Tag Archives: home equity loans

How To Go Bankrupt: Slowly Then Suddenly

In Hemingway’s, “The Sun Also Rises,” one of the characters, Bill, asks his friend, “Mike,” how he went bankrupt. Mike replied, “I had a lot of friends. False friends. Then I had creditors…” This passage from the novel comes to mind when I hear ads during the local sports radio programming from mortgage brokers urging listeners to use a cash-out refi or home equity loan to take care of credit card debt that piled up during the holidays.  Beneath the surface is the message, “c’mon in, the water is fine, go ahead and take on even more debt.”

If in fact the retail sales turn out to be as strong as projected, it’s because the average household has tapped into its savings and used an unusually large amount of credit card debt to fund holiday spending this year:

The chart on the left shows the 13-week annualized percentage change in household credit card debt. The data comes from the Fed. As you can see, the use of credit cards to fund spending has soared. Further compounding potential household financial stress, the personal savings rate in November dropped to 2.9% from 3.2% in October. It’s the lowest personal savings rate since November 2007. November 2007 is one month before an official recession was declared back then.

The 18% spike in credit card debt is perhaps more troubling than the plunge in the savings rate. It’s been theorized that consumers may have used credit cards to “pre-spend” an anticipated savings in taxes from the tax legislation. Unfortunately, the changes to the tax code will be neutral at best for the average middle class household.

Furthermore, borrowing to fund current consumption in the absence of future income growth or capital gains received from monetizing assets (stocks, homes, etc) merely shifts future consumption into the present. If retail sales come in “hot” for Q4 because of strong holiday sales fueled by credit card debt, it will be offset by a steep decline in consumer spending in 2018. This is because the rate at which consumer credit is rising at more than double the rate of growth in wages. The “cherry” on top of this scenario is that there will likely be an acceleration in the rate of credit card and auto loan delinquencies and defaults.  This latter development would a continuation of the rising trend in credit delinquencies and defaults that emerged during 2017.  Mortgage payment problems are sure to follow.

The “feel good about the economy” propaganda has been over-the-top this year.  Trump has been the primary cheerleader as he extols the virtues of a soaring stock market that he labeled “a massive bubble” when he was begging for votes on the campaign trail.  Now he points to the stock market as an indicator that the country is better off since he became president.

In truth, the middle class continues to be hollowed-out from an increasing need to assume more debt in order to maintain its lifestyle. More debt is necessitated by an income level that is not keeping up with the ravages of the inflation that the Government can’t seem to find in its CPI report.  “Middle class”  includes everyone who requires a mortgage to claim “ownership” on their home plus anyone not rich enough to pay for self-enriching legislative policy at the State and Federal levels of Government.  If you fit either of those of those or both,  you are strictly speaking “middle class.”

2018 is going to be a difficult year for most Americans.  I have no idea how much longer the stock market can continue transmitting the illusion that every one is becoming more prosperous.  I have a gut feeling that real inflation, resulting from the inexorable devaluation of the dollar since 1971, will rip through the system sometime in the next year or two and drive interest rates to a level that could bankrupt a major portion of the economy.  It really won’t take much of a bump in rates for this to occur…slowly, then suddenly.

Housing Market Horror: Home Equity Loans Making A Big Comeback

…Just in time for the housing market to take a big dump. I’m going to really start hammering on the truth about the housing market. The media propaganda and industry hype is flowing in epic proportions. Lately I’ve been hearing a plethora of ads on the radio for mortgage companies pushing home equity loans. “Time to take advantage of the higher housing prices and use the equity in your home to pay off credit cards or remodel your house.” Vintage 2005. The ad I heard earlier today said that you can close in 10 days and not have to make a payment for 60 days. Lead the sheep to slaughter.

This is just in time for a big price collapse to hit the market. Most of you probably missed this report, but I did not:   30% Of Homes Lost Value Over The Last YearLINK

Almost 30% of all homes lost value in August from a year earlier, according to real estate company Zillow Group Z, -0.81% down from a recent high of 65% in January 2009… real-estate website Trulia’s recent report on the fastest moving housing markets showed a slowdown in how quickly homes are being sold…

This means that in most markets, if you bought a home in the last 9 months and took advantage of the new FNM/FRE 3% down payment program, you’re already way underwater.  The article references Denver has a “hot market.”  Yes it was white-hot until about June.  I would bet, based on all the data that I observe, that the average price is down 10% since June.  My email gets peppered every day with notices of price reductions on metro area homes.   This is not the kind of sign you see in a market that’s hot:

MakeOffer1

I recently posted an article from the Denver Post in which an actual realtor was quoted as saying that buyers were drying up and sellers were chasing the market lower with price reductions. This is how it started when the big bubble popped. Denver was one of the hottest markets during the bubble and it was one of the first to explode. Any buyer who bought a home in the last three months with the intent of fixing it up and flipping is now going to be stuck unless they’re willing to eat a big loss.

The reason home equity loan pimps are working overtime is because the banks that fund this paper take the security and throw it into a pooled asset-backed structure and they slice it up into “risk” tranches and wrap derivatives around it and toss it to the institutional pigeons who have loads of cash looking for yield.  No one factors in loss of principal in their ROR models.  All they care about is that the “juicy” 4% yield.

While the re-emergence of aggressive home equity lending is a signal the top is in and a renewed collapse is starting, this is perhaps the biggest warning flare, just like the first time around 8 years ago:    Hamptons Mansions Pile Up on Market as Luxury-Home Sales Dip

As I was discussing with a good friend of mine in NYC yesterday, it’s not the absence of foreign money that’s taken the bid away from the Hamptons, as the Bloomberg article asserts, it’s the bread and butter Wall Street jockey who is looking at a serious cut in bonus compensation and the possible loss of his job.   Just wait until the ones who leveraged up with a big fat jumbo mortgage realize that they can no longer afford to maintain their Hamptons retreat and their NYC apartment or their NY/NJ Mcmansion.   There will be a lot of homes out on the east end of Long Island from which the owner walks.

The Hamptons indicator precluded the popping of the big bubble. It will also be one of the smoking guns that precedes the re-collapse of the housing market.