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):
January 29, 2013

Are Commercial Loans Easier To Fund Today Than Residential Loans?

Image
 

Are commercial real estate loans easier to find than residential loans today? Had I asked that question back in 2007, most people would have then said “No way.” Today, many investors and brokers may have to really think about it first prior to giving an answer one way or another.


In Southern California, upwards of 55% of all homes purchased in 2012 may have been acquired with either all cash or FHA loans partly since the secondary markets are so restricted. A very high percentage of these home purchases were for homes priced below the conforming / FHA loan limits of $417,000. Many of these all cash buyers were investment or hedge funds, domestic and foreign.


Obviously, the mortgage lending markets have tightened up significantly since 2007 with the Jumbo Mortgage market (loans above $417,000 in many regions of the U.S.) dramatically shutting down the most in recent years due to less secondary market investors.


In 2012, the Jumbo Mortgage market began to slowly increase partly due to the record low interest rates, and the improving residential home prices related to lower home inventory numbers and increased demand from both U.S. and foreign investors. The weaker U.S. Dollar has helped attract lots of foreign investors from regions such as Canada, China, Europe, and Mexico.


More sellers and builders have considered and / or used “seller financing” options (i.e., creating a new 1st mortgage, a Contract for Deed, All Inclusive Deed of Trust (AITD), or using private money sources) in order help sell their properties at a faster pace.


Yet, there is a brand new lending rule in effect which I am still trying to learn myself which may adversely affect residential property lenders, sellers, builders, and brokers. This new rule is The Dodd-Frank Wall Street Reform and Consumer Protection Act (DFA), which began on January 21, 2013.


The rules related to DFA note that no creditor may make a residential mortgage loan without first making a reasonable or good faith determination that the customer may have the ability to repay the loan based upon several statutory factors.


Some sellers may be exempt from DFA if they sell less than three (3) properties every year or they may be considered “Mortgage Loan Originators.” Please confirm with your personal advisors since these guidelines are brand new here in 2013.


Some of these qualifying DFA (Dodd-Frank Act) factors that may determine if a seller may provide various forms of seller financing options may include:


1.) The seller did not build the home. This may hurt many small to mid sized builders.


2.) The loan must be fully amortizing with balloon payments potentially being completely prohibited. How may sellers really want to offer seller financed terms for more than one (1) to five (5) years as opposed to 20, 25, or 30 years instead with no balloon options?


3.)The seller determines that the buyer is able to later repay the loan. This new option may turn sellers who offer financing options into strict “bank underwriters.” One of the many benefits associated with seller financing in years past was related to the ease of qualifying options.


4.) The loan must have a fixed interest rate for a minimum of five (5) years.


5.) The loan must also meet other guidelines established by the Federal Reserve Board. As of now, I do not know what those additional seller financed lending guidelines may be though. How do we find out?


Since the last real estate market peak near 2007, both the residential and commercial market sectors have sadly experienced massive price declines. In many cases, homes, retail shopping centers, land, hotels, and other types of properties have had their values cut in half or more.


As it relates to the commercial property sector’s last market peak near 2007 or 2008, many of the existing 5 year fixed commercial loans may be ballooning or coming all due and payable in 2013. In many cases, commercial loans are fixed for shorter 5, 7, and 10 year terms so they must be refinanced or paid off more often than residential loans.


Upwards of 4,750+ CMBS (Commercial Mortgage Backed Securities) with loan balances near $55 billion may need to be refinanced in 2013 alone. Sadly, a very high percentage of these same potentially ballooning commercial mortgages may not have sufficient income to service the existing mortgage debt.


In addition, there may be an additional 6,300+ non-CMBS commercial mortgage loans (according to Bloomberg Financial News) with balances of almost $79 billion that may be coming all due and payable in 2013. Which of these properties may qualify for a new commercial loan though today?


In many situations, the existing commercial mortgage debt may currently exceed the conservative market value today in 2013 based upon the income and expenses for the existing properties. Yet, some mortgage lenders or servicing companies may accept partial payoffs almost akin to a residential "Short Sale" by way or either a sale or a refinance. Property owners may wish to consider trying to remain somewhat optimistic in spite of their challenging financial position today.


Most banks still don't want to foreclose on their properties so they may better realize today that a partial payoff may be much better for them than a foreclosure. Many lenders today may agree to some type of a discounted payoff which may be a "Win / Win" for all parties.


The most encouraging part of the commercial real estate industry today is that interest rates continue to hover near records low rate ranges (3% to 5%+). With lower interest rates today, then borrowers may lock into this historically low rates and potentially improve their monthly cash flows significantly.


If lending may hopefully ease up later this year as it relates to both residential and commercial properties, then sales and property values may begin to increase more so than in years past. Once again, it is the availability of capital that may best determine the direction of U.S. property values.

Comments

Hide Comments (0)       Add a new comment
Archives
tiangle  2019
tiangle  2018
tiangle  2017
tiangle  2014
tiangle  2013
tiangle  April (2)
tiangle  March (2)
tiangle  February (3)
tiangle  January (3)
dot Are Commercia...
dot Cause and Eff...
dot Billions of C...
tiangle  2011
tiangle  2010
tiangle  2009
tiangle  2008