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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):
December 8, 2009

How Many Borrowers Are At Risk Of Default?

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Of all of the residential mortgage loans existing today, approximately 75% were refinance or purchase loans funded during the "Bubble" years between 2003 and 2007.

The vast majority of these same funded loans (2003 to 2007) were highly leveraged refinance loans which typically provided the property owner with cash out via a 1st mortgage only, a stand alone 2nd mortgage or line of credit, or a combination of a concurrent 1st and 2nd mortgage.

There were approximately 500% more cash out refinance loans than new purchase loans (a 5 to 1 ratio) during this same "Bubble" year time period as well. In many cases, property owners used the cash to pay off consumer (i.e. credit cards), business, and school loans, or to use the cash to pay daily expenses or invest the money elsewhere.

During the same "Bubble" years ('03 to '07), there were an estimated 43 million residential mortgages funded. According to a recent Mortgage Banker's Association report, approximately 8.2 million of these 43 million existing residential mortgage loans (approximately 14.41%) were in some form of default, delinquency, or foreclosure status nationwide.

As property values have declined anywhere from 20% to 50% plus in various areas nationwide since the peak "Bubble" years, then many of these same properties funded have little, no, or negative equity right now. The hardest hit states in terms of value decline are the following "Bubble" states (those states that appreciated the most in the same "Bubble" years): 1.) California, 2.) Florida, 3.) Nevada, and 4.) Arizona.

Borrowers who currently are "upside down" in their homes (debt exceeds value) are more likely to walk away from their homes even if they can afford the monthly mortgage payments. As a result, we may sadly continue to see a much larger wave of mortgage defaults in 2010.

We will continue to keep our clients informed though about the best investment opportunities as the Credit Crisis continues onward.



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