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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withdrawn from homes during the boom was used to acquire luxuries such as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
John Rubino
DollarCollapse.com
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