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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 25, 2011

What options are there for someone who has no equity left?

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 At present, there are more homes in foreclosure and with negative equity of 50% or more than there are "non distressed" homes currently for sale in the USA.

As both short and long term interest rates may likely soon rise due to the weakening Dollar, rising government debt, lack of positive results from the Fed's "Quantitative Easing" programs or other stimulus programs, then we may see an acceleration of properties headed toward foreclosure as adjustable rate mortgages may soon rise as well.

In 2011, the number of existing option pay ARM adjustable loans, 3 and 5 year fixed rate loans, and HELOC (Home Equity Line of Credit) 1st and 2nd mortgages may all soon hit their peak in terms of recasting to fixed rate or higher payment adjustable loans since most of them were funded approximately 3 to 5 years ago nationwide.

Many of the higher price jumbo mortgage loans typically found near pricier coastal areas tend to have the highest concentration of adjustable mortgages primarily since the payment options were more reasonable than even the best fixed rate mortgage back then. As a result, the higher end coastal regions found in areas like Southern California may have even higher mortgage default rates after many of these same adjustable mortgage loans recast into higher priced fixed rates this year and next in 2012.

For homeowners in properties which they may not seemingly sell since their current mortgage debt far exceeds the most recent current market value, here are some options (all these options have both pros and cons) which owners may wish to consider if a conventional home sale is not possible:

1.) Short Sale. List the home with an agent who may then try to convince the existing lender to reduce their existing debt in order to make a sale to a new home buyer. *** We will soon be offering legal services in which our experienced team of attorneys and credit repair specialists will negotiate the Short Sale with the bank while getting paid upon the sale of the home direct by the bank as well. In addition, my same affiliate legal and credit repair group may then work to legally delete any negative items on the owner's credit report(s) within 30 to 90 days.

2.) A Deed in Lieu of Foreclosure: The owner tries to convince the bank to take a "deed in lieu" which means that the property owner will then sign the deed back over to the bank so they may sell the home themselves. In many cases, banks may not consider this due to their internal company policies, title issues, or legal issues.

3.) A Strategic Default: In this situation, the owner may have the funds available to continue making the mortgage payments, but the same owner believes that they are so far "upside down" (debt exceeds the current value) that it makes more sense to "walk away". There may or may not be any additional financial penalties for choosing this option depending upon the state, and whether or not the existing mortgage debt was "purchase money" or "non purchase money" (i.e. a cash out refinance loan, or a 2nd mortgage also funded more than one day after the original purchase date). There may or may not be some tax penalties as well so the owner should seek out some accounting advice as well.

4.) Refinance the home: In today's tougher lending world, cash out 1st and 2nd mortgage loans are much more difficult to qualify for these days. For traditional bank lending, a homeowner may qualify for a cash out loan in the 50% to 65% LTV range. For private money, a homeowner may be lucky to qualify for more than 65% of the most recent appraised value. ** If an owner is more than 60 days late on their mortgage, then recent housing studies have noted that the odds of refinancing into a new mortgage are very close to ZERO (0%) percent. 

5.) Rent the own. Will a tenant's new rent be able to cover the existing PITI (Principal, Interest, Taxes, and Insurance) on the home?

6.) Sell the home to a new buyer using creative seller financing techniques such as "cash subject to the existing mortgage", an AITD (All Inclusive Deed of Trust), or a Land Contract or Contract for Deed (an unrecorded wraparound mortgage). Since many people now don't believe that they may be able to qualify for a new mortgage due to the much tougher underwriting guidelines, then this may be an attractive selling option as well.

There are a few other options to consider as well for homeowners. As the Credit Crisis continues to worsen here in the U.S., then the housing market continues to worsen as well. It is important to consider as many options as possible while weighing both the potential positives and negatives associated with each and every decision.

It is better to plan and act, though, than to react to all of life's many challenges one way or another. 







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