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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):
July 23, 2008

California Foreclosures Up 261% In One Year

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According to Dataquick (La Jolla, CA), foreclosure filings in California are up 261% in just one year. The scary thing about these numbers is that they are probably on the low estimate side. There were over 121,000 Notice of Default foreclosure filings in the 2nd quarter alone in California.

My sources in various locations around the state tell me that the true number of non-performing mortgage loans may be 2 - 5 times higher. Most banks, whether privately held or publicly traded, are very slow to file their initial Notice of Default documents (begins the approximate 111 day foreclosure process in California) as they don't want to flood the REO / foreclosure market even more. The increase in foreclosures will hurt the existing sales comparables even more in just about every region in the state.

They are very slow to begin foreclosure whether they are in 1st or 2nd lien position. Many 2nd lenders (lines of credits, fixed rate mortgages) do not even bother to file the foreclosure filings as they don't want the extra legal and filing fees as many of them are secured by homes that are "upside down" with negative equity. 

Many U.S. banks are technically insolvent right now. This is especially true of banks with high exposures to "bubble regions" like California, Arizona, Nevada, and Florida. I expect many more small, mid-sized, and large banks to go bust within the next few months. 

This increase in bank takeovers by the FDIC may completely wipe out their reserve capital base. Please protect your cash reserves by thoroughly analyzing the existing "safety" of your current bank.

IndyMac Bank (the 2nd largest takeover in U.S. history) wasn't even on the recent "negative watch list" of the FDIC before the government took them over a few weeks ago. There are at least 90 banks currently on the "negative watch list" according to the FDIC, but they will not tell us who is on that list. The website at www.ambest.com is a good place to start reviewing the potential safety of banks around the country.

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