Image
Image

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 4, 2008

SIVs May Now Be Gone Forever!!!

Image
As I wrote in one of the chapters in my book (SIVs and SUVs), SIVs (Structured Investment Vehicles) are a central part of our ongoing Credit Crisis. Specifically, banks and investment banks used these "off balance sheet investments" to borrow with short term money (i.e. money market funds) and invest those same funds in longer term investments such as mortgages. 

When there weren't many buyers for these SIVs after the Credit Crunch began early last year, it caused much of the secondary markets around the world to "freeze". These "off balance sheet" investments usually were not reported by the banks or Wall Street investment banks. Whether these SIVs caused substantial losses or gains, the banks did not feel the need to report the current stauts of these investments. Didn't Enron do the same thing?

The Financial Accounting Standards Board (FASB) just removed the concept of QSPEs (Qualifying Special Purpose Entity) from the FASB's
set of regulations (Regulation #140) on Friday (April 4, 2008).  

As a result, banks and investment banks will have to add these "off balance sheet investments" back on to their bank balance sheets within the next 6 months or so (no later than the start of 2009). For some banks, their unreported losses may hurt their balance sheets significantly and cause their stock values to drop. For other banks, it may not be a big issue.

Off balance sheet investments should never have been allowed in the first place. This "shady" form of bookkeeping and investing is part of the reason why the we are in the Credit Crisis mess in the first place.

Comments

Hide Comments (0)       Add a new comment
Archives
tiangle  2019
tiangle  2018
tiangle  2017
tiangle  2014
tiangle  2013
tiangle  2011
tiangle  2010
tiangle  2009
tiangle  2008
tiangle  December (10)
tiangle  November (10)
tiangle  October (8)
tiangle  September (8)
tiangle  August (14)
tiangle  July (17)
tiangle  June (18)
tiangle  May (19)
tiangle  April (19)
dot Fed Cuts Rate...
dot Housing Price...
dot New Home Sale...
dot G.E.'s C...
dot Royal Bank of...
dot Bank of Ameri...
dot Citibank Anno...
dot Germany'...
dot Oil Just Went...
dot Wachovia Anno...
dot Washington Mu...
dot Iceland Raise...
dot IMF Predicts ...
dot How Overvalue...
dot SIVs May Now ...
dot Unemployment ...
dot Investment Ba...
dot Automobile Sa...
dot UBS & Deu...
tiangle  March (19)
tiangle  February (3)