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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):
October 30, 2008

The Credit Card Crisis May Be Next

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Unsecured credit cards are potentially more risky to the American economy than "sub-prime" or "Alt-A" mortgage loans. Many Americans needed to tap into their home equity lines of credit in order to pay down their various consumer and business debts over the years. For example, homeowners pulled out an estimated $1.2 trillion from their home equity (cash out 1sts or 2nds) between 2002 and 2007.

Since the official start of the Credit Crisis in 2007, many lenders nationwide discontinued "stated income" cash out 1st or 2nd mortgage loans to consumers. In addition, many national lenders stopped issuing lines of credit (2nds) altogether, or they "froze" their existing customers' lines of credit so they could not access any more cash from their HELOC accounts.

As a result of less access to credit, many consumers are now delinquent on their existing credit card accounts. Some financial analysts are now saying that upwards of $850 billion in unpaid credit card balances are now delinquent. This number is supposedly moving closer to $1 trillion, which is equivalent to the total amount of the U.S. "subprime" mortgage market. 

Within the past year alone, CNN is reporting that consumers have charged more than $2.2 trillion worldwide in purchases and cash advances on credit cards alone. Credit card companies are now writing off close to 5% of all of their existing payments as "total losses". 

At present, the percentage of all credit card accounts in the U.S. that are at least 30 days late was up 26% from the previous year ($17.3 billion). Accounts that were more than 90 days late increased by 50% in just the past year. 

Much of this same performing on non-performing credit card debt was also securitized by many of our largest banks and investment banks on Wall Street. This securitized debt was sold off as investment pools to investors around the world just like much of our U.S. mortgage debt over the past decade or so. 

The major difference between non-performing credit card debt and non-performing mortgage debt is that there generally is NO COLLATERAL to protect against credit card losses. At least with a home mortgage default, the investor or lender has real estate as collateral against the debt. The lender can foreclosure on the non-performing mortgage loan, take ownership of the property, and sell the property for a profit or a loss. With credit cards, the lender may end up with zero so the risk of a major default wave for credit cards is potentially more troubling for our economy than any other segment. 

As consumer spending represents upwards of 2/3 of America's entire economy, we need those credit cards available in order to keep our economy moving forward. As the holiday shopping periods are now just around the corner, we need those credit card companies solvent or the economy may get even worse.

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