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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):
April 27, 2010

New Home Sales Fueled By FHA Money

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The Federal Housing Administration (FHA) is a government insured entity which was established back in 1934 in order to assist home buyers with small down payments, low interest rates, and long loan terms.

This mortgage insurance program helps protect lenders against their future losses should the homeowner later default on their loan payments. There have been close to 40 million FHA home loans made to date across the U.S. since the creation of FHA back in 1934.

As the ongoing Credit Crisis continues to worsen, a higher percentage of home buyers or people wishing to refinance their existing mortgage loan(s) have relied upon FHA to qualify for a new loan partly due to tightening lending standards for both conventional and jumbo (greater than $417,000 loan amounts) loans in recent years.

Approximately 25% of all mortgage loans originated today are now insured by FHA. In many high cost regions of the U.S., FHA loans may be as large as $729,750 (up to almost 97% loan to value (LTV)). In recent times, home sellers were allowed to credit their home buyers between 3% and 6% toward their recurring and non-recurring closing costs.

As I speak or meet with many Realtors and professional real estate investment advisors, I am hearing that FHA is really the driving force behind a high percentage of home sales (existing and new) due to the higher loan to value limits, lower rates, and lower FICO credit scores allowed for these same loan products.

As the options for stated income, lower FICO credit scores, and higher leveraged conforming and jumbo loans have been reduced in recent years, more people have become dependent upon the FHA loan product. In many regions of the U.S., FHA insured mortgage loans may represent over 50% of all new home sale mortgage loans now within new development subdivisions.

In Southern California for example, the highest percentage of home sales seem to be in the more affordable price regions ($100,000 to $400,000 price range) such as Riverside County, or in the lower end of the price spectrum in Los Angeles, Orange, and San Diego Counties.

In 2008, FHA insured loans represented close to $400 billion nationwide. Last year, approximately one (1) million homeowners were able to refinance out of their existing sub-prime or Alt-A short term fixed rate mortgage loans into longer term (30 year fixed) mortgage rates offered by FHA as well.

If more existing FHA borrowers continue to default on their existing mortgage loans nationwide, then the FHA's already dwindling insurance cash reserves may drop too low to cover any future mortgage losses.

As a result of concerns about the record high foreclosure rates, weakening bank balance sheets, and low cash reserves for FHA, there are potential changes being discussed in regard to FHA which may include these following points:

1.) Tightening the underwriting guidelines to qualify.
2.) Increase the FHA insurance premiums to the borrower.
3.) Increase the required down payment requirements.
4.) Increase the minimum FICO credit score required to qualify.

It may be easier to qualify for a purchase or refinance loan now rather than later in the year especially if long-term thirty (30) year fixed mortgage rates continue to rise due to the reduced demand for our 10 year Treasury Bonds (30 year fixed mortgage rates are tied to these bond yields) in recent times.

Regardless of the weakening financial markets and the U.S. economy, there continue to be options or solutions for many real estate situations if you know where to look these days. Sadly, the options now are much less than in recent years though.

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