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Too Sad To Be Funny

The following three stories would be funny if the picture they paint wasn’t so sad. First this:

Second-Mortgage Misery

Almost 40% of homeowners who took out second mortgages—extracting cash from their residences to cover everything from vacations to medical bills—are underwater on their loans, more than twice the rate of owners who didn’t take out such loans.

The finding, in a report to be released Tuesday by real-estate data firm CoreLogic Inc., illustrates the consequences of easy borrowing amid the housing boom’s inflated prices. The report says 38% of borrowers who took cash out of their residences using home-equity loans are underwater, or owe more than their home is worth. By contrast, 18% of borrowers who don’t have these loans were underwater.

It’s not clear how much cash withdrawn from homes during the boom was used to acquire luxuries such as expensive automobiles, and how much went to basic necessities, including tuition expenses, or renovations intended to raise a property’s value.

What is clear is that home-equity loans, which account for about 10% of the U.S. mortgage market, have been a headache for homeowners and lenders alike. Second mortgages refer to any loan taken out on a property that is subordinate to the first mortgage, and include home-equity loans or lines of credit.

Second mortgages are weighing on a fitful recovery, in which housing has figured as particularly weak spot. The S&P/Case-Shiller National Index last week showed that home prices tumbled 4.2% nationwide in the first quarter, its third straight quarter of price declines after a modest recovery in early 2010. Nationwide, prices have fallen 34% since their peak in 2006. The inventory of unsold homes will take 9.2 months to sell, the National Association of Realtors said recently, about 50% higher than what is considered a healthy level.

“When a homeowner’s house is underwater, “it’s harder to get a credit card or a car loan, you can’t put your home up for a small business loan,” said Mark Zandi, chief economist at Moody’s Analytics. “There are all sorts of little, pernicious effects that you don’t necessarily think about.”

CoreLogic found that borrowers with second mortgages had deeper levels of negative equity—an average of $83,000 compared with $52,000—than borrowers without second mortgages. In many cases, borrowers withdrew cash from their properties using home-equity loans or lines of credit, a type of second mortgage. The CoreLogic report doesn’t include cash-out refinancing, a common practice during the boom, where borrowers opted to extract cash while refinancing their first mortgage.

According to Federal Reserve Board data, homeowners took out a total of $2.69 trillion from their homes at the height of the housing boom between 2004 and 2006. That tally includes cash-out refinancings.

The risks extend beyond the borrowers to banks. While the majority of first mortgages were bundled into pools and resold to investors as securities, second-lien mortgages are heavily concentrated on bank balance sheets.

Nearly three-quarters of roughly $950 billion in home-equity loans outstanding were held by commercial banks at the end of last year, according to Federal Reserve data. More than 40% of that debt is on the books of the nation’s four largest banks: Wells Fargo & Co., Bank of America Corp., J.P. Morgan Chase & Co., and Citigroup Inc. Requiring big writedowns on those loans could burn through banks’ capital.


Then this:

Zombie Consumers May Chomp Into Growth

Forget the vampire craze. Investors should focus on zombies instead.

Zombie consumers, that is. In the same way corporations were “walking economic dead” in Japan after stocks and real estate collapsed there in the late 1980s, zombie U.S. consumers today could be similarly destined for years of retrenchment, notes Stephen Roach, chair of Morgan Stanley Asia. That doesn’t bode well for vigorous economic growth. Indeed, heavy household debt loads, lackluster real wage growth and renewed weakness in the housing market help explain why this has already been a disappointing recovery.

And the economy is likely to be stuck with at best subpar growth until the private sector’s deleveraging, or debt-shedding, process is complete. In Japan, that took the better part of 15 years. It was no quicker during the Great Depression. Certainly, households have made some progress lately, but this still looks to be in its early stages. While debt as a percentage of after-tax income has fallen from its peak, it remained at year end at about 120%—well above the 89% it averaged in the 1990s.

Moreover, there are signs that consumers are even starting to borrow again. On Tuesday, the Federal Reserve is expected to report that consumer credit outstanding rose by $5.5 billion in April after a $6 billion increase in March. This is hardly an encouraging development. For one, much of the recent rise appears to come from record-high levels of student-loan debt, which will depress the spending power of the next generation of Americans. Plus, a slight, recent uptick in credit-card borrowing may have resulted from consumers becoming more cash-strapped as the run-up in food and gas prices has outpaced wage gains.

That, plus further declines in home prices, could make defaulting on debt more attractive for consumers who otherwise would struggle to repay it. Already, about 60% of a half-trillion-dollar drop in household debt outstanding since 2008 appears due to defaults as opposed to repayments, estimates Paul Dales of Capital Economics. That could hamper future household borrowing activity, he notes.


And finally:

Loans From 401(k)s Are on the Rise As Investors Tap Their Inner Banker

In spite of decades of advice to the contrary and the improving economy, millions of Americans are increasingly turning to what was once a lender of last resort—their 401(k) plans.

In 2010, about one in seven workers borrowed from a 401(k) plan, according to new data from human-resources consulting group AON Hewitt. Companies that run the plans report double-digit increases in borrowing from 2009: up 14% in Vanguard Group Inc.-run plans; up 11% in plans run by T. Rowe Price Group Inc. Today, almost 30% of 401(k) savers have a loan outstanding, the highest in recent history.

That is too many, says a pair of senators. Last month, Sens. Herb Kohl (D., Wis.) and Mike Enzi (R., Wyo.) introduced the Savings Enhancement by Alleviating Leakage in 401(k) Savings Act (or SEAL Act), which would, among other things, ban products that promote withdrawals, such as 401(k) debit cards. “While having access to a loan in an emergency is an important feature for many participants, a 401(k) savings account should not be used as a piggy bank,” Mr. Kohl said in a statement.


Some thoughts:

  • There are 401(k)-linked debit cards???
  • Could the fact that the big banks hold so much second-mortgage paper explain the recent carnage in financial stocks?
  • During the credit bubble consumers could borrow on their credit cards to pay their mortgage, then extract home equity to pay off their credit cards, thereby ratcheting up their debt year after year. Now that cycle has gone negative, with underwater mortgages and excessive credit card balances taking turns draining what’s left of the average American family’s disposable income.
    This implies two things: First, consumers will be scaling back for years to come, even if interest rates stay low. Second, government will have to keep piling up debt to compensate for the runoff in mortgages and credit cards. So the economy treads water, unemployment stays high enough to force Washington to continue borrowing (no austerity for the mighty USA), and the game goes on until the markets lose their taste for new dollars.

15 thoughts on "Too Sad To Be Funny"

  1. Now see here, folks, you just go buy your dam banking stocks and take your dam virus inducing medications. Why can’t you people just die?

  2. “Time to BUY”? It’s time to freakin’ E-M-I-G-R-A-T-E ! The entire country is falling apart at the seams like a cheap lady’s summer dress under a torrential rainstorm and you MOFO’s want me to go out and buy a house. WTF are you people DRINKING?

  3. I see the point of living within one’s means. But if everyone starts doing that, the economy crashes into an even bigger hole, since consumer spending accounts for 70% of the economy. Or as they say, ‘what is good for the individual is horrible for the country as a whole’.

    With globalization, our debts cannot be inflated away, since wages won’t rise fast enough. We might as well default on our debts and get it over with. And if we’re going to do that, we might as well go back and start over with a new constitution as well.

    Sorry, but those conspiracy theories don’t make much sense to me. If those financial elitists want to take over as a fascist junta, all they have to do is just do it. They don’t have to drag this out. Probably just the opposite. They are afraid of losing all their phantom wealth, which is tied up in OTC derivatives, US Treasury Bonds, and the stock market.

    Most economic theory is hogwash, because it assumes that wealth can be stored on a macroeconomic level. It cannot. Gold and silver (which I like, btw) have no more intrinsic value than a federal reserve note. They only have the advantage of being difficult to reproduce in vast quantities. The elite apparently don’t understand that the only way to perpetuate their wealth is to make sure the economy continues to grow at a slow, steady pace.

  4. Just another 2 cents here. We’ve recently made our move and now enjoy more house for less money in a safer, smaller thus better area. We’re actually getting involved in our local community. Next Wednesday, I’m making a presentation to local biz people and community activists about creating a Public District for Economic Development.

    I’m by no means a secessionist sovereign citizen conspiracy freak whack job but I am and have been convinced that our solutions are local, not regional or national. Meeting life’s challenges and exploiting opportunities at the local level are the fights we can win.

    What impresses me most about JR’s “3 sad stories” is how, nearly 4 years following the sub-prime mortgage crash of August ’07 so many still haven’t figured out how to live within their means. Unlike most, I don’t blame these sad folks. They’ve fallen into a trap.

    Specifically, that trap is the intersection where declining wages meet rising prices. Last weekend we were stunned to see what little by way of paper goods and other staples that $149.00 actually buys these days. And $75.00 to fill the gas tank. We didn’t borrow to make these purchases though. Sad indeed that some do.

    No doubt the same predatory scum who’ve somehow avoided jail safter selling those 2nd mortgages and HELOCs are now selling ‘IRA-LOC’s.”

    The only solution for individuals is to get debt service under 35% of income. I’m still amazed that four years into the Great Recession or Greater Depression so many have failed to adjust.

    That sad fact tells me we’re in for a long one.

  5. I only can advise you people to do some research about the Bilderberg Group, and then you will understand what the Elite is trying to do. You Americans had the richest middle class, and that needs to be wiped out, because in that case the “rest” will follow. The two biggest “players” (sorry for this polite expression, I had a more filthy word in mind for them) are the Rothschilds and the Rockefellers who are organising this rigged game, and all the politicians including Obama are just puppets… The banks and the biggest multinationals are the real men in power who will squeeze our last money out of our pockets….To be honest, I’m glad I live in Belgium/Europe because when I see things like ; Martial Law , The bill of “Prolonged detention” , All those FEMA camps, HAARP, National Gard exercising on your own soil, the declining freedom of speech in America, violating human rights (refering to the constitution) and so on….than I can only pray for you guy’s. I’m also afraid that there will be NO next presidential election, because a man like Ron Paul could win (unless he will not survive untill then, you know what I mean) For those who are not awear for what ‘s happening (yet) look on youtube and start with watching ; Meltup , End of Liberty , From freedom to fascism, The endgame, National Inflation Association, interviews with Gerald Celente, etc….then you can prepare yourself for the scary near future. And please DON’T LET OTHERS THINK FOR YOU, BUT THINK FOR YOURSELF AND DON’T ACCEPT ALL THE STUPID CRAPNEWS THAT CBS, CNBC, ABC, FOX ans CNN broadcast. It’s filtered news to a ratio of 5-6 % truth, the rest is concealed. For instance did you know that Osama Bin Laden already died in december 2001, after being hospitalised BEFORE 9/11 and died of natural causes….Nothing is what it seems in this world, almost everything is organised an it’s only for the profit of a few…..Even Al-Qaeda is not real ; it’s a creation of the CIA to scare people with the intention of creating a common feeling of desperately needing a gouvernment to “protect” them….Never has a word been more abused as the word “terrorism”…….Stay allert and be God with you………………R.I.P.

    1. I’ve got plenty of time for Gerald Celente, and Max Keiser, but the risk is that you get labled a conspiracy theorist. This is the technique utilised to try and convince the sheeple that what you are referring to is propaganda, whereas the propoganda is more likely to come from the comporate business interests (and their media) who have convinced neoliberal governments to prioritise their interests over the interests of the broader population.

  6. Some more thoughts, largely evoked by the previous commentary:

    First of all, I agree that the recent increases in consumer credit is not such a good thing (even though “Pavlovic” Wall Street thinks so, until they really think about it.) In almost every case it means that one does not have the savings or income to pay for things with cash, and that the on-going debt payments will reduce future disposable income or that debt will be defaulted upon, neither of which bodes well. If one has damaged credit from the foreclosure of a house, say, then defaulting on credit card debt is a lot less onerous. Ditto that if inflation picks up. And, if we enter a counter-intuitive deflationary period then debt default may not even be an option, unless one has purposely borrowed to conserve one’s cash for just such a circumstance.

    Ken is right to question the supposedly good conditions to buy RE right now. Besides all of the myriad possible macro-economic and monetary land mines in the offing, purchasing RE now at low prevailing interest rates is only a possibly good deal if one either actually lives there for at least 10-15 years or RE prices in general increase substantially (i.e., at least 3% per year faster than inflation) over the next 5-10 years (again). This is because most people buy based upon monthly carrying costs and higher future interest rates (which is presumably why it’s such a good time to buy now) will tend to depress selling prices in the future, so prices need to increase at greater than historical rates for the math to work out in one’s favor. (Remember also that property taxes and insurance are bound to rise too in a high interest-rate/inflationary environment.) If one chooses to just live there then at least one’s mortgage payments will be “low”. Another factor to consider is that because of the slow down in new construction, if and when things do pickup future buyers will have the option to buy new, maybe “green”, etc. homes versus old ones (if they have the income and savings for a down payment, and a credit rating to qualify for a higher priced house at higher rates). If Obama has his way, those older homes may be deemed “clunkers” for not being “environmentally friendly”, which would more than just price depressing.

    Suzanne is at least right about my sentiments. I tried to borrow from my 401k to buy PMs but I can’t. I’m no longer counting on ever seeing my 401k money (and possibly IRA money too) again.

    1. I feel the same way about my retirement accounts (401a and 403b). I can’t borrow my money back, and I can’t take my money out. I would take it all out at a 70% loss if I could, because it’ll be 25 years before I can begin withdrawing, and the money will be long gone by then. Between hyperinflation, the decline of paper assets, financial collapse, the failure of FDIC / SIPC sorts of programs, and plain old confiscation… no way does my retirement money survive another quarter of a century. No way. That money’s just gone.

      Thank goodness for gold and silver.

  7. I think a lot of people are trying to get at their 401Ks right now because they know the government is going to nationalize them (take them away). My guess is the current group of people trying to get their 401Ks out of the system are trying to beat a second stock market crash AND get their savings invested into silver and gold, even if they have to take out a “loan” to do so. Anyone that isn’t completely blinded by normalcy bias is trying to get ready for the big collapse, and that means getting out of paper. Some people are so far under water they might as well rack up further debt and file bankruptcy.

    1. The first thing I thought of when I read about the SEAL legislation is that it was the first step toward eventual nationalization.

    2. Yes, Suzanne, this will be hell and it could happen overnight. The US Govt is like a crazed junkie on crack, they will do anything to get their fix and not have to deal with their addiction. First they go for the federal pensions, then the private pensions, then 401k and IRA accounts, then foreign bank accounts of US citizens living abroad, then bank accounts of all US citizens at home, then confiscation of all gold and silver. I wonder if they will come after me, I moved out of the USA and relinquished my US citizenship over 40 years ago; will the US Govt reverse that and grab all my money? I do not trust any of them, and I hope I didn’t give them any ideas just now.

  8. One thing offsetting the debt repayments is that so many people (millions) are living rent-free in foreclosed homes. We’ve all heard about people who were in their home for a year or two (or more) without making a single payment, but here’s another trick: In some states, banks who move to seize a property which is being rented must give renters a certain amount of time, say 90 days, to relocate before the bank evicts them. So, if you have a friend who’s abandoning their foreclosed home, you can move in and pay them a token few dollars in rent, and as long as there’s a legal lease then you get another 90 days in the home, rent-free, guaranteed. A friend of mine had a non-profit housing advocate explain this to her and direct her to a website for creating leases. That indicates to me that this rent-free living is common and entrenched.

  9. Why It’s Time To Buy? You got to be kidding….

    I may be looking at this this simplistic but anytime loan interest rates are really low it gives the power to the price of a long term loan. Bankers also seem to go to extra lengths to market to these customers that seem to need cash for everything, second mortgages. As long as government is handing money out for next to nothing the bankers risk is nothing. I think we are tired of the housing price market, everyone seems to be looking for the next (bubble) to happen. The people in the market want sales to happen thats the only way they make money and they will hype it up every way possible.

  10. Why It’s Time To Buy

    The Wall Street Journal

    Ruth Simon and Jessica Silver-Greenberg, On Saturday June 4, 2011, 2:47 am EDT

    Back in June 2006, when the housing market peaked, the prospect of a five-year national housing bust seemed unimaginable to most people. And yet here we are, with the latest Standard & Poor’s Case-Shiller index showing that prices hit new bear-market lows, falling back to 2002 levels nationally and to 1990s levels in some battered regions.

    Despite all the gloom, however, there are growing indications that it is a good time to buy. Mortgage rates, which fell to 4.55% for the week ending June 2, according to Freddie Mac, are near 50-year lows. Homes have become more affordable than they have been in years: According to Moody’s Analytics, the ratio of home prices to income is now 20.9% lower than the 15-year average through 2010, and 12.5% lower than the 1989-2004 average. A historic glut of homes, meanwhile, has created a buyer’s market: There were about 15 million vacant homes in the U.S. last year, according to John Burns Real Estate ConsultingInc.—some 3.1 million more than normal.

    Such conditions might not last long. Moody’s Analytics predicts that the number of distressed sales will begin to fall in 2013, and that prices will begin to edge upward then. Home building is at a virtual standstill, so the supply overhang isn’t likely to get much worse. Meanwhile, demographic indicators such as “household formation”—the number of new households each year—are on the rise, and promise to take a bite out of the glut in coming years.

    The upshot: “While we might not see rapid growth in the next couple of years, there are a tremendous number of positive signs that could lead to a rebound,” says Anthony Sanders, a real-estate finance professor at George Mason University.

    One has to wonder who’s payroll these reporters (or the Journal itself) are on, you can’t make this stuff up – or perhaps, maybe one can as this story seems to do just that. And I’m a little more than surprised to see a professor out of George Mason dribble this gobble-dee-gook. I always had a respect for GMU as they seemed to represent a more realistic view of the world…

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