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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):
November 6, 2008

The Housing Nightmare Escalates

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The Credit Crisis continues to cause havoc for the USA as well as the rest of the world. Since early 2007, the Credit Crisis has evolved into something far worse than most analysts could have imagined. We have seen sharp declines in property values around the world. Yet, the worst may be yet to come as so many negative factors are beginning to hit all at once. 

To date, many of the U.S. mortgage problems have been related to sub-prime and Alt-A (no income verification prime loans) deals. However, the prime, full doc mortgage loan borrowers are now beginning to default at very high numbers as interest rates begin to creep up, unemployment numbers increase, and as our national recession (or depression) continues to worsen.

In addition, the real near term combination of an economic depression, asset deflation, and currency hyperinflation have yet to hit with their full strength. Once those negative economic issues hit, then we may all experience more financial pain.

In 2008, one in ten American homeowners have defaulted on their mortgages or lost their homes in foreclosure to date. Let me write that one more time for you to better emphasize this point: 1 in 10 Americans in 2008 have defaulted on their mortgages or lost their homes. In addition, nearly 4 in 10 Americans now owe more than their homes are worth. As values continue to plummet, we may expect that 50% to 60% of all American homeowners will be upside down on their properties in the very near future.

By mid-2008, the "Federal" Reserve (they are neither "federal" nor do they have a "reserve") reported a estimated total of $14.8 trillion in U.S. mortgages currently outstanding. This is approximately 40% more than the entire national debt. This figure is also triple the total of all mortgages in America just 10 or 12 years earlier. 

In addition to the $14.8 trillion of combined residential and commercial mortgage loans outstanding, there is appoximately another $20.4 trillion in consumer and corporate debts outstanding. This figure means that mortgages represent just over 40% of all of the private sector debt problems in the USA. 

Wow!!! How bad will the economy get in the near term as the Credit Crisis continues it's descent toward the Abyss. Banks will need cash desperately in the near term so we will do our best to find the best REO foreclosure deals around the nation for all of our clients.

*** A Final Note. R.I.P. Michael Crichton. My favorite author of all time passed away yesterday at the age of 66. He was a brilliant man who wrote books like Jurassaic Park, The Andromeda Strain, Disclosure, State of Fear, and many other excellent novels. I have read no less than 15 of his wonderful novels in my life. He also created the T.V. show E.R.

Michael Crichton's extensive medical background made him one of the most knowledgeable writers out there. His work and life positively influenced me more than any other writer. I was humbled by how brilliant and passionate his writing skills were in his too short life. Rest In Peace, Michael Crichton.

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Adam on November 17, 2008 12:38 PM
I recently discovered your blog and find your blog useful and informative.  If you were a fan of Crichton you may or may not have read his article on complex systems, which I think is very pertinent in the current financial debacle we are in.  In it he discusses how even though we live in and interact with complex systems such as financial markets we really don't know how they work or how to manage them.  Where I really think this comes in to play is the $700b bailout.  In the long run we really have know idea what is going to happen as a result of rescuing these companies and I believe it will get much worse before it gets better.  A friend of mine owns a title company and he stated that after the changing of the guard in the oval office it is likely that a moratoreum will be placed on foreclosures.  If that is the case the long term foreclosure rates will skyrocket because in the short term people will stop making their payments.  If you are out of a job or expect to be soon or if you just would rather spend the money somewhere else why bother to make your payments if they can't foreclose on you anyway?  Bank income will dry up as interest payments go uncollected and once the moratoreum is lifted a flood of houses added to OREO and the market will be a mess.

Here is the link to the Crighton article.
www.michaelcrichton.net/speeck-complexity.html

Adam
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