# The Mortgage Crisis



## GuitarsCanada (Dec 30, 2005)

I keep an eye on the financial and economic scene daily. More as entertainment lately than actually seeing how much money I have lost in the stock market. But what I find amazing is all these stories coming out now of people in the States that are losing their homes. Amazing not that they are losing the homes, rather, amazing that they ever got them in the first place. here is an example, one of thousands just like it. A single woman working as a cosmetics salesperson. Purchased a home with a mortgage of $472,000 WITH NO MONEY DOWN. Her mortgage payments were $3800.00 a month.

I think that gives you a little idea of what happened down south with the mortgage crisis.

Try walking into any bank in Canada and getting away with that.


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## mhammer (Nov 30, 2007)

One of the reasons why that could happen would appear to be a near-Ponzi-scheme that the mortgage companies were running, in which they would sell interests in the mortgages to others. In other words, they were effectively lowering their own risk on the backs of people who were purchasing/expecting a cut of what was never really going to come. You'll forgive me if I don't follow these things closely enough to know the lingo.

I have a childhood friend who spent some time in boiler rooms and occasionally bilking people in phone scams. His attitude was that the ones who would get bilked were generally those who were expecting something for nothing. While I do not condone what he did, it is also clear to me that he was right about how easy it was to not feel guilty in those circumstances. Grownups *should* realize that you can't get something for nothing, and that you can't get yourself into a huge mortgage like what you described without there being some sort of sacrifice involved.

At the same time, contemporary North American notions of what "success" is are so bizarrely twisted as to make it easy for folks to think that if they drive around in a car they can't possibly afford to even pay the insurance on, let alone pay off, then that must mean they are successful. I guess it is the same mentality that lets people think that if they look brownish enough all over, by use of chemicals and tanning beds, it makes them "exotic" and seem rich. And the same mentality that makes people think that if they have a great website then they have a "real business". Weird.


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## GuitarsCanada (Dec 30, 2005)

I don't think it will go political. But I do find it very intersting and I appreciate your explanation. It sounds very feasible and likely that many of these people were thinking just that. I cannot comment on the banking and mortgage lending practices that were going on becuase I dont understand most of them anyway. But I would like to learn more. I find it amazing that this was allowed to go on.


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## Rugburn (Jan 14, 2009)

Paul is absolutely right. Add to this, the same people having to own a brand new car/truck that is priced out of their means, and things get ugly fast. The Big 3 decided in their great wisdom to start financing car sales through their dealerships. "Let's not let the banks run away with all that juicy interest money on these car loans". I don't know about you guys, but if I've got a mortgage that's killing me, a family to feed and clothe, and what have been some crazy gas prices, the car payments may just get neglected. Another layer to heap on the steaming pile.

Shawn


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## GuitarsCanada (Dec 30, 2005)

Paul said:


> One thing my wife and I are discovering, (and I hope that more of us figure out), is that we make waaaaaay more money that we really need. I've shopped at Zehrs for years because it was convenient. I'm now shopping with coupons at Food Basics and I am now, (and I am NOT making this up), I am now spending less than 1/2 as much money on food. Our weekly grocery bill for 2 overweight adults not on a diet is less than $65.00. We eat healthy and we don't go hungry.



Clearly, we could all cut back. Marnie and I have lived high for many years. I made really good money and we found a lot of ways to spend it. I did, however, manage to save a pretty large sum at the same time. Thanks to those savings were were able to open our business. But when you sit down and start thinking about the things you could do without, it adds up and quickly. Things like you mentioned are true all over. I guess when it was flowing it flowed. So now we get a scare, maybe thats good for all of us.


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## GuitarsCanada (Dec 30, 2005)

Rugburn said:


> Paul is absolutely right. Add to this, the same people having to own a brand new car/truck that is priced out of their means, and things get ugly fast. The Big 3 decided in their great wisdom to start financing car sales through their dealerships. "Let's not let the banks run away with all that juicy interest money on these car loans". I don't know about you guys, but if I've got a mortgage that's killing me, a family to feed and clothe, and what have been some crazy gas prices, the car payments may just get neglected. Another layer to heap on the steaming pile.
> 
> Shawn


Agreed. But let me tell you this. If by chance you really "need" a new vehicle now is the time to buy (if you have the cash) becuase they are just about giving them away. I seen a $39,000 truck listed in the states last week for $17,900


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## GuitarsCanada (Dec 30, 2005)

*The Thinking Process*

Getting back to that first mortgage I mentioned. We must explore the thinking process more deeply. I ask the question to anyone who would reply. "Would you get into a $400,000 mortgage with a payment of $3800 a month"? I mean, what is the thinking process there? Other than the thought of flipping it, but I am sure there were many that were not thinking that way.


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## Guest (Mar 5, 2009)

Paul said:


> The risk of this going political is the extreme right position that gov't should keep out of things and let private enterprise and the free market solve the problems. Regulations and taxes impede the healthy growth of the economy, or so the story goes.
> 
> OTOH, (and this is more in line with what I believe), unregulated free enterprise means folks will lie and cheat. Regulations, (not self regulation, but actual gov't oversight), will hopefully deter and catch thieves.


The argument for less regulation I believe in has to do with letting the free market fail. Fannie Mae and Freddie Mac are fast becoming the dominate shareholders in shill business at the expense of the U.S. tax payer simply to prop up models of investment and lending that are now proven so very wrong they need to be left to die. And their supporters need to sink with those ships.

That's the free market solution that I believe in. It's harsh, but it's truly the only one that corrects the problem. Anything with a bailout attached isn't a free market solution. The government can still make regulations, but it shouldn't be bailing out businesses that abuse or otherwise extend the limits of the system to the point where they break.

Dammit. I swore I would never get into these political threads.

If you're interested in some of the math that helped convince banks that leveraging their loans:assets something like 30:1 check out this month's Wired 17.03 -- The Formula That Killed Wall Street. An absolutely fascinating look at the world of risk assessment and financial mathematics. And how relying too much on one formula is a recipe for disaster.

I'm also a daily reader of Mish's Global Economic Trend Analysis blog. He's cynical -- but he's right. And he gives it all to you in a very approachable manner.

And for a little levity here's the sub-prime mortgage scheme explained by potty-mouthed stick figures.


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## Guest (Mar 5, 2009)

Paul said:


> I hate the word "bailout". It's a loan. The last time a major US automaker was "bailed out", Chrysler paid back the money in full, with interest, ahead of time. So far there is no evidence that can't work again.
> 
> The problem with letting things die is that too many things die with them. Often times a pregnant woman will be kept alive until a pregnancy is viable. That's a lousy analogy, but it's the best I have. AIG alone has already received 5 times as much money as 2 of the Detroit 3 are requesting, with much less fanfare or hoopla. If GM is allowed to die a quick death, the collateral damage to the Tier 2 and Tier 3 supply base would be catastrophic.
> 
> The cost of intervention/bailout/nationalization/gov't backed loans, etc. is high. OTOH, there is a lot of educated opinion out there that doing nothing will cost more. What we don't know, and can't know until later, is what the correct "something" or "somethings" is that must be done.


The common misconception these days is that this situation is unique. It isn't. Ask Japan how well the government backed loans are working for them. And Bernanke is regretting the AIG handout big time these days. Said as much.

Your analogy, vile though it is, is flawed in that there is a definite end to the suffering. Someone dies, some thing new is born. There is no talk of death or birth in the handout. Only continual resuscitation of a system that is no longer alive. If giving GM money meant that it would be dismantled humanely and new car companies would rise from the ashes I'd be all for it. No, the money is going to support and labour union system and a business plan that no longer function.

That's it for me though. I swore I wouldn't do political. I won't. Ultimately what you or I think means nothing -- the suits in Washington and Ottawa are doing what they think is best.


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## keto (May 23, 2006)

I think Paul has an excellent explanation of what is happening, over the course of 2 or 3 of his posts. I work in the financial industry, I do several things but collecting accounts is one of them. Thank <diety> I am not in the same position in the USA, the people in my position have nightmare jobs right now. We are primarily an agricultural lender, a big part of that these days is the acreage market. Guess what DOESN'T get paid first, before the credit cards, the Escalade payment, and your unaffordable mortgage? That's right, the cute little yard tractor. Anyone wanna buy one cheap, we got lots.

I agree strongly with iaresee, the first time I heard 'bailout' I cringed and every nickel that's been poured into the system has done bad things for the long term economic health of most north americans, in my opinion. Let the market and the economy find its own bottom, thanks very much. As noted, it will kill off some of the trash and we will be stronger for it later. Yes, it will hurt worse in the short term.

I do believe particularly the Americans need more, not less, regulation in their banking system. Canada's is fairly highly regulated, but is a shining star in the financial world right now. As you might know from some of the recently released financial results, regulation does NOT equal lack of profit. Nor does it keep out ALL the crooks, just most of them.


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## Stratin2traynor (Sep 27, 2006)

Interesting thread. Letting the Big 3 fail (or even one of the big three) would have a catastrophic domino effect on the economy. The government knows this and really has no choice but to bail out the automakers.


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## GuitarsCanada (Dec 30, 2005)

Paul said:


> I heard the other day a not so facetious idea that they should stop teaching evolution in highschool and replace it with mandatory classes in basic household financial planning.


I think this is a very good thing


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## mhammer (Nov 30, 2007)

I think the next 2 years will see a serious re-evaluation of the role of "growth" in contemporary society. 

The attraction value that "growth" has for investors is immense. Enough, that this is why people continued to invest in Nortel even though they didn't seem to have all that much of a client base anymore. After all, they were buying up this and that (with investment moneys and loans, NOT with revenues), and erecting all this real estate here in Ottawa. So there was this sense of growth and the promise of profitability based on mere impressions (well, that and some book-cooking). Same thing with the sub-prime mortgage thing. People figured that "growth was inevitable" and housing prices would only go up, which would allow me, the home-buyer, to turn my house over and move up to a bigger one, even if I couldn't afford the one I was in...or an apartment for that matter. (Can we prosecute Tom Vu, and his own-property-with-no-money-down cronies, for the current crisis? Pretty please??)

The thing is that, while it obviously happens, growth is neither inevitable nor necessarily sustainable. When you blow enough air into the bubble, and there is no more gum to back it up, no matter how hard you can blow, the bubble bursts and you end up with gum all over your face. And that's pretty much what happened the past 2 years.

Incidentally, last nights "Daily Show", that gave a brief recap of the sorts of economic/financial advice/predictions given out by "the wizards" and go-to people the last 2 years, was absolutely brilliant. The kind of elegant savagery I used to wait for as a kid when Edouard Carpentier would do a double backflip from a standing position on the turnbuckle, and smack the smug off the faces of his enemies.


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## GuitarsCanada (Dec 30, 2005)

Paul said:


> The thing is that it _wasn't_ a $3 800.00 payment at first. It was something much much less that they could afford for a the first couple of years as a "teaser" rate to get them in. There were even negative mortagages where the loan payment was LESS than the interest owning. The longer people stayed in their houses, the more the principal went UP!!
> 
> There were also no requirements for proof of income or employment for the borrowers. They called them liar loans or Ninja, (No Income, No Job or Assets) loans.
> 
> ...


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## kat_ (Jan 11, 2007)

I'm not following the US side of this much but I'm in the middle of trying to get a mortgage here in Canada and I can't believe how difficult it is.

We're buying a house for $228,000. We can put up to $160,000 down if we really need to but I'd rather put about $100,000 down and keep the rest where it's currently invested. We both work full time and my father-in-law is willing to co-sign. 

We have no other debts and that is causing the problem. Yesterday I had to write a letter explaining why we have no debts. I couldn't believe I was writing a letter to explain to a bank that we save up until we can afford stuff and then pay cash (debit) for it. This apparently confuses them. Now they want me to fax in all of my utility statements, phone statements, and rent receipts for the last year so that they can see that we've never been late on a payment. I'll do that this morning.

If this doesn't get sorted by tomorrow I'll be pulling all of my money out of where it's invested and my father-in-law will lend us the rest so that we can just buy the house outright. I find it absurd that we can buy the house without a mortgage but we can't get a mortgage.


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## GuitarsCanada (Dec 30, 2005)

Paul said:


> Fair enough, I shouldn't speak to your example. Much of what I have read about the US housing/mortgage meltdown has roughly followed the Adjustable Rate Mortgage with a teaser rate model.
> 
> The lending institutions weren't on the hook though....they sold those "assets" off. The original lenders made their money from up-front fees. The institutions that bought the "assets" probably assumed a 3% to 5% default rate, which was an acceptable loss. They are getting much higher defaults on properties that are now worth much much less than the outstanding principal.


I don't want to break my own rules and mention anything political. So I will just hint at this and say that I have no sympathy whatsoever for the lending institution or the idiot homeowner in my OP example. They both lose their shirts... well too bad. Don't make stupid decisions.


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## GuitarsCanada (Dec 30, 2005)

kat_ said:


> I'm not following the US side of this much but I'm in the middle of trying to get a mortgage here in Canada and I can't believe how difficult it is.
> 
> We're buying a house for $228,000. We can put up to $160,000 down if we really need to but I'd rather put about $100,000 down and keep the rest where it's currently invested. We both work full time and my father-in-law is willing to co-sign.
> 
> ...


Seems overboard to me. Our banks have always done background on debts, payments etc. I think that is the prudent thing to do. If you lend money you want some kind of idea that you will get paid back. I think right now they are tightening it even more. But for established customers, like you, they should be treating you better.


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## Rugburn (Jan 14, 2009)

This was on the Daily Show last night. This may be the break down of facts your lookung for. Go to Daily Show episodes then click on March 4. 

http://watch.thecomedynetwork.ca/th...barack-obama/best-of-barack-obama/#clip145169

Shawn


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## mhammer (Nov 30, 2007)

GuitarsCanada said:


> Go back to my OP. This was a single person, one medium income. So where I am coming from is what kind of lending institution is giving out a $400K + loan to a person like this, no money down. The second part is why would a person like this even think of purchasing a home for $400K with no money and $3800 a month? As far as I know there was no teaser rate. May have been something but overall pretty stupid move.


Now here's the head-scratcher. Suppose this same individual had gone to a bank, and requested a loan for the same amount to start up a business. Don't you think the bank would have put that person through the ringer with respect to having a clear and feasible business plan? So how come one needs to provide incontrovertible evidence of imminent profitability for a small business loan, but little or no evidence for a loan of identical amount for home purchase?

That, for me, is the clincher, and I return again to belabour the point of what the current basis of industrialized economies seems to be these days: the *appearance* of growth, best exemplified by real-estate moguls, the real estate market, and the reliance on illusion, hype, and expectation as the basis of price-point. I'm not knocking real estate folks - wear that jacket proudly - but its the notion that this is the very best exemplar of how the economy is *supposed to function* at its peak that drives me up the wall and down the other side. It's an *outlier*, folks, not the *prototype*!!


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## Starbuck (Jun 15, 2007)

kat_ said:


> I'm not following the US side of this much but I'm in the middle of trying to get a mortgage here in Canada and I can't believe how difficult it is.
> 
> We're buying a house for $228,000. We can put up to $160,000 down if we really need to but I'd rather put about $100,000 down and keep the rest where it's currently invested. We both work full time and my father-in-law is willing to co-sign.
> 
> ...


Find A mortgage broker, they'll get you one WITH a good rate.


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## kat_ (Jan 11, 2007)

Starbuck said:


> Find A mortgage broker, they'll get you one WITH a good rate.


We're using a mortgage broker. Have been all along.


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## nitehawk55 (Sep 19, 2007)

kat_ said:


> We're using a mortgage broker. Have been all along.


Beware of some of these Mortgage brokers , they arn't all that and don't always lead you down the right paths . Your situation sounds obsurd , I would look elsware and I wouldn't be playing that stupid game with the bank you are mentioning , they do not deserve your business and should not be treating you like that .


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## Guest (Mar 6, 2009)

nitehawk55 said:


> Beware of some of these Mortgage brokers , they arn't all that and don't always lead you down the right paths . Your situation sounds obsurd , I would look elsware and I wouldn't be playing that stupid game with the bank you are mentioning , they do not deserve your business and should not be treating you like that .


A HUGE +1 to that advice. Shop around. Make them beg. They will.


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## RIFF WRATH (Jan 22, 2007)

have you approached a credit union???.............worked for me last go around, when no one else would talk to me................


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## kat_ (Jan 11, 2007)

nitehawk55 said:


> Beware of some of these Mortgage brokers , they arn't all that and don't always lead you down the right paths . Your situation sounds obsurd , I would look elsware and I wouldn't be playing that stupid game with the bank you are mentioning , they do not deserve your business and should not be treating you like that .


I didn't mean to threadjack the discussion but thanks to everyone who let me vent yesterday. Here's a update - 

We talked to a person at Alberta Treasury Branch yesterday. This is the first person who has been both polite and competent. Up until now we've had to choose between those. She spent a lot of time trying to understand my employment situation (I teach guitar so it's steady work but self-employed sub-contracting) and she was able to actually explain why we'd been having problems. It turns out my husband has no credit score. At least he doesn't have a bad credit score, but at first she thought it was a computer glitch since it's strange for someone in his 30s to not have any score. That automatically yellow-flags the application so it needs to go higher up to be approved. Otherwise it looks good.

So yesterday was a huge relief since someone has finally talked to me and let me know where we stand instead of just requesting a seemingly endless trail of papers with no explanation. Hopefully ATB approves us since they are also offering the best mortgage we've seen (lowest rates and the most opportunity for early repayment.) I will definitely be closing my old CIBC savings account and moving it to ATB. They have been absolutely wonderful to deal with and I wish I'd talked to them first instead of wasting so much time with the mortgage broker.


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## mhammer (Nov 30, 2007)

Ah, superficial indices of......anything. Gotta luv 'em.

Kids, let this be a lesson to you. * Always* make critical decisions, especially about other people, on the basis of superficial marginally valid indices.9kkhhd

Honestly, I seem to spend half of my job trying to prevent that very thing. Whenever I am asked to provide data, or an interpretation of data, or report, or even simply design a means for acquiring data, my first instinct is to think "Okay, now how is some doofus in authority going to potentially misinterpret this and think it means more than what it really does?".


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## GuitarsCanada (Dec 30, 2005)

mhammer said:


> Ah, superficial indices of......anything. Gotta luv 'em.
> 
> Kids, let this be a lesson to you. * Always* make critical decisions, especially about other people, on the basis of superficial marginally valid indices.9kkhhd
> 
> ...


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## keto (May 23, 2006)

mhammer said:


> Ah, superficial indices of......anything. Gotta luv 'em.
> 
> Kids, let this be a lesson to you. * Always* make critical decisions, especially about other people, on the basis of superficial marginally valid indices.9kkhhd
> 
> Honestly, I seem to spend half of my job trying to prevent that very thing. Whenever I am asked to provide data, or an interpretation of data, or report, or even simply design a means for acquiring data, my first instinct is to think "Okay, now how is some doofus in authority going to potentially misinterpret this and think it means more than what it really does?".


I don't know that the analogy applies in this case....a credit bureau score is something that probably 99% of financially stable adults past 'normal' school age would have, and I don't think 99% is an exaggeration. So, it is confusing to the banker no doubt. I work in the industry (25 years this month!) and would be very suspicious of someone with no credit score who appears otherwise stable (banks love stability in their clients - address, job, etc.).

Back to the original topic, obviously the financial industry threw long standing practices out the window...or I guess they were legislated out, or a provision to bypass them was put in, however you care to look at it. And the consumers said, 'Wow! I can have THAT?', and here we are today.


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## mhammer (Nov 30, 2007)

My just-a-little-too-obliquely-delivered point was that one cannot simply rely on "Does he have a credit rating? Yes/No" You actually have to look through the *entire file* and find out more, which was clearly not done until you pressed a little more If somebody has no credit rating, and the odds are VERY high that they ought to have one, given everything else about them, then clearly no decision should be made on the basis of no evidence of a credit rating, since something is amiss. I'm sure it is useful information, but it is merely a superficial index, NOT the whole story.

I was trying to make a snide comment about the tendency of organizations to take snippets of info and run with them.


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## allthumbs56 (Jul 24, 2006)

mhammer said:


> My just-a-little-too-obliquely-delivered point was that one cannot simply rely on "Does he have a credit rating? Yes/No" You actually have to look through the *entire file* and find out more, which was clearly not done until you pressed a little more If somebody has no credit rating, and the odds are VERY high that they ought to have one, given everything else about them, then clearly no decision should be made on the basis of no evidence of a credit rating, since something is amiss. I'm sure it is useful information, but it is merely a superficial index, NOT the whole story.
> 
> I was trying to make a snide comment about the tendency of organizations to take snippets of info and run with them.


Much like statistics, such as when New Brunswick took the Canadian Cancer Society stat: "1 in 5 people smoke" and turned it into "1 in 5 children may be exposed to tobacco smoke in vehicles".

The former, when surrounded by plenty of asterisks is somewhat truthful and it used most often to justify the great impact all of our/their cessation efforts have had on the number of people smoking. They started with a "2 in 5" stat. 

The latter is a blatent lie, unsupportable in any way, but sounds good and official and .... given the bandwagon, who was really going to contest it?

Awe now I'm started ....... how about our local St. Catharines firefighters - who were handed 6 mil in retroactive pay in recogition of their new post 9/11 role as Homeland Defenders.

Uh-oh my blood is starting to boil.

Appologies in advance to the Mods - the smoking comment is strictly an example of incorrectly applied statistics - not anything to do with smoking itself - I have no horse in that race (anymore) :smile:


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## GuitarsCanada (Dec 30, 2005)

allthumbs56 said:


> Much like statistics, such as when New Brunswick took the Canadian Cancer Society stat: "1 in 5 people smoke" and turned it into "1 in 5 children may be exposed to tobacco smoke in vehicles".
> 
> The former, when surrounded by plenty of asterisks is somewhat truthful and it used most often to justify the great impact all of our/their cessation efforts have had on the number of people smoking. They started with a "2 in 5" stat.
> 
> ...



I must have missed this story, whats with the 6 mill again?


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## allthumbs56 (Jul 24, 2006)

GuitarsCanada said:


> I must have missed this story, whats with the 6 mill again?


Not sure if you're impacted in Thorold as the firefighters are municipal. But here they just got their contested "3/6/9 retention pay" + 4 years in cummulative back pay increases awarded by arbitration. According to the paper 158 firefighters will get a lump sum averaging 40K = 6 mil total.

The retention pay in question was originally devised to keep Toronto cops from leaving that area - a "pay them more because it costs more to live there" idea. Well you know how it goes ..... then the firefighters got it ........ then North Bay got it ...........now it's spread to St. Kitts and is working it's way through the rest of Ontario.

The really silly thing is that the contract in question (and settled in March/09) had already pre-expired on Dec 31/08 .............. they are now back at the table for the next round.

Depending on seniority some of these stiffs will get around 100K in a lump sum. What are the odds that we can move the firehall to China?


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