Skyrocketing Consumer Debt & Falling Rates
With home mortgages, the primary collateral for the loan balance is the home itself. In the event of a future default, the lender can file a foreclosure notice and take the property back several months later. With automobile loans, the car dealership or current lender servicing the loan can repossess the car.

Homeowners often refinance their non-deductible consumer debt that generally have shorter terms, much higher interest rates, and no tax benefits most often into newer cash-out refinance mortgage loans that reduce their monthly debt obligations. While this can be wise for many property owners, it may be a bit risky for other property owners if they leverage their homes too much.

With credit cards, lenders don’t have any real collateral to protect their financial interests, which is why the interest rates can easily be double-digits about 10%, 20%, or 30% in annual rates and fees, regardless of any national usury laws that were meant to protect borrowers from being charged “unnecessarily and unfairly high rates and fees” as usury laws were originally designed to do when first drafted.

Zero Hedge has reported that 50% of Americans don’t have access to even $400 cash for an emergency situation. Some tenants pay upwards of 50% to 60% of their income on rent. A past 2017 study by Northwestern Mutual noted the following details in regard to the lack of cash and high credit card balances for upwards of 50% of young and older Americans today:

* 50% of Baby Boomers have basically no retirement savings.

* 50% of Americans (excluding mortgage balances) have outstanding debt balances (credit cards, etc.) of more than $25,000. 

* The average American with debt has credit card balances of $37,000, and an annual income of just $30,000. 

* Over 45% of consumers spend up to 50% of their monthly income on debt repayments that are typically near minimum monthly payments.


Rising Global Debt 


According to a report released by IIF (Institute of International Finance) Global Debt Monitor, debt rose to a whopping $246 trillion in the 1st quarter of 2019. In just the first three months of 2019, global debt increased by a staggering $3 trillion dollar amount. The rate of global debt far outpaced the rate of economic growth in the same first quarter of 2019 as the total debt/GDP (Gross Domestic Product) ratio rose to 320%.

The same IIF Global Debt Monitor report for Q1 2019 noted that the debt by sector as a percentage of GDP as follows:

Households: 59.8%

* Non-financial corporates: 91.4%

* Government: 87.2%

* Financial corporates: 80.8%


Rate Cuts and Negative Yields

As of 2019, there’s reportedly an estimated $13.64 trillion dollars worldwide that generates negative yields or returns for the investors who hold government or corporate bonds. This same $13.64 trillion dollar number represents approximately 25% of all sovereign or corporate bond debt worldwide. 


On July 31, 2019, the Federal Reserve announced that they cut short-term rates 0.25% (a quarter point). Their new target range for its overnight lending rate is now somewhere within the 2% to 2.25% rate range. This is 25 basis points lower than their last Fed meeting decision reached on June 19th. This was the first rate cut since the start of the financial recession (or depression) in almost 11 years ago dating back to December 2008.

It’s fairly likely that the Fed will cut rates one or more times in future 2020 meeting dates. If so, short and long-term borrowing costs may move downward and become more affordable for consumers and homeowners. If this happens, then it may be a boost to the housing and financial markets for so long as the economy stabilizes in other sectors as well such as international trade, consumer spending and the retail sector, government deficit spending levels, and other economic factors or trends.

We shall see what happens in the near future in 2020 and beyond.

* The blog article above is a partial excerpt from my previous article entitled Interest Rate and Home Price Swings in the Realty 411 Magazine linked below (pages 87 - 91):
August 30, 2019

The Frozen Securities Markets

frozenhousingmarketAs the securitization market for mortgage loans has effectively been “frozen” for several years as I had forewarned many of my readers in various regional and national real estate publications several years in advance of the “official” start of The Credit Crisis back in 2007, we primarily have seen loans being funded which are backed by governmental bodies via Fannie Mae and Freddie Mac (both taken over by the U.S. government back in September 2008) and FHA (government insured financing).


Through the 1st Quarter of 2010, government insured or backed financing represented over 96.5% of all mortgage loans nationwide. This 96.5% number is absolutely staggering for a country which was built upon the idea of a “Free Market” way of life. In recent years, the percentages of government backed or insured mortgage loans may be closer to 97% +.


As I have created financial charts in the past to better support my viewpoints in regard to how bad the world’s financial meltdown is today, there may be over 1,600 TRILLION DOLLARS worth of primarily unregulated derivatives in existence worldwide (as compared to approximately $7 or $10 trillion in combined residential mortgages nationwide).


The Credit Crisis is primarily due to the “unwinding” of these overvalued, complex, and essentially worthless (in some cases) derivatives. It is NOT just a “sub-prime mortgage” problem as portrayed by many in the media as they try to blame the struggling U.S. homeowner for this problem. “Sub-prime” debt represents just a tiny portion (less than 1%) of the overall derivatives debt worldwide.


Many of these same financial derivatives have been leveraged another 10, 20, 30, 40, or 50 plus times their face amount by the owners of these same financial instruments. Many derivatives investments (on and off balance sheet investments) absolutely DWARF the entire combined net worth of many of our largest banks and insurance companies worldwide. If many of the top 20 largest U.S. banks acknowledge how bad their overall financial losses in these complex financial instruments, then they would effectively be insolvent.


To better visualize this risky form of “financial gambling”, please imagine placing $100 on the color “green” on a roulette table. If you win your bet, you may take home approximately 40 times the amount of the bet (or $4,000). However, if you lose the bet, then you owe the casino $4,000. Now, please imagine making that same bet with $1 Trillion Dollars. Could you or your bank afford to take a $40 trillion dollar loss today?


Let’s hope that the FDIC, Fannie Mae, Freddie Mac, FHA, SBA, and other government backed entities will be there for all of us in both the short and long term. Equally as important, let’s hope that more private capital begins to enter or re-enter the financial markets once again in order to begin to “unfreeze” the securities and secondary markets at some point very soon.


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