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The Consumer Debt Anchor
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 29, 2010

The "Shadow Inventory" Of Delinquent U.S. Mortgages Is Staggering!!!!

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As I have written for years, the true number of distressed properties or delinquent mortgages is significantly higher than what is published in most media outlets. In some "bubble burst" regions like California, Nevada, Arizona, and Florida, the potential delinquent mortgage numbers may be anywhere from 200% to 400% larger than what is being reported right now.

There are a number of reasons why U.S. banks are not readily admitting to how large the impending and forthcoming foreclosure "wave" is right now. First, banks do not want to admit or acknowledge how bad their financial losses are right now partly due to their concerns about their own stock values of their financial entities.

If the banks acknowledge their losses and take their financial "hit" for their quarterly or annual reports, then it may trigger a default on some on their off-balance sheet derivatives investments like Credit Default Swaps (a glorified hybrid form of an insurance and financial instrument).

A default of a multi-trillion dollar Credit Default Swap would effectively bankrupt the bank's parent company as many multi-trillion dollar Credit Default Swaps have also been leveraged 10 to 50 plus times their face amount.

To learn more about Credit Default Swaps, please view this video from the "Videos" section which is in regard to Long Term Capital Management's (LTCM - a $3 billion hedge fund business) collapse which almost single-handedly caused the world's financial markets to "freeze" back in the mid-1990s. LTCM was losing up to $500 million per day due to their hedge fund losses. Video link here -

http://www.youtube.com/watch?v=xGfXyVtiB1E

The Credit Crisis is really all about the unwinding of primarily unregulated Credit Default Swaps, Mortgage Backed Securities, Interest Rate Options Derivatives (these financial instruments were the primary cause of Orange County's 1994 bankruptcy through their Merrill Lynch investments), Structured Investment Vehicles (SIVs), and other financial and insurance hybrid instruments.

The Credit Crisis is NOT a "sub-prime mortgage" problem as originally portrayed by many in the business media as delinquent "sub-prime mortgages" represent a tiny fraction of the delinquent financial debt worldwide.

To better visualize how large the entire Credit Default Swap and derivatives market is worldwide, some analysts project the current valuation of the derivatives market to be close to 1,600 TRILLION DOLLARS. As a comparison, the combined value of all of the real estate, bond, and stock markets on planet Earth was recently valued at a grand total of 100 TRILLION DOLLARS.


Many of the largest big banks in the U.S. have had to rely upon bailouts from the Federal Reserve in recent years via anonymous lending facility programs such as The Term Auction Facility, Term Securities Lending Facility, or as many as ten (10) additional anonymous lending facilities.

Banks borrow and lend money using a "Fractional Reserve" lending system in which they tend to leverage their deposits somewhere between 10 to 100 times the amount of cash on hand (i.e. customer's deposits).

As such, the amount of outstanding loans in the form of credit card, automobile, business, or real estate loans may completely dwarf the bank's true cash balances. In addition, most U.S. banks effectively maintain the equivalent of 0% to 1% (effectively ATM and minimal vault money) of their entire customer savings balances actually within the bank's vaults.

In late February 2010, a recent financial analysis projected that there were possibly 4.6 million plus mortgages in the U.S. now over ninety (90) days delinquent.
Many of my associates are telling me stories about homeowners who have not made a mortgage payment in over two (2) years, and they still have yet to receive a foreclosure notice.

In various "Trust Deed" states like California, lenders may not be able to pursue the delinquent homeowner for any future financial losses should the homeowner "walk away' from their "upside down" property if the homeowner used a "purchase money loan" to buy the property. If the property owner used a first mortgage loan or a concurrent 1st and 2nd (or a "piggyback" loan) to originally buy the home, then they may many times walk away from the property without fear of the lender coming after them for their losses.

If the property owner place a 2nd loan just one day after the original purchase date or refinanced their existing purchase money 1st mortgage (rate and term or cash out), then the lender may later pursue the property losses for any financial losses as they can do in Texas, and in many other states around the USA. For more advice on this complicated subject, please consult with your own financial advisors.

Barclays Bank and the Wall Street Journal are predicting about 1.6 million in distressed property sales this year via short sales or foreclosures. While this number is large, it is still 3 MILLION less than the projected 4.6 million plus mortgages which are thought to now be more than ninety (90) days delinquent.

In many cases, a bank may have to set aside up to $8 for every $1 dollar in acknowledged foreclosure losses. Since most large banks are effectively insolvent, they do not have the cash reserves readily available to cover any additional foreclosure losses.

In many situations, the stressed and cash-strapped homeowner is actually healthier financially than their own bank who struggles to avoid financial insolvency themselves. The smaller credit unions and community banks tend to be financially more solvent these days as they were less reliant upon the risky Credit Default Swap and other derivatives investments for higher yields in the past.

The good news is that more short sales are being approved these days as banks have to unload their non-performing loans anyway possible these days. In addition, there are more foreclosure investment opportunities than ever before if you know where to look for them.

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