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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):
June 11, 2008

California Set A New Foreclosure Record In May '08 (Over 2,000 Per Day)

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According to data released by http://mrmortgage.ml-implode.com & Foreclosure Radar (two excellent websites, blogs, & foreclosure analysis companies), over $10.4 Billion in loans were taken back by the banks in May alone in California. Unfortunately, a high percentage of these same properties had junior liens or loans (2nds or lines of credit) completely wiped out at the final Trustee's Sale as well. This dollar amount was 9% higher than the previous ALL TIME record set one month prior in April.

Many of these new bank REOs (Real Estate Owned) may later re-sell for only 60% of the bank's loan balances. These new lower sales comps will then establish the new sales comps for most neighborhoods in California. The bulk of home sales in our state in recent times have primarily been REO sales at significantly lower prices. Unfortunately, these new lower prices hurt everyone in the immediate area. 

There were an additional 43,011 new Notice of Defaults (NODs) in May as well. NODs start the formal 111 day foreclosure process for a homeowner who is typically 2 to 6 months late on their existing mortgage payments. The average daily foreclosure filings now are 2,009 PER DAY in California. I had recently written in various publications that they were only 1,000 per day. Now, the number of foreclosures filed EVERY DAY is DOUBLE that number. Nationwide, there are now over 1 MILLION properties in foreclosure right now.

The vast majority of homes in foreclosure now are going all the way to the final Trustee's Sale. Over the past 4 to 6 months, banks took back an average of 97% to 98% of these properties as there were few third party investors wanting these properties. A high percentage of these homes had little or negative equity so they did not appeal to outside investors. 

There were a record 34,564 properties that had Notice of Trustee's Sales filed against the homeowners in May alone. The Notice of Trustee's Sale is filed 90 days after the initial Notice of Default. 25,523 homes went all the way to the final Trustee's Sale in May as well. Each month, the foreclosure numbers seem to get worse. 

Expect significant value reductions in most parts of California due to the new "market makers" set by REOs in most neighborhoods. Don't expect any rate hikes from the Fed anytime soon as asset values keep falling unfortunately. The "vicious downward cycle" of more foreclosures is causing more negative equity for existing homeowners. These same homeowners with negative equity are more likely to walk away from their homes, which causes further downward price pressure for the rest of their neighborhoods. (SEE VIDEO #1 IN THE VIDEO LIBRARY FOR MORE INFORMATION)

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