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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):
June 10, 2010

Cancelled Foreclosures Outnumber Sales In California

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In December 2009, the number of California foreclosure cancellations increased 26.5% to 13,243 mainly due to increased loan modifications. For the first time ever, the number of foreclosure cancellations surpassed actual bank REO (Real Estate Owned) foreclosure sales in which the properties revert back to their respective banks if no third (3rd) party bidders purchase them at the final Trustee's Sale on the courthouse steps.

In 2009, lenders had to discount the opening bids at the final Trustee's Auction Sale by almost 40% in order to potentially attract investors as the existing mortgage debt typically exceeded the true market value in many cases. I saw many properties go to final Trustee's Sales recently in which the existing mortgage debt was over $ 1 million, but the current market value price ranges were closer to $600,000 so these discounted opening bid numbers do seem realistic to me.

Yet, the vast majority of Trustee's Sales across the state had very few true buyers who actually showed up to purchase the properties. In almost 97% of the foreclosure auctions last year alone, there were no bidders who purchased these properties with all cash (or 3rd party private financing). As a result, the foreclosured properties typically ended up back with their respective bank or mortgage loan servicer.  

Over 80% of all scheduled Trustee's Sales were postponed at least one time last year as well as lenders were trying to delay the huge "wave" of non-performing and foreclosure properties from hitting their "books" in too short of a time period. I have seen many properties scheduled for final Trustee's Sale be postponed for up to one or two plus years as well.

Under the new HAMP (Home Affordable Modification Program), the U.S. Treasury provided financial incentives to mortgage loan servicers to provided new modified work-out loans for their existing borrowers. In the last few months of 2009, there were approximately 30,000 permanent loan modifications which were completed primarily due to the HAMP program.

The increase in loan modifications by way of the HAMP program is a major reason why there was such a big increase in foreclosure sale cancellations (as opposed to just "postponements") in recent months due to the loan modification work-outs with lower interest rate, payment, and reduced principal amounts in some cases.

As I have noted several times in the past, many banks must set aside up to $8 dollars for every $1 dollar loss tied to foreclosure losses. Many banks are currently low on their own cash reserves just as most borrowers are today as well. In many cases, banks maintain close to 1% of their bank deposit funds in actual cash reserves which typically equates to ATM money and minimal bank vault cash.

Partly due to how banks leverage their customer's bank deposits via the U.S. banking system's "Fractional Reserve System" which allows them to leverage their investments up to 10 to 50+ times their actual bank deposits, the continued financial problems in the U.S. banking system make it challenging for many banks to either take back more foreclosed properties, or to make new loans to their customers.

As the Credit Crisis continues onward, there are some incredible investment opportunities if you know where to look, and if you know how to find the cash to get in and to get out of the property as soon as possible so you may realize your gains sooner rather than later.

We continue to provide our clients both the targeted investment data which finds the best discounted foreclosure properties as well as we may provide them with a large portion of the capital (debt and equity money) to buy the foreclosed residential or commercial properties.

For more information, please send me an email or call me today.

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