3% increase.

$25.8 billion in outstanding credit card and installment debt, up 58.4%.

Student loans approached $20 billion, a 15.8% increase.

Almost 11 million families reported owning at least one credit card in 2005.

Lenders have been lending more and more credit and borrowers have been going further and further into debt each and every year, in Canada, since the 1970s. There has been something deeper than a mercurial stock market – especially for middle and lower income consumers - individuals and families. It may be more accurate to see the recession as a culmination of events and that the undue reliance on credit, in its many forms, has been tenuous at best.

The recent announcement by the government of Canada to give consumers a 21-day grace period before charging interest, when the balance is paid in full, falls into the category of ‘slightly better than nothing.’ However, it completely overlooks the financial realities of real individuals and families struggling to make ends meet today – not to mention the millions hanging on the cliff of predictable job loss, corporate reorganizations and bankruptcy.

Not capping or regulating the actual interest rates reaffirms this unspoken, unforgiving attitude to debtors. It ignores the sacrosanct status of charge card interest rates - in some cases the rate of 28% per year has remained untouched for the last 35 years – even now when the Bank of Canada’s rate is almost zero at 0.25% for its overnight rate. There doesn’t seem to be any relief for preexisting debt and debtors – all $416 Billion of it.

For those facing financial adversity, what is most needed is compassion and a much better understanding of the realities of personal finance – especially from of the federal and provincial governments. Debt is a huge part of the family economic pie. We cannot shrug our shoulders or pretend that all of the bankruptcies are caused by toxic assets or some temporary, international, economic blip creating job losses. Similarly, it is equally sinister to ignore the pain and suffering of hard working and honest individuals and families and the inescapable losses of the accumulated family wealth of millions of people over, in many cases, a lifetime - such as the family home or the RRSPs that have been cashed to meet family expenses and pay creditors prior to reaching a state of absolute destitution.

John Kenneth Galbraith drew attention in The New Industrial State to the abandonment of profit maximization for modern corporations in favour of stability and predictability. Perhaps it’s time to revisit such principles, especially with respect to interest rates and a recession that has the potential to devastate the middle and lower income groups. This is a time for compassion for the less fortunate and vulnerable and an opportunity to take preventative steps to mitigate the losses, for both lenders and consumers.

This would be an excellent period to redefine the enemy.

Is it the debtor? Governments need to look beyond a debtor-creditor contract and see real people with families and children. People should not be swept away from public attention under the ominous veil of a bankruptcy. Instead, there needs to be more creativity and flexibility with interest rate reductions for honest individuals and families caught in the recessionary malaise; moratoriums on monthly payments and interest for both mortgages and consumer loans, where appropriate; and the overall willingness to help their customers, co-operate with proposals and be reminded that bankruptcy is a tragedy, the final step in the debt collection process.

Douglas Welbanks, is the former Director of Debtor Assistance and Debt Collection for British Columbia. He is an author and director on the board of the Debtor Assistance Society, a newly formed non-profit service scheduled to open in August 2009 that has been designed to help individuals and families with long and short term debt problems through education and workshops.