January 15, 2013

Unintended Consequences Of An Unprecedented Period

The Winnipeg Free Press reports from Canada. “While the days of double-digit house-price increases may be over, analysts are still expecting the Winnipeg market to hold its own. A new report from Royal LePage is predicting a one per cent rise as demand weakens, while Canada Mortgage and Housing Corp. is expecting increases closer to four per cent. And while Winnipeg Realtor’s residential-market analyst won’t be releasing his 2013 forecast until next Wednesday, Peter Squire said his initial thought is the Royal LePage forecast is too conservative.”

“Squire noted Winnipeg has enjoyed 17 straight years of rising house prices, including double-digit gains in seven of the eight years between 2003 and 2010, a six per cent increase in 2011 and a five per cent hike in 2012. ‘We’ve had a good run,’ he said, ‘and I’m certainly not ready to declare it over.’”

The Montreal Gazette. “Condo resales may be down more than 20 per cent in Greater Montreal, but you’d never know it from the pace of sales at the Tour des Canadiens project. Developer Canderel Group has already sold out the Bell Centre project’s more than 500 units in about a month, with additional floors being put up for sale this weekend. And that was during the hockey lockout.”

“Real estate industry observers attributed the Tour’s rapid sales to a combination of marketing, a sales strategy that targeted buyers across Canada and the success of a similar Toronto condo project at Maple Leaf Square. Others argue that the strong interest in the Tour des Canadiens has spilled over to other downtown project, where thousands of units are under construction, or have been announced.”

“Toronto real estate broker Brian Persaud recalled how buyers at Maple Leaf Square made significant returns on their investments, even though the condos cost more per square foot than neighbouring projects. ‘I think word got out that people who bought at Maple Leaf Square were making at least $100,000,’ said Persaud, author of the book Investing in Condos.”

The Globe & Mail. “It would seem that regulators want to dissuade Canadians from buying homes with nothing down. When buying a home, you generally need at least 5 per cent of the purchase price as a down payment. Yet despite all of the recent changes, buyers can still get into the real estate market with little cash on hand. You’re free to borrow your down payment from a line of credit, personal loan or even a credit card.”

“In many provinces, lenders that aren’t federally regulated (like credit unions) can still offer cash-back down payment mortgages. The few that actually do will give you 5 per cent cash to use for your down payment. You then need to cough up only your closing costs, which include legal and inspection fees, the land transfer tax and so on.”

“Various provinces and municipalities provide down payment assistance grants. These programs are typically for people with low or moderate income. Despite these borrowers being higher risk, in some cases, they’re permitted to buy a home with nothing down. There are also specialized programs at individual lenders. For example, Canada’s biggest credit union, Vancity, currently finances an affordable condo project in Vancouver whereby it lends 90 per cent of the purchase price while the developer provides a 10 per cent second mortgage with no interest and no payments.”

“All of these down payment alternatives have one thing in common. They all come with some degree of added risk. It’s curious how Ottawa encourages people to have their own skin in the game, yet sanctions various substitutes to the traditional 5 per cent down payment.”

The Toronto Star. “Canada’s housing ‘bubble’ is more likely to develop a slow leak than actually burst, some of Canada’s top chief economists predict. But a cooler residential real estate market poses other kinds of risks to the economy, the Economic Club of Canada heard Friday. Slowing residential sales means fewer jobs in construction and lower prices will cut the value of most households’ key retirement asset, the club heard.”

“Even if Canada doesn’t see a U.S.-style wave of mortgage defaults, which few economists are predicting, a slowdown in sales will mean a slowdown in new residential construction, the club heard. The construction slowdown could come as soon as mid-summer, said Warren Jestin, chief economist with Scotiabank. It hasn’t shown up yet because so many condos are presold, he said. ‘By the time we get into the second half of this year you’re likely to see housing construction down very substantially,’ Jestin predicted.”

“A prolonged period of little or no growth in house prices could also hurt Canadians’ retirement savings, especially if interest rates also remain relatively low, Jestin cautioned. It’s one of the unintended consequences of an unprecedented period of record low interest rates, the panel said. While the Bank of Canada’s decision to lower its trendsetting rate helped the country survive the worst of the financial crisis of 2008 and the Great Recession that followed, it may have also created other more far-reaching problems down the road, Jestin cautioned.”

“‘Low interest rates are a gift to borrowers, but they’re a penalty to people trying to save for retirement,’ Jestin said.”

The Guardian. “To hear George Osborne tell it when he announced his selection of Mark Carney as the next governor of the Bank of England, Canada is doing very well. It ‘is acknowledged to have weathered the economic storm better than any other major western economy, bank bailouts have been avoided, sustained growth has returned,’ Osborne told the House of Commons.”

“It’s probably time to let you in on a secret. While it’s true that as a nation, Canada learned some sound policy lessons from its own financial and economic meltdowns in the latter decades of the 20th century, a lot of us are now personally up to our eyeballs. In fact, when it comes to mortgage debt, we’re not doing much better than Spain.”

“‘Canadian ‘household debt as a percentage of disposable income has risen by almost 60 percentage points to 165% today,’ Tiff Macklem, the senior deputy governor of the Bank of Canada told an audience at Queen’s University. Here’s the kicker: ‘The bulk of this rise in debt – 66%, or $636 bn – has been in the form of mortgage debt, putting Canadians in an uncomfortable neighbourhood between Spain and the United States in the ranking of household mortgage debt,’ Macklem said. ‘Thanks in part to low interest rates, it’s generally been our policy to become indebted. Just like everyone else in the world.’”

The Financial Post. “A couple we’ll call Tiff and Sandy turned their long-time friendship into a union when they bought a house in British Columbia and combined their fortunes in 2008. Each had a house with a mortgage. Then they bought a new residence and used a line of credit to add a rental apartment to the new house. Their $1.5-million of debt is 12 times their gross employment income. Revenue from the income properties barely covers their total costs — mortgage and line-of-credit interest, taxes, utilities, insurance and maintenance. Add in falling prices in the sliding B.C. housing market and the couple is subsidizing losing investments.”

“They started with 25% conventional down payments, but now find themselves with about 10% equity in the rental units as a result of falling property prices and debt-financed buyouts of former partners. Their return after paying all interest costs, utilities, insurance and taxes is negligible. Unless they can raise rents drastically or realize future capital gains, the investments are flops. They have just $2,000 in cash. If interest rates rise by 1% or 2%, they would be forced to refinance, but they already have 30-year amortizations.”

“Family Finance asked Adrian Mastracci, a portfolio manager and financial planner at KCM Wealth Management Inc. in Vancouver, to work with the couple. ‘The couple’s problems are far too much debt, especially for properties that are poor investments, and an excessive concentration in real estate, for each unit is within just blocks of the others,’ he says. ‘By selling their non-performing income properties, Tiff and Sandy can raise their standard of living, create savings, add to RESP and other registered savings, and increase their financial security.’”




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45 Comments »

Comment by Cantankerous Intellectual Bomb Thrower™
2013-01-15 08:14:24

“Canada’s housing ‘bubble’ is more likely to develop a slow leak than actually burst, some of Canada’s top chief economists predict. But a cooler residential real estate market poses other kinds of risks to the economy, the Economic Club of Canada heard Friday. Slowing residential sales means fewer jobs in construction and lower prices will cut the value of most households’ key retirement asset, the club heard.”

Did America’s bubble-headed economist brigade relocate to Canada?

Comment by Cantankerous Intellectual Bomb Thrower™
2013-01-15 08:16:00

“…most households’ key retirement asset…”

At the risk of appearing dumb, what, pray tell, is the ‘key retirement asset’ for most Canadian households?

Comment by Dave of the North
2013-01-15 08:34:22

You mean beside the house?

Let’s see - Tim Hortons gift cards, various ball caps with the classic Canadian Tire logo, and that jar of pennies that can only go up, up, up in value as the government isn’t making any more pennies.

Comment by Cantankerous Intellectual Bomb Thrower™
2013-01-15 08:41:28

Do Canadians collect hockey cards, the way some Americans collect vintage baseball cards?

If their houses don’t cover their retirements, maybe Canadians could sell their hockey card collections to raise funds.

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Comment by Pimp Watch
2013-01-15 08:41:38

This strange notion that “a house is a retirement” asset….. this has never been true yet it seems to get airplay consistently. Houses are dead assets and always have been.

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Comment by Patrick
2013-01-15 08:51:37

Dave

Eh - you forgot about the case of 24.

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Comment by Arizona Slim
2013-01-15 08:21:44

Did America’s bubble-headed economist brigade relocate to Canada?

‘Fraid so, CIBT. And what did poor Canada do to deserve them?

 
Comment by ProperBostonian
2013-01-15 09:34:29

Further proof that bubble-headed economist brigade has moved to Canada: “Even if Canada doesn’t see a U.S.-style wave of mortgage defaults, which few economists are predicting,”

Which in a year will be changed to: “No one could have predicted that Canada would see a U.S.-style wave of mortgage defaults.”

 
Comment by Beer and Cigar Guy
2013-01-15 10:49:55

“Canada’s housing ‘bubble’ is more likely to develop a slow leak than actually burst, some of Canada’s top chief economists predict…”

Ahhhhh, yes… So it won’t pop like a bubble, it will only deflate a bit, like a souffle. Now where have I heard THAT analogy before?

Comment by Cantankerous Intellectual Bomb Thrower©
2013-01-15 11:24:17

UCF College of Business Administration
Institute for Economic Competitiveness
Nationally Recognized, Locally Focused.
IEC In The Media
No housing bubble, just a soufflé
Posted on Wednesday, November 22, 2006 at 12:27 AM
By Jeff Ostrowski
Original Link: Palm Beach Post, US 11.22.2006
November 22, 2006

Bubbles burst, soufflés flatten. So says University of Central Florida economist Sean Snaith, who denies that the housing market is in a bubble.

He prefers a culinary analogy: Snaith sees the run-up in housing prices as a soufflé, which rises until it’s done, then loses some hot air. Here’s his analysis of the housing soufflé, from UCF’s latest Florida economic forecast:

“The housing soufflé reached its peak in 2005. It has subsequently come out of the oven and has been cooling significantly. Housing starts will continue to fall off in 2007 and 2008, as mortgage rates continue their slow climb and housing inventories are finally sold off.

“This has been a fundamentals-driven expansion in the housing sector (as opposed to a speculative bubble), and, as long as the fundamentals remain solid, the soufflé will not collapse. There is no sign that the demographic, macroeconomic, and financial underpinnings of the housing market will completely dissipate. In terms of prices, there will be some cooling, and the highest points of the soufflé are now settling. As we look beyond 2006, the loftiness of the soufflé will continue to give way, as mortgage rates rise. Barring any reversals in the ingredients of the soufflé, the talk of a national housing bubble will just seem like a lot of hot air.

“Some economists’ dubious predictions of a housing-induced recession are being proven wrong. Currently, the most pessimistic predictions expect prices to fall 10 percent to 20 percent in some areas. If these predictions come to pass, it would hardly be indicative of a bubble bursting. If the Nasdaq had only fallen by 10 percent to 20 percent from its peak, would we be referring to it today as the dot-com bubble?”

Comment by Mugsy
2013-01-16 01:42:47

Oooohhhh! I love when Prof. CIBT reprints the classics!

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Comment by Cantankerous Intellectual Bomb Thrower™
2013-01-15 08:27:15

“Their $1.5-million of debt is 12 times their gross employment income.

They started with 25% conventional down payments, but now find themselves with about 10% equity in the rental units as a result of falling property prices and debt-financed buyouts of former partners.

‘The couple’s problems are far too much debt, especially for properties that are poor investments, and an excessive concentration in real estate, for each unit is within just blocks of the others,’ he says. ‘By selling their non-performing income properties, Tiff and Sandy can raise their standard of living, create savings, add to RESP and other registered savings, and increase their financial security.’”

Let’s roughly estimate the $1.5-million in debt was the amount of the property purchase prices not covered by the ‘25% conventional down payments.’ So $0.5-million ($500,000) in down payments on an initial purchase of $2-million came from the couple’s pockets.

And now their equity has gone from 25% down to 10%, a loss of 15% of $2-million or $300,000, which is a 60% loss on their initial outlay of $500,000. And Mr. Financial Planner Dude says the solution is to dump their ‘non-performing income properties?’

Wouldn’t they do better by just riding the falling knife all the way to the floor?

Comment by Arizona Slim
2013-01-15 08:48:49

And now their equity has gone from 25% down to 10%, a loss of 15% of $2-million or $300,000, which is a 60% loss on their initial outlay of $500,000. And Mr. Financial Planner Dude says the solution is to dump their ‘non-performing income properties?’

I don’t know about the rest of you, but I’m not interested in buying someone else’s non-performing income properties. I don’t care if they’re being dumped, I just don’t want ‘em.

Comment by joesmith
2013-01-15 10:50:26

I like income properties as an investment class, but not shiny new ones that have HOA or condo fees. And too many things can go wrong with high-priced rental properties.

Expensive nabes are also harder to deal with because of restrictions on using entrances for move-in/move-out and restrictions on when and how maintenance can be done (e.g. can only use certain gates or elevators at certain dates and times).

My idea rental property would be ugly but sturdy as heck. Duplex or, even better, rowhome (with interior being the best). Concrete block behind brick. Cheap enough purchase price to revamp the elec and plumbing (run PVC throughout). No central air so big savings by not running ductwork throughout (the renters can get window units). 2 or 3 BR (harder to rent 1 BR or more than 3 BR). Not too many sq ft (keeps tax assessment down). Lastly, really have to emphasize that ugly & outdated houses are the best… you can open up the floor plan at minimal costs but knocking out non-load-bearing walls and can remove the “ugly” factor by pulling down wallpaper, having the place painted, and pulling up carpet to put down Pergo (or similar). The key is to do just enough to make it rentable to decent people but not so much that the investment keeps you up at night.

The other key is to buy cheap, keep lowballing until you find someone who has given up on holding out for bubble-type price. Out-of-state children of a deceased homeowner are more likely to firesale than your average homedebtor.

Comment by oxide
2013-01-15 12:58:33

How do you plan to heat the house without ductwork?

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Comment by joesmith
2013-01-15 13:25:02

Keep the existing baseboards or radiators. No new ductwork.

 
 
 
Comment by Cantankerous Intellectual Bomb Thrower©
2013-01-15 12:59:52

“I don’t care if they’re being dumped, I just don’t want ‘em.”

If I had $500K to blow, I’d take them at 75% off…

Comment by Pimp Watch
2013-01-15 15:01:45

“If I had $500K to blow, I’d take them at 75% off…”

And you’d still be paying too much.

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Comment by Cantankerous Intellectual Bomb Thrower™
2013-01-15 08:54:08

On the other hand, if you and a bevy of other stupid fools are all soon going to dump your McTrump empire of real estate holdings, it’s best to be the stupid fool who dumps first.

Comment by Beer and Cigar Guy
2013-01-15 10:52:18

Dump now or be priced-in forever?

 
 
 
Comment by Cantankerous Intellectual Bomb Thrower™
2013-01-15 08:59:29

How long from now until when the Canadian government (i.e. central bank) steps up to reflate the value of Canadian households’ “key retirement assets”?

 
Comment by joesmith
2013-01-15 09:08:59

“A prolonged period of little or no growth in house prices could also hurt Canadians’ retirement savings, especially if interest rates also remain relatively low, Jestin cautioned. It’s one of the unintended consequences of an unprecedented period of record low interest rates, the panel said. While the Bank of Canada’s decision to lower its trendsetting rate helped the country survive the worst of the financial crisis of 2008 and the Great Recession that followed, it may have also created other more far-reaching problems down the road, Jestin cautioned.”

A PRIMARY RESIDENCE IS NOT RETIREMENT SAVINGS. Jesus, when will people understand this?

Even if you downsize or become an equity vulture (move to flyover or floriduh), the best way to think of the extra cash is a pool of money to pay for repairs, property taxes, insurance, and utilities. To me, this means that you’ve covered some of your expenses, but it’s still not retirement savings.

Comment by joesmith
2013-01-15 09:31:23

Retirement savings: A store of money you can use to pay your living expenses as well as some retirement activities (can be mundane or exciting, but if you’re not working you have to be doing something during your waking hours).

Unless you’re going to HELOC your house, a primary residence isn’t going to become an ATM that can pay your bills for you.

Comment by Cantankerous Intellectual Bomb Thrower™
2013-01-15 09:35:22

“Unless you’re going to HELOC your house, a primary residence isn’t going to become an ATM that can pay your bills for you.”

Kevin Hunt: Is This A Federal Reverse-Mortgage Offer Or A Scam?
((MCT) )
January 14, 2013|Kevin Hunt - The Bottom Line, The Bottom Line

The successful scam letter looks authentic. But what happens when an authentic offer looks like a scam?

Shirley Stewart of South Windsor recently received a multi-color form letter — the old style, U.S. Postal Service type — inviting her to apply for a reverse mortgage through a federal program administered by the Department of Housing and Urban Development. It looked like an official government notice.

Bold blue type, bordering a photograph of an older woman, declared “Approved HUD Lender” and “You May Be Approved For A FHA Benefit HECM Program.” Just above the Stewart household’s address, in bold black, was a reference number.

At the bottom, below an explanation of rights/benefits and limitations/restrictions, was the name of a benefits specialist, Garry Bates, and a bank name, Evolve Bank & Trust of Auburn, Mass.

Stewart, wary, prepared to discard the letter.

“No,” she says. Not interested.

Instead, she passed it along to The Bottom Line.

“My understanding of a reverse mortgage,” she says, “is that, when you die, the house is sold and there’s usually nothing left at that point. “[The letter] seemed to be promising that if there was anything left you could leave it to your kids, but I’m sure there wasn’t going to be much under those circumstances.”

Stewart is right about the dangers of a reverse mortgage and showed good judgment in suspecting a scam. Yet the offer was legitimate, as was the bank and the benefits specialist. Evolve is listed by HUD as an approved lender.

 
 
Comment by Cantankerous Intellectual Bomb Thrower™
2013-01-15 09:32:27

“A PRIMARY RESIDENCE IS NOT RETIREMENT SAVINGS.”

How did you manage to avoid the brainwashing?

Comment by ProperBostonian
2013-01-15 09:38:38

And this other brainwashing:

“Winnipeg has enjoyed 17 straight years of rising house prices, including double-digit gains in seven of the eight years between 2003 and 2010, a six per cent increase in 2011 and a five per cent hike in 2012. ‘We’ve had a good run,’ he said, ‘and I’m certainly not ready to declare it over.’”

Argh! Why is this reported as a GOOD THING? All it means is that housing will be more expensive overall. If you sell your place, which is the only way to realize the gain, you still have to move somewhere else and unless it’s outside of Winnipeg, all your so-called gains will be eaten up by the cost of buying an equally bubbled house.

Comment by Cantankerous Intellectual Bomb Thrower™
2013-01-15 09:43:43

Moreover, after such monstrous price appreciation, there is a severe shortage of greater fools available to buy your overpriced dump.

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Comment by ProperBostonian
2013-01-15 11:02:07

Overpriced dumps is something we have a lot of in Boston. From the outside, the place will look like a charming historical New England house. You get inside and it looks like sometime in the 1980s the Three Stooges decided to renovate.

 
 
Comment by Steve J
2013-01-15 09:53:30

Any one know what percent real estate is of the Canadian economy?

I have the feeling there are going to be quite a few unemployed construction workers pretty soon.

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Comment by Cantankerous Intellectual Bomb Thrower™
2013-01-15 10:04:44

…to be shortly followed by a boom in government construction projects…

 
 
Comment by alpha-sloth
2013-01-15 10:03:20

If you sell your place, which is the only way to realize the gain, you still have to move somewhere else and unless it’s outside of Winnipeg, all your so-called gains will be eaten up by the cost of buying an equally bubbled house.

Ah! That’s why you have to own two houses. Or more!

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Comment by Lionel
2013-01-15 22:02:34

Well, Winnipeg is a magnificent tropical paradise, so it makes perfect sense that its housing stock has experienced such terrific appreciation.

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Comment by oxide
2013-01-15 13:00:25

So who here wants to pay rent when they’re 75? We don’t all have kids we can move in with.

Comment by joesmith
2013-01-15 13:27:07

A paid off house is still not the same thing as retirement savings. Unless you have a currency printing press in the basement :-P

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Comment by Steve J
2013-01-15 13:37:14

But a paid off house can reduce the need for an income stream.

 
Comment by joesmith
2013-01-15 13:57:38

It still can’t provide income, unless you count borrowing against it.

The point of my comment was to challenge the idea (from the Real Estate Industrial Complex) that high house prices are good for people and that one of the reasons they are good is that high prices = retirement income from one’s housing investment).

I know money is fungible and I realize some people can time the sale of a house so they do make some “profit”. But the mindset where high housing prices = retirement income… that’s just stupidity.

 
Comment by alpha-sloth
2013-01-15 15:05:01

. But the mindset where high housing prices = retirement income… that’s just stupidity.

No, you don’t get it. Prices will be very high in Canada, because they are smart, and very low in the US, because we are dumb. So you have a lot of money left over when you sell your house in Canada and move to Miami. (That’s the Canadian perspective.)

 
 
Comment by Cantankerous Intellectual Bomb Thrower©
2013-01-15 14:44:51

“So who here wants to pay rent when they’re 75? We don’t all have kids we can move in with.”

I’m saving money now that I could be using to pay off an overpriced house in order to have some left to pay rent when I’m 75. And I don’t anticipate the agony of having to short sell an underwater home with nothing to show for years of mortgage payments that went straight down the toilet…

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Comment by Pimp Watch
2013-01-15 15:26:10

So who here wants to pay rent when they’re 75?

You are the Queen of Strawmen.

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Comment by WT Economist
2013-01-15 11:11:26

“Canada’s housing ‘bubble’ is more likely to develop a slow leak than actually burst, some of Canada’s top chief economists predict.”

I believe the word is souffle. At least that’s the one Liereah used.

Comment by Cantankerous Intellectual Bomb Thrower©
2013-01-15 11:25:20

Sean Snaith (just reposted the 2006 article above…)

Comment by WT Economist
2013-01-15 12:33:40

Yup, that’s it. After inflating the housing market just passes some gas.

Comment by ProperBostonian
2013-01-15 16:31:45

A Snaifu.

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Comment by Cantankerous Intellectual Bomb Thrower™
2013-01-15 23:58:42

Yegads!

Local News
Real Housewives of San Diego Looking for Talent
By San Diego 6 News Editors
Story Published: Jan 15, 2013 at 9:18 PM PST
Story Updated: Jan 15, 2013 at 9:19 PM PST

SAN DIEGO - It looks like the Real Housewives trend is coming to San Diego. The company making the TV show - Asylum Entertainment 8-) - has a casting call out right now looking for women who live in the area.

The producers are looking for upscale, women who live fabulous, glamorous lives along with their busy social calendars.

Tweet sent to us by the casting agent said they are focusing on the La Jolla and Rancho Sante Fe areas.

No word yet on a production schedule or when the show might hit the air.

If you are interested in auditioning for the potential new “real housewives of san diego” show, email your name, age, bio, current photos and phone number to alex@alexshaw.Tv.

Comment by SaladSD
2013-01-17 22:50:06

Sweet! The La Jolla plastic surgeons must be thrilled, another batch of fem-bots to advertise their merchandise. “Product” placement, to be sure. I just want to say one word to you. Just one word. Yes, sir. Are you listening? Yes, I am. Plastics.

 
 
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