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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 24, 2010

The "Frozen" Securities Markets

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As 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.

Since 2004, many of the largest private money insurers began withdrawing their funds from the private residential mortgage securities markets. In 2005, "Derivatives" money (i.e. funds backed by Credit Default Swaps, futures, options, and other complex insurance and banking hybrid contracts) began to monopolize (or "colonize") the mortgage securities markets which later proved to be horrific for the financial markets.

A "derivative" is an agreement or contract which is not based or backed by anything real or tangible. It is more of a financial agreement between two parties which is supported (or "derived") from the value of an underlying asset or event (such as the default or non-payment of another financial instrument). As the derivatives money began "freezing", there were less buyers for mortgage bond debt since 2005 as well.

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 $8 trillion in combined residential mortgages nationwide, $4 or $5 trillion in total U.S. bonds in existence, etc.).

The Credit Crisis (for the 100th time) 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 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?

For the past few years, the Federal Reserve (and the U.S. government) has been either directly or indirectly (via various anonymous "emergency loans" to banks and insurance companies) backing, supporting, or purchasing the securities for both residential and commercial loans.

Supposedly, the Federal Reserve has purchased close to $1.25 Trillion of mortgage-backed securities in recent times. In addition, the Federal Reserve has been the main purchaser of U.S. Treasury Bond debt over the past few years (over 80% to 90% of all U.S. bond debt, according to various financial reports) since there were so few domestic or international buyers interested in U.S. bond debt (AAA rated debt too).

In April 2010, the percentage of delinquent mortgage-backed securities (MBS) increased 41% in the month of April alone. This increase may have added an additional $12.8 billion of non-performing commercial paper on top of the estimated $184 plus billion of non-performing mortgage backed securities nationwide.

As retail spending and consumer spending overall (represents approximately 2/3s of our overall U.S. economy) continue to struggle, this means that there may be more commercial loan defaults which only hinders the value of these existing mortgage-backed securities even further for the banks (or other investors).

As such, I am continuing to spend more time on commercial loan workouts (or "cramdowns") as existing lenders are now more than willing to accept multi-million dollar loss payoffs at 100% to 250% plus discounts off their existing face amounts.

If the "Fed" had not stepped in to purchase U.S. Treasury Bond debt, then long-term mortgage rates would easily have shot up to the high double digit numbers since 30 year mortgage loans are tied to the yields of the existing 10 year Treasury Bond. With less buyers for this bond debt, then these yields or rates tend to increase significantly in order to attract new bond buyers. In 1981, the U.S. Prime Rate hit 21.5%, and some 30 year mortgage loans hit 16% so current mortgage rates are historically cheap right now.

In Europe, the Bank of England and the European Central Bank (ECB) have also been the main purchasers of mortgage backed bonds and securities partly through "Repo" deals. Prior to 2007, private investors purchased almost 95% of all European mortgage-backed securities. Sadly, private European investors now purchase just 5% which is very similiar to the U.S. numbers too.

According to Shadow Stats, various major universities, and numerous economists, the true U.S. unemployment numbers (actual, underemployed, self-employeds who can't find work, frustated short-term workers) are closer to 20% to 22%+ right now.

During the depths of The Great Depression (1929 - 1939), the unemployment numbers hit 25% nationwide. During The Great Depression, some of the more challenging years were back in late 1931 and 1932 era when various banks began to "collapse". "Bank runs" soon followed as customers flocked to their banks for much needed cash. This is when the FDIC came into existence to better insure the bank customers' savings accounts.

Today, we have come full circle in that we now are at the mercy of the government to back, bailout, insure, and solve our ongoing Credit Crisis. 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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