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The State of the American Debt Slaves, Q1 2020

The State of the American Debt Slaves, Q1 2020

How are consumers positioned going into the crisis?

Most of the first quarter was still the Good Times, but in later February and early March it hit the fan, as markets were crashing. In mid-March lockdowns started to roll across the country, and the layoffs by the tens of millions commenced. So how were consumers positioned going into this crisis? Many of them, up to their eyeballs in debt.

Consumer debt – student loans, auto loans, and revolving credit such as credit cards and personal loans but excluding housing-related debts such as mortgages and HELOCs – jumped by $153 billion at the end of the first quarter, compared to Q1 a year earlier, or by 3.8%, to $4.15 trillion (not seasonally adjusted), according to Federal Reserve data:

In March, the problems already became apparent. On a seasonally adjusted basis (the above is not seasonally adjusted), consumer credit fell 0.3% in March from February, and except for December 2015, when a large statistical adjustment was made, this was the first month-to-month decline since the Great Recession.

OK, we know consumer credit is going to plunge. Balances of auto loans and credit loans will come down not because consumers are suddenly more prudent, but because they have lost their jobs and will default on their credit cards and auto loans. Those defaults were already happening going into the crisis, and they’re now accelerating. When lenders write those loans off, the consumer credit balances come down. Nothing to do with prudence of consumers but with losses at lenders.

…click on the above link to read the rest of the article…

HELOCs in the US & Canada: As “Scarred” Americans Learned Bitter Lesson, Canadians Went Nuts

HELOCs in the US & Canada: As “Scarred” Americans Learned Bitter Lesson, Canadians Went Nuts

Home-equity-loan balances in Canada per capita are now 3.3 times what they were in the US during HELOC peak before it all collapsed.

Home Equity Lines of Credit – the infamous HELOCs Americans used as endless ATMs to draw equity out of their homes before home prices collapsed – played a role in the US mortgage crisis. And Americans have learned a lesson since, despite mega-efforts by the industry to revive HELOCs.

Balances of revolving home equity loans at US commercial banks soared by about 300% in seven years, from $154 billion at the beginning of 2002 right into the crisis, peaking in June 2009 at $609 billion. As the housing-and-mortgage crisis blew those dreams of the endless ATM apart, Americans learned their lessons, either defaulting on, or paying down, their HELOCs. At the end of August, HELOC balances had fallen 41% from the peak, to $357 billion – back where they’d been in 2004 on the way up – even as aggregate home values now exceed the peak of Housing Bubble 1:

This near-decade-long decline triggered lamentations by William Dudley last year, when he was still president of the New York Fed, that Americans weren’t borrowing enough against their homes, and that they therefore were too lackadaisical in their job of boosting consumer spending with borrowed money.

“The previous behavior of using housing debt to finance other kinds of consumption seems to have completely disappeared,” he said. “Instead, people are apparently leaving the wealth generated by rising home prices ‘locked up’ in their homes.”

In Canada there is no such reluctance. That makes sense because Canadians had skipped the housing bust that Americans had gone through. Instead, the Canadian home-price surge, after a brief dip during the Financial Crisis, continued until 2017 and in the process became one of the wildest and scariest housing bubbles in the world. And Canadians are loving their endless home-equity ATMs.

…click on the above link to read the rest of the article…

Congrats! Canadians Just Set A New Record For Borrowing Against Their Homes

Congrats! Canadians Just Set A New Record For Borrowing Against Their Homes

Congrats! Canadians Just Set A New Record For Borrowing Against Their Homes
Canadian real estate related debt tapering? That would be ridiculous! Filings obtained from the Office of the Superintendent of Financial Institutions (OSFI) show, after a brief decline in January, the balance of loans secured by residential real estate hit a new high in February. More interesting is the segment of loans being used for personal consumption, is growing at the fastest pace in years.

Securing A Loan With Home Equity

Loans secured by residential real estate are exactly what they sound like. They’re loans that you pledge your home equity in order to secure. The most common example would be a Home Equity Line of Credit (HELOC). You know, the same type of loan the Canadian government is discretely paying to teach you how to borrow. There’s also more productive uses, like when you start a new business and need to use your home as security – just in case you aren’t able to pay your loan shark bank back.

Either way, debt is debt. The big difference to note is a loan secured for personal reasons, is considered non-productive. The borrower isn’t expected to take a calculated risk, in order to earn more money. A business loan is considered productive, since it might generate more money. This isn’t just our opinion, banks actually classify these loans separately in their filings. Today we’ll go through the aggregate of these numbers, then break them down segment by segment.

People Used Over $283 Billion In Home Equity To Secure Loans

Loans secured by real estate hit a new all-time high in February. The total balance of loans secured with real estate racked up to $283.65 billion, up 0.77% from the month before. This represents a 7.79% increase compared to the same month last year.

…click on the above link to read the rest of the article…

Household Debt Rises By $572 Billion, Ends 2017 At All Time High

After we first reported last week  that US credit card, student and auto debt all hit record highs in December of 2017…

… it should not come as a surprise that according to the just released latest quarterly household debt and credit report  by the NY Fed, Americans’ debt rose to a new record high in the fourth quarter on the back of an increase in virtually every form of debt: from mortgage, to auto, student and credit card debt (although HELOCs posted a tiny decline).

Aggregate household debt increased for the 14th straight quarter, rising by $193 billion (1.5%) to a new all time high, and as of December 31, 2017, total household indebtedness was $13.15 trillion, an increase of $572 billion from a year ago – the fifth consecutive year of increases – equivalent to 67% of US GDP, versus a high of around 87% in early 2009. After years of deleveraging in the wake of the 2007-09 recession, household debt has risen more than 18% since the trough hit in the spring of 2013.

Some more big picture trends:

  • Mortgage balances, the largest component of household debt, increased by $139 billion during the quarter to $8.88 trillion from Q3 2017.
  • Balances on home equity lines of credit (HELOC) have been slowly declining; they dropped by another $4 billion and now stand at $444 billion.
  • Non-housing balances, which have been increasing steadily for nearly 6 years overall, saw a $58 billion increase in the fourth quarter.
  • Auto loans grew by $8 billion to $1.22 trillion
  • Credit card balances increased by $26 billion to $834 billion
  • Student loans saw a $21 billion increase to $1.38 trillion

There were some red flags of caution: confirming recent negative data from Wells Fargo, and suggesting that the housing recovery is stalling, mortgage originations were at $452 billion, down from $479 billion in the third quarter.

…click on the above link to read the rest of the article…

 

Canadian Homeowners Take Out HELOCs to Fund Subprime Buyers Unable to get a Mortgage

Canadian Homeowners Take Out HELOCs to Fund Subprime Buyers Unable to get a Mortgage

The Housing & Debt Bubble ascends to the next level of risk.

By Steve Saretsky, Vancouver, Canada, Vancity Condo Guide:

The HELOC (Home Equity Line of Credit) has been a blessing and a curse for Canadian households. While it has helped spur house prices and simultaneously provided consumers the ability to tap into their new found equity, it has also crippled many Canadian households into a debt trap that seems insurmountable.

Between 2000 and 2010, HELOC balances soared from $35 billion to $186 billion, according to the Financial Consumer Agency of Canada, an average annual growth rate of 20%. As of 2016, HELOC balances sit at $211 billion, a 500% increase since the year 2000. While also pushing Canadian household debt to incomes to record highs of 168%.

Scott Terrio, a debt consultant, says the situation is a full blown “extend and pretend,” meaning borrowers are just continuously refinancing or taking on more and more debt in order to sustain their lifestyle. Canadians can extend their debt repayment terms and pretend to live a lifestyle they can’t otherwise obtain.

What the HELOC has also been able to do is help spur the private lending space which has ultimately supported rising house prices. Seth Daniels of JKD Capital, one of the most astute Canada-Watchers, says there’s a growing trend where “a homeowner acts as a sub-prime lender by drawing a HELOC at 3% interest only, and lends it to a subprime borrower at 8-12% for one year (interest only).”

This is something I’ve been hearing on an ongoing basis from mortgage brokers and lawyers who help facilitate these deals. Especially since mortgage lending conditions tightened, starting with OSFI’s first mortgage stress test back in November, 2016. The financial regulator required “high-ratio” borrowers (those with less than 20% down payment) to qualify for a mortgage at the borrowing rate plus 2%. So basically you’re getting qualified on what you can borrow at 5% even though you’re borrowing at 3%.

…click on the above link to read the rest of the article…

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