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):
April 5, 2013

The Shadow Inventory vs. Declining Home Listing Inventory

How is it possible that home listing inventories have fallen in many regions by upwards of 30% to 70% in year over year comparison numbers in spite of our ongoing sluggish economy? With the rapid home listing number declines in various regions, then many homes have increased in value by 5% to 17%+ just over the past year as well.
Are there potentially several million "Shadow Inventory" foreclosure homes which may have been delayed partly due to a wide variety of legal and financial reasons? Are banks trying to artificially suppress listed home inventory levels so that home prices slowly increase once again?
Are banks more concerned about being sued for their questionable actions rather than offering their “Shadow Inventory” (mortgage loans delinquent more than ninety (90) days) for sale to the General Public?

Is it more important to try to drive asset prices higher in order to improve our economy, which may benefit both the lender and the owner in many cases? From my perspective, one of the best ways to try to increase the value of something is to allege that there is a shortage of the product.
Why have foreclosure filings been dropping in recent times as opposed to remaining fairly consistent, or even possible increasing as our national job market seems to worsen? Why were foreclosure moratoriums placed by mainly of the largest U.S. banks and mortgage loan servicing companies in order to slow down their own foreclosure filings?

Why do many lenders take upwards of 2, 3, 4, or 5 years to even begin the foreclosure process? Aren’t banks interested in taking back their assets, and reselling them again for even more profit? I thought that banks were in the business to make money as opposed to letting homeowners stay in their homes “rent free” for upwards of several years.

It is very interesting that many banks have willingly offered to pay their delinquent banking customers thousands or tens of thousands of dollars in “Relocation Fees” to better motivate the delinquent borrowers to move out of their homes without destroying the property in the process? To me, it seems like the more affordable option for many banks was to offer a settlement or a paid fee in exchange for a waiver of future legal rights and the near term vacating of the homes rather than end up in civil court for several years at a time with an angry homeowner.
In recent years, there have been an incredible amount of lawsuits by homeowners against many of the largest U.S. banks for a variety of reasons such as defective title problems, and lack of valid mortgage security instruments which may not contain original promissory notes, deeds of trust, and legitimate borrower, lender, and notary signatures.

National Mortgage Class Action Lawsuit and Settlement
These financial and legal scandals noted above then helped lead to a “National Mortgage Settlement’ in early 2012. In February of 2012, forty nine (49) State Attorney Generals and the U.S. federal government collectively announced a $25 billion class action settlement due to the alleged financial and legal fraud and “bad faith” related to improper lending and foreclosure activities. The settlement was paid by lending institutions such as Ally / GMAC, Bank of America, Citi, JP Morgan Chase, and Wells Fargo.
At the time, it was the largest multi-state class action settlement since the Tobacco Settlement back in 1998. Sadly, only about $1.5 billion of the $25 billion settlement were set aside to help compensate borrowers who lost their homes to foreclosure during the time span of January 1, 2008 to December 31, 2011. At best, many of these homeowners may receive just a few thousand dollars each.
A large portion of these Class Action Settlement funds were supposed to be used to reduce mortgage principal balances for many of the millions of “upside down” homes nationwide. This is one of the reasons why Short Sales and Loan Modifications have increased in recent times as upwards of $10 billion dollars of this discounted mortgage debt is covered by the National Mortgage Settlement money.

The “Financialization” of Assets

According to a report released by the Federal Reserve in early 2012, approximately 1/3 of all homes nationwide were “free and clear”. Of the remaining 2/3s of homes nationwide with existing mortgages, the estimated average LTV (loan to value) range of these mortgage loans based upon 2012’s values were something like 94% LTV. After the seller factors in 6% to 7% potential selling costs, then the average mortgaged home in the USA in 2012 had near zero equity.

“Financialization” is a process when the government and banks encourage cheaper rates by way of “Quantitative Easing” policies (or “create money out of thin air to buy assets”) in order to drive up asset prices such as stocks (i.e., Dow above 14,000) and real estate prices. Since homeowners are more likely to walk away from an “upside down” property, then increased home values can help both owners and lenders.
Since last year, the Federal Reserve has purchased approximately $85 billion PER MONTH of both Treasury Bonds and Mortgage Backed Securities Bonds in order to try to allegedly stimulate the financial and housing markets. Coincidentally, the recent proposed budget cuts by way of “Sequester” were also $85 billion dollars.
What is “Quantitative Easing”, and how does it affect interest rates, stocks, and real estate values?

It is the introduction of new money (billions or trillions) into the U.S. economy by a Central Bank like the Federal Reserve. In recent years, the Federal Reserve has been the primary buyer, or one of the main buyers, of U.S. stocks, bonds, and mortgage backed securities.

Increasing the money supply may also lead to higher rates of inflation partly since the value of the U.S. Dollar declines as partly noted by the high costs of gasoline which is related to the “Petrodollar” (“Oil for Dollars) system. When the U.S. Dollar is strong, then the cost of gasoline and other consumer goods declines (and vice versa).

Fixed mortgage rates are typically pegged to the 10 year Treasury Bond yields. Increased demand for U.S. treasury debt then leads to much lower interest rates for all of us since they are inverse to one another (or “High Demand = Lower Rates, and Lower Demand = Higher Rates). Without the Fed’s decision to buy more stocks, bonds, and real estate debt in recent years, then interest rates should now be much higher, and the Dow Jones, and other financial indices, could be much lower today.

Since the housing peak near 2007, approximately five (5) million homes nationally have gone all the way through the entire foreclosure process while ending up with the banks, or with 3rd party investors. Another potential five (5) million homes may have gone through various phases of foreclosure, but did not go all the way to a final foreclosure sale.

If these numbers are true, then there were potentially upwards of ten (10) million homes nationally which went through some phase of the foreclosure process these past several years. As a comparative number, there are an estimated five (5) million mortgaged homes combined in California.
In life as well as in real estate, perception typically becomes one's reality. If someone believes there aren’t enough homes for sale, then this will cause that same buyer to jump back into the real estate arena before the existing prices and interest rates rise too rapidly in the near term. As demand increases, then so do home prices.

In recent years, we are seeing many of the big banks and mortgage servicing companies try to clear up their foreclosure supplies by either selling them off in bulk to large investment banks or even bulldozing them in many cases like in Detroit. Instead of a true “popping” real estate bubble, we have experienced more of a slow leak by gradually releasing more foreclosed “Shadow Inventory” homes to the General Public.

The brightest real estate investors out there are picking up some great deals with very cheap money, and are “fixing and flipping” these same homes for quick profits while the home listing inventories remain very low today. One must know where are the best regions to find these deals, and how small or large is the true size of the non-performing “Shadow Inventory” homes in their same region.

Let’s hope that banks decide to lend more of their money to U.S. consumers as opposed to hoarding their cash to save themselves!!! It is the supply of capital that typically drives the future direction of the housing market more so than any other economic factor.

During easy money time periods of 2001 to 2006, then home sales were quite strong. Since the 2007 financial slowdown, lending requirements have tightened considerably and home sales and prices have declined as compared to the peak 2006 to 2008 price levels in various U.S. regions.

In any type of crisis like our ongoing “Credit Crisis” (a financial crisis related more to the implosion of the derivatives markets worldwide rather than a “Sub-Prime Mortgage Crisis” as falsely alleged by some people) or challenging period in life, there are many opportunities to learn, grow, evolve, and prosper. One must try to focus on the opportunities out there more so rather than the obstacles which may stand in their way.


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