When consumers take on debt, eventually it’s paid off. Debt is not an asset people spend their lives accumulating, at least it’s not supposed to be. Paying off debt is a process known as deleveraging. In a growing economy, young people take on debts to buy cars and houses while old people pay off debts. In aggregate, debts should grow at a measured pace. When lenders make debts grow too fast, the economy becomes over-stimulated and debtors become insolvent. When large numbers of borrowers become insolvent, a credit crunch ensues, and the bills come due. This flushes out the Ponzis and mass deleveraging takes place.
When economists think about deleveraging, they envision people who got a little overextended tightening their belts and paying back their loans. This collective belt-tightening causes the economy to suffer because money that people previously spent buying goods and services is instead diverted to interest and repayment of debt. This conventional understanding may apply to some small sub-group of distressed borrowers, but the housing bubble created a much larger group of Ponzis who couldn’t possibly pay down their debts even if they wanted to. That is the bitter reality of deleveraging banks, economists, and the federal reserve don’t want to face.
The amount of home mortgages, credit card debt and most other consumer liabilities now stands on par with 2006 or earlier, according to Moody’s Analytics data.
WASHINGTON — After a long period of consumer retrenchment, U.S. families have cut their once-out-of-control debt loads down to pre-recession levels, largely removing one major obstacle to a faster economic recovery.
Bullshit. US Families haven’t cut anything. Banks have written down debts to pre-recession levels, but borrowers were not paying them back.
The amount of home mortgages, credit card debt and most other consumer liabilities now stands on par with 2006 or earlier, according to calculations by Moody’s Analytics. The notable exception is student loans, which have skyrocketed in recent years, with people flooding into schools and college costs soaring.
Overall, households today are paying less than 16% of after-tax income to cover debt payments and lease obligations, the smallest share since 1984, Federal Reserve data show.
Few experts are expecting a big ramp up in people’s spending any time soon: Consumers remain cautious because of what they’ve been through over the last five years and because of uncertainty about what lies ahead.
“It’s sort of a new reality that you have,” said Jack Ablin, chief investment officer at Harris Private Bank in Chicago. “We’re going to try to live within our means because living beyond it didn’t work out.“
The reality of economic stimulus and deleveraging is not what economists envision. The housing bubble was part of a much larger credit bubble fostered by the federal reserve and eagerly lapped up by Ponzis looking for a free lunch. Debt burdens grew wildly out of control. When the first loan modifications came out, borrowers seeking aid had total debt obligations that exceeded 75% of their gross pay! Think about that. If 25% comes out for taxes, that leaves absolutely nothing for living expenses of any kind.
So how did people live that way? Easy. They went Ponzi. It doesn’t matter what your debt service ratio is as long as another lender comes along to give you more money to pay your debt service and cover your living expenses. That’s the essence of going Ponzi.
It’s easy to blame the irresponsible borrowers for this foolishness, but the banks are more culpable than the borrowers. The banks had the responsibility to make sure they were loaning money to people with the capacity to pay them back. Obviously, they didn’t take this responsibility very seriously, or they wouldn’t have loaned more money to someone who already had debt-service burdens far in excess of what’s reasonable. Banks did this to themselves, then they turned to the US taxpayer to bail them out.
So why do I say that Ponzi borrowing is the reality of deleveraging? Because deleveraging is only occurring when banks write off their bad loans. Very few borrowers are voluntarily paying down their debts. The banks inflated a massive Ponzi Scheme that can’t be repaid, and the slow deleveraging of bank write downs is what’s paralyzing our economy, and it will continue to keep us weak until the process is complete.
Submitted by Tyler Durden on 10/15/2012
Lately there has been an amusing and very spurious, not to mention wrong, argument among both the “serious media” and the various tabloids, that US households have delevered to the tune of $1 trillion, primarily as a result of mortgage debt reductions (not to be confused with total consumer debt which month after month hits new record highs, primarily due to soaring student and GM auto loans). The implication here is that unlike in year past, US households are finally doing the responsible thing and are actively deleveraging of their own free will. This couldn’t be further from the truth, and to put baseless rumors of this nature to rest once and for all, below we have compiled a simple chart using the NY Fed’s own data, showing the total change in mortgage debt, and what portion of it is due to discharges (aka defaults) of 1st and 2nd lien debt. In a nutshell: based on NYFed calculations, there has been $800 billion in mortgage debt deleveraging since the end of 2007. This has been due to $1.2 trillion in discharges (the amount is greater than the total first lien mortgages, due to the increasing use of HELOCs and 2nd lien mortgages before the housing bubble popped).
In other words, instead of actual responsible behavior of paying down debt, the primary if not only reason there has been any “deleveraging” at all at the US household level, is because of excess debt which became insurmountable, not because it was being paid down, the result of which is that more and more Americans are simply handing their keys in to the bank and walking away, and also explains why the US banking system is now practicing Foreclosure Stuffing, as defined first here, as the banks know too well, if all the housing inventory which is currently in the default pipeline were unleashed, it would rip off any floor below the US housing “recovery” which is not a recovery at all, but merely a subsidized bounce, as millions of units are held on the banks’ books in hopes that what limited inventory there is gets bid up so high the second housing bubble can be inflated before the first one has even fully burst.
This is one of the most revealing charts to come from the housing bust. It completely refutes the idea that borrowers are voluntarily paying down their debts. The only major source of deleveraging is bank write downs.
Naturally, two concurrent housing bubbles can not happen, Bernanke’s fondest wishes to the contrary notwithstanding, especially since as shown above, US households do not delever unless they actually file for bankruptcy, and in the process destroy their credit rating for years, making them ineligible for future debt for at least five years. It is thus safe to say that all the other increasingly poorer US households (who are not getting paid more as we showed this morning with the chart showing Y/Y change in US household earnings) are merely adding on more and more debt in hopes of going out in a bankrupt blaze of glory just like everyone else: from their neighbors, to all “developed world” governments.
And why not: after all this behavior is being endorsed by the Fed with both hands and feet.
Source: NY Fed
The cycle of Ponzi borrowing will be repeated. We learned nothing positive from the housing bubble. The federal reserve is counting on this behavior to stimulate the economy through the “wealth effect.” We have an entire generation who sees housing as a breadwinner, and these people are signing up to buy again as soon as they can. Why not? Other than having to live in a rental for a while, it worked out well for them last time.
Banks keep putting off the Day of Reckoning hoping it will never come. They figure if they can get people through their productive years that perhaps they will pay off their debts as seniors, or at least die with enough assets to make lenders whole. As Ponzi age, they won’t change. The current generation of seniors came from the Great Depression and WWII Era. They believe they have a moral duty to repay their debts. The Baby Boomers and generations that followed grew up with consumer debts, and they will have a very different attitude in their senior years. They have been Ponzis all their lives, and you can’t teach an old dog new tricks.
Oct. 10, 2012, 3:24 p.m. EDT
At some point, is one too old to bother paying off a debt?
Yes. At some point, seniors should tell lenders to piss off.
Consider this Kansas couple saddled with $120,000 in debt on 13 credit cards. Jim Bostick, then 68, and his wife Francine, then 57, feared they’d spend their golden years in the red. Then “Jim was diagnosed with Alzheimer’s and I knew he wouldn’t be able to continue working,” Francine says in this interview with The National Foundation for Credit Counseling . “With the debt that we had there was no way we could pay it. I lay awake at night,” she says.
Who is to blame, the lenders that gave these people $120,000 in credit lines, or the borrowers themselves?
… the Bosticks didn’t have any medical emergency. “Everyone wants nice things,” Francine says; “we used credit cards to get them.”
The couple finally took action. Francine reached out to the non-profit Housing and Credit Counseling Inc. in Topeka, Kan., a member of the national foundation. In addition to her full-time job, she took an evening cleaning job and launched her own Avon business. Despite his condition, Jim, who was a maintenance and custodial supervisor at Kansas State University, worked 30 hours per week to help the couple stick to their household budget and $2,500 a month repayment plan. “It was probably the greatest thing I ever did,” Francine says.
But was it the smartest?
No. It wasn’t.
Based on their age, they should have explored filing for bankruptcy, some experts say. “I think the couple did the ethical thing, but it probably was not in their financial best interest to do what they did, especially at their age,” says Wade Westhoff, a financial adviser based in Danville, Calif. Couples facing retirement – especially if they have already paid off their mortgage – have less reason to worry about the impact of a bad credit rating, he says. “They could have wiped the slate clean.”
These people are working themselves to death in what should be their golden years. I suppose that’s the price Ponzis pay for the way they live. They either suffer an extreme loss of entitlement in their old age, or they work until the day they die. I hope I suffer neither of those fates.
Doubling the mortgage in seven years
The former owners of today’s featured property deleveraged like most other Ponzis. They walked away and forced the bank to take a huge write down. They consistently went to the housing ATM without regard to how they would pay back the mortgage or even service the debt. They were foolishly offered free money by a bank looking to generate fees, so they took the money.
- This property was purchased for $435,000 on 5/11/2000. They used a $391,500 first mortgage, a $21,750 second mortgage, and a $21,750 down payment.
- On 7/12/2000, after their mandatory two-month waiting period, they obtained a $22,000 HELOC and promptly withdrew their down payment. Obviously, this house was never intended as a reservoir of value. It was a workhorse.
- On 7/21/2000, a week later, they obtained another HELOC for $36,000.
- On 9/26/2002 they refinanced with a $427,000 first mortgage.
- On 11/4/2003 they obtained a $100,000 HELOC.
- On 7/20/2005 they refinanced with a $663,600 first mortgage.
- On 5/26/2006 they refinanced with a $700,000 first mortgage.
- On 7/18/2006 they obtained a $200,000 HELOC.
- On 4/2/2007 they opened a $204,330 HELOC.
- Assuming they maxed out the final HELOC, the total mortgage equity withdrawal was $491,080, and the total property debt was $904,330.
- They squatted for two and a half years.
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Proprietary OC Housing News home purchase analysis
$575,000 …….. Asking Price
$435,000 ………. Purchase Price
5/11/2000 ………. Purchase Date
$140,000 ………. Gross Gain (Loss)
($34,800) ………… Commissions and Costs at 8%
$105,200 ………. Net Gain (Loss)
32.2% ………. Gross Percent Change
24.2% ………. Net Percent Change
2.2% ………… Annual Appreciation
Cost of Home Ownership
$575,000 …….. Asking Price
$115,000 ………… 20% Down Conventional
3.46% …………. Mortgage Interest Rate
30 ……………… Number of Years
$460,000 …….. Mortgage
$104,417 ………. Income Requirement
$2,055 ………… Monthly Mortgage Payment
$498 ………… Property Tax at 1.04%
$0 ………… Mello Roos & Special Taxes
$144 ………… Homeowners Insurance at 0.3%
$0 ………… Private Mortgage Insurance
$0 ………… Homeowners Association Fees
$2,697 ………. Monthly Cash Outlays
($319) ………. Tax Savings
($729) ………. Equity Hidden in Payment
$125 ………….. Lost Income to Down Payment
$164 ………….. Maintenance and Replacement Reserves
$1,938 ………. Monthly Cost of Ownership
Cash Acquisition Demands
$7,250 ………… Furnishing and Move In at 1% + $1,500
$7,250 ………… Closing Costs at 1% + $1,500
$4,600 ………… Interest Points
$115,000 ………… Down Payment
$134,100 ………. Total Cash Costs
$29,700 ………. Emergency Cash Reserves
$163,800 ………. Total Savings Needed