Bad News For The Economy: Some Have Stopped Paying Loans On Mobile Homes

Some people in the United States have stopped paying their loans on mobile homes. This is a bad sign for the economy as many no longer can afford the increase in interest rates.

According to a report by Yahoo Finance, the mobile home market is showing the first signs of stress.  The delinquency rate on mobile home loans has increased by 200 basis points, or 2 percentage points, over the past year, according to research cited by UBS. The 30-day-plus delinquency level is now about 5%, the highest level since 2005.

The increase in the number of struggling mobile-home borrowers suggests that a large chunk of these people haven’t benefitted from the economic growth of the past few years, despite the low unemployment level. For those living paycheck to paycheck, even the slightest increase in interest rates could force them to decide whether to eat or pay their loan on their home.

“We interpret this data to mean that these individuals have not largely benefitted from these macro-dynamics, and may also be disproportionately exposed to industries that have experienced compression — rather than expansion — in the current economic conditions, such as retail or some areas of energy extraction,” UBS said.

Although this is a warning sign for the economy, conventional single-family residential loan delinquencies haven’t seen a similar uptick. Instead, they are continuing their steady downward path through the post-recession recovery.  But many analysists would argue there was never actually a recovery. In 2016, Peter Schiff warned that we were in a false recovery: one that’s worse than a legitimate recession. 

“The real choice is not between recession now or recession later. It’s between a massive recession now, or an even more devastating one later … Now is the time to bite the bullet, endure the pain, and allow the wound to actually heal,” said Schiff, who accurately predicted the 2008 recession and says the recovery isn’t a real one.

Since 2009, all of the standard metrics for indicating a recovery have shown sub-par results. The only growth has occurred in asset prices. However, higher prices in stocks and bonds haven’t occurred because of upward pressure from a free market, but have been artificially inflated by easy borrowing and risky speculation. Consequently, the “recovery” we’re supposedly experiencing is as artificial as asset prices themselves. The next bubble that will have to burst is the Fed’s own fantasy it’s been selling investors. –Schiff Gold

The truth is, the US economy is stuck; raising rates will send the US into a recession, but keeping them the same will make the eventual pain of an economic crash much worse. “I agree with those who believe that rate hikes now will bring on a recession,” Peter Schiff stated in an article. “But I disagree that we should keep rates where they are … despite the short term pain that will surely follow, we need to raise rates now to break the addiction before it gets worse.”

But UBS did admit that losses will start to impact other debts as well, and likely soon. “We believe weakness in these two groups [lower and middle class] will drive higher credit losses at some stage over the next few years — particularly in credit card, installment, and student loans — with macroeconomic inflection from job growth to job loss as a likely catalyst,” UBS said.

Now is a great time to prepare for the economic collapse.  The economy won’t last forever being propped up by debt and Feds manipulation of the markets. But the good news is, prepping for the eventual collapse is made easy with the book titled The Prepper’s Blueprint.  It’s a great resource for those just starting out and for those who may have overlooked something.

Canadian Homeowners Take Out HELOCs To Fund Subprime Purchases

Authored by Steve Saretsky via VanCityCondoGuide.com,

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%.

HELOC Debt in Canada

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 theres 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 which required high ratio borrowers (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%.

This strategy has been bulletproof, because, well, prices can only go up.

The lender makes a juicy return, and the borrower gets his house. The borrower then transitions into a traditional mortgage once his home equity rises after the one year expires.

This has created a situation where, as of September 2017, personal loans secured against residential real estate hit a record high $247 Billion.

Source: Better Dwelling via OSFI

Thanks to an endless supply of new loans (credit) and rising house prices, mortgage arrears rate continue to fall to rock bottom lows.

Source: CMHC

But as Seth Daniels remarked, “Up to a point, the greater the debt growth, the lower the arrears because as they say ‘a rolling loan gathers no loss’. In other words when debt growth is exploding people can find ways of avoiding default by rolling the loan, refinancing, selling the asset, or whatever. So, paradoxically, the default rate will seem to improve when the actual risk in the economy is exploding”.

With another mortgage stress test set to roll out January 1, 2018, this will likely push another swarm of borrowers into the private lending space. We’re already witnessing a huge end of the year push as buyers scramble to secure a home prior to further mortgage clamp downs.

The new mortgage stress test which previously only targeted high ratio borrowers (less than 20% downpayment), will now include low ratio borrowers (more than 20% downpayment) as well. This could be substantial, considering  85% to 90% of all mortgages in Toronto & Vancouver are low-ratio.
(American Readers: Canadians can only secure a mortgage rate for a maximum term of 5 years, meaning a rising interest rate environment is much more impactful)

It’s anticipated to eliminate some 12% of low ratio borrowers while simultaneously reducing borrowing power by 20%.

This could signal a final boom for the private lending space in Canada.

These PE Firms Are About To Get Crushed By Their Subprime Auto Bets

In the aftermath of the "great recession," private equity firms placed massive bets on subprime auto finance companies with the typical "thesis" going something like this: "well, people have to get to work don"t they?"...genius, if we understand it correctly.

Of course, the "thesis" seemed to be confirmed when auto securitizations performed relatively well throughout the financial crisis, amid a sea of mortgage bonds getting wiped out, and private equity titans were off to the races with wall street titans from Perella Weinberg to Blackstone and KKR scooping stakes in small niche lenders.

Unfortunately, as Bloomberg points out today, the $3 billion bet on subprime auto lenders hasn"t played out precisely to plan as the "well, people have to get to work" thesis has proved to be somewhat less than full proof.

A Perella Weinberg Partners fund has been sitting on an IPO of Flagship Credit Acceptance for two years as bad loan write-offs push it into the red. Blackstone Group LP has struggled to make Exeter Finance profitable, despite sinking almost a half-billion dollars into the lender since 2011 and shaking up the C-suite multiple times. And Wall Street bankers in private say others would love to cash out too, but there’s currently no market for such exits.

 

Since the turn of the decade, buyout firms, hedge funds and other private investors have staked at least $3 billion on non-bank auto lenders, according to Colonnade. Among PE firms, everyone from Blackstone and KKR & Co. to Lee Equity Partners, Altamont Capital and CIVC Partners waded in.

 

Many targeted smaller finance companies that often catered to the least creditworthy borrowers with nowhere else to turn. Overall, subprime car loans -- those extended to people with credit scores of 620 or lower -- have increased 72 percent since 2011. Last year, about 20 percent of all new car loans went to subprime borrowers.

 

“The PE guys sailed into this thing with stars in their eyes. Some of the businesses have done fine and some haven’t,” said Chris Gillock, managing director at Colonnade Advisors, a boutique investment bank. But right now, “it’s about as out-of-favor a sector as I can think of.”

Of course, the turnaround strategy was "simple." Given that subrpime auto collateral held up well during the great recession, private equity investors figured they were sitting on rock solid collateral that would holdup under even the most egregious loosening of underwriting standards.  Therefore, given that there was "no downside", lenders wholeheartedly embraced deteriorating underwriting standards, like stretching out terms so borrowers could "afford" cars they couldn"t really afford, as a way to grow their loans books. 

Alas, it didn"t work out as planned as subprime delinquencies are suddenly soaring and used car prices are tanking...making profits somewhat elusive.

Take Exeter. The company, which is licensed in all 50 states and works with roughly 10,000 dealerships, hasn’t been profitable since 2011, when Blackstone took a majority stake, an S&P Global Ratings report in September showed. That’s after the PE firm invested $472 million to help Exeter expand and cycled through three CEOs at the lender.

 

On a pretax basis, Exeter turned a profit in 2016 and 2017, according to Matthew Anderson, a spokesman at Blackstone. He added the New York-based firm hasn’t tried to sell the lender.

 

Blackstone may look to unload Exeter later next year, said a person familiar with the matter, who asked not to be identified because it’s private.

 

Bad loans remain an issue. This year, a rash of delinquencies in two bonds stuffed with loans that Exeter made in 2015 caused the securities to dip into their extra collateral to keep investors whole.

 

Another example is Flagship, which Perella Weinberg bought in 2010. (Innovatus Capital Partners, which manages the lender on behalf of Perella Weinberg, was formed by former Perella Weinberg managers last year after they split from the firm.)

As it turns out, the "well, people have to get to work" thesis only works to the extent that auto manufacturers maintain some level of discipline and refrain from exploiting their captive finance companies to flood the market with new supply...a move which will eventually lead to crashing used car prices and massive subprime securitization losses.

Unfortunately, as we pointed out last month, a review of the latest Fed data on auto loans underwritten by "Banks and Credit Unions" compared to those loans provided by "Auto Finance" companies prove that the nightmare scenario is playing out for subprime lenders...

First, taking a look at auto loans provided by traditional banks and credit unions, one can see some marginal deterioration in subprime auto loans.  That said, the deterioration is certainly nothing substantial with 90-day delinquencies pretty much in line with 2004/2005 levels and no where near the rates experienced in 2008/2009.

 

 

But, a drastically different picture emerges when looking at just the auto loans originated by America"s auto finance captives.  To our great "shock", auto OEMs in the U.S. seem to have been much more "flexible" on underwriting standards over the past couple of years resulting in delinquency rates that nearly rival those last experienced at the height of the great recession.

 

Of course, we"re sure that GM Financial and Ford Motor Credit just got unlucky with their deteriorating credit portfolios...certainly they would never knowingly attempt to game their own short-term financial success by putting millions of Americans into cars they can"t possibly afford, right?

Defaulting on Student Loans Can Mean Loss of Jobs

The following states have laws permitting suspension of professional or driver’s licenses of individuals defaulting on student loans – compounding a deplorable racket:

Alaska, Arkansas, California, Florida, Georgia, Hawaii, Illinois, Iowa, Kentucky, Louisiana, Massachusetts, Minnesota, Mississippi, New Mexico, North Dakota, Tennessee, Texas, Virginia and Washington.

Maybe others will join them, part of a great wealth transfer swindle, shifting it inexorably from most Americans to its privileged class, ongoing for years.

The student loan racket is a disturbing government/corporate partnership. Students are exploited for profit. Providers are enriched.

For many, rising tuition and fees make higher education unaffordable. Others need large loans to attend, forced into burdensome debt bondage. For many, it’s crushing.

For too many, it’s permanent, amounts owed unforgiven. Declaring bankruptcy doesn’t end the obligation.

Lenders thrive on defaults. Wages can be garnished. So can Social Security and disability income, along with other retirement benefits. Liens can be placed on property owned. Tax refunds can be seized.

A conspiratorial alliance of lenders, guarantors, servicers, and collection companies profit from debt service and inflated collection fees – a deplorable predatory system.

Principal, accrued interest, late payment and collection agency penalties create enormous burdens to repay.

Once entrapped, escape is impossible. Unless repaid, future lives and careers are impaired.

Outstanding student loan debt exceeds $1.5 trillion, second only to household mortgages – nearly equal to credit card and auto loan debt combined, the amount increasing by an astonishing $3,000 per second, $180,000 per minute, $10,800,000 per hour, over 259,000,000 daily, around $100 billion annually – why it’s so lucrative for lenders and collection companies.

The New York Times addressed the issue, saying “(f)all behind on your student loan payments, lose your job.”

“Firefighters, nurses, teachers, lawyers, massage therapists, barbers, psychologists…real estate brokers (and others) have all had their credentials suspended or revoked.”

Numbers of individuals affected aren’t known because states don’t keep records. Loss of jobs means lost income, for many desperation, many others unable to work in their chosen field, disrupting their lives and welfare.

Failure to make payments on time affects credit ratings, harming the ability to get future loans.

In 1990, the Department of Education urged states to deny professional licenses to student loan defaulters, or revoke them from individuals having them.

American Federation of Teachers president Randi Weingarten called suspending or revoking licenses “tantamount to modern-day debtors’ prison.”

Alaska, Hawaii, Iowa, Massachusetts and Washington aren’t using their laws. Oklahoma and New Jersey eliminated earlier ones enacted into law.

Where enforced, the livelihood of anyone failing to maintain repayments as required is jeopardized.

If out of work because of failure to keep up and having licenses suspended, how is future debt service possible without employment providing income?

Congress bears full responsibility for increasing debt bondage. It ended bankruptcy protections, refinancing rights, statutes of limitations, truth in lending requirements, fair debt collection ones, and state usury laws when applied to federally guaranteed student loans.

Millions of graduates and families are harmed, many relegated to years of debt bondage, for some a lifetime – through legalized wealth extraction, a congressionally sanction extortion racket.

The post Defaulting on Student Loans Can Mean Loss of Jobs appeared first on The Sleuth Journal.

This Michigan Bank Just Brought Back The Zero-Down Mortgage; They"ll Even Cover Your Closing Costs

A small savings bank in Michigan, Flagstar Bank, has come up with a genius, innovative new mortgage product that they believe is going to be great for their investors and low-income housing buyers: the "zero-down mortgage."  What"s better, Flagstar is even offering to pay the closing costs of their low-income future mortgage debtors.  Here"s more from HousingWire:

Under the program, Flagstar will gift the required 3% down payment to the borrower, plus up to $3,500 to be used for closing costs.

 

According to the bank, there is no obligation for borrowers who qualify to repay the down payment gift.

 

The program is available to only certain low- to moderate-income borrowers and borrowers in low- to moderate-income areas throughout Michigan.

 

Borrowers would not have to repay the down payment or closing costs. But a 1099 form to report the income would be issued to the Internal Revenue Service by the bank. So the gifts could be taxable, depending on the borrower’s financial picture.

 

Flagstar said borrowers who might qualify for its new program typically would have an annual income in the range of $35,000 to $62,000. The sales price of the home -- which must be in qualifying areas -- would tend to be in the range of $80,000 to $175,000.

Think it"s too good to be true?  Lakeshia Wiley of Detroit"s west side begs to differ...she recently went through Flagstar to purchase her new home and only had to come up with $350 of her own money.  Per the Detroit Free Press:

Lakeshia Wiley, 35, said she wouldn"t have been able to buy her first home without the Fifth Third Down Payment Assistance program and two other grants, including one from Southwest Solutions.

 

The brick home, built in 1951, is on Detroit"s west side, needed very little work and was priced at $50,000.

 

"I"m very excited every time I think about it. It"s beautiful. I love it," Wiley said.

 

Wiley never expected to be able to buy a home, though, because she has had a hard time saving for a down payment.

 

"I didn"t think I"d be able to do it," said the single mother who has two sons, ages 17 and 10, and a daughter, age 6. She works at a Detroit pharmacy.

 

Thanks to the down payment assistance and the grants, Wiley was able to buy her home in April. She had to bring less than $350 to the table at closing.

The Flagstar program is available in 18 counties in Michigan, and could be used for certain homes in Detroit and Flint, along with other cities.

Of course, we would highly encourage Flagstar to take a look back into ancient history for case studies on what happened the last time banks started peddling "innovative" mortgage products.  Here"s a summary of the Lehman Brothers case study:

Ironically, South Park also did some fascinating research on the topic:

U.K. Litigation Cases On Defaulted Consumer Debts Soar Beyond 2008 Levels

Last month, S&P warned that UK lenders could incur £30 billion of losses on their consumer lending portfolios consisting of credit cards, personal and auto loans if interest rates and unemployment rose sharply.  Much like in the U.S., S&P warned that "loose monetary policy, cheap central bank term funding schemes and benign economic conditions" had fueled an "unsustainable" yet massive expansion of consumer credit that will inevitably end badly.  Per The Guardian:

The rapid rise in UK consumer debt to £200bn from car finance, personal loans and credit cards is unsustainable at current growth rates and should raise “red flags” for the major lenders, ratings agency Standard & Poor’s has warned.

 

In detailed analysis of the sector, S&P warned that losses from this form of lending suffered by banks and other financial institutions could be “sharp and very sudden” in an economic downturn and may be exacerbated if the Bank of England increased interest rates.

 

It also warned that it could downgrade banks’ credit ratings if the high growth rate persisted or banks took on too much risk in this sector. But it did not fear any system-wide impact from consumer credit.

 

“Loose monetary policy, cheap central bank term funding schemes and benign economic conditions have supported consumer credit supply and demand,” S&P said.

 

Annual growth rates in UK consumer credit of 10% a year have outpaced household income growth, which is closer to 2%, and become a focus for the Bank which is scrutinising lenders’ approach to the sector.

 

“We believe the double-digit annual growth rate in UK consumer credit would be unsustainable if it continued at the same pace,” S&P said.

Now, new data surrounding the growing number of court filings related to the recovery of consumer debts highlights just how serious the personal leverage problem has become in the UK.  As the FT points out this morning, there have been over 900,000 court judgements on consumer debts in just the first 9 months of 2017, up 34% compared to the same period in 2016, compared to only 827,000 at  the height of the great recession in 2008.

Consumers who refuse to repay their debts are increasingly being taken to court, with litigation at levels last seen in the run-up to the 2007-08 financial crisis.

 

New figures show there were 910,345 county court judgments in the nine months to the end of September. This is an increase of 34 per cent per on the same period in 2016, and compares with 827,000 in the whole of 2008, at the onset of the financial crisis.

 

The rise in court judgments is another indication of the high levels of unsecured debt weighing on British consumers, with Bank of England data showing that borrowing through credit cards, overdrafts and car loans has topped £200bn for the first time since the global crisis.

 

Although UK unemployment is at all-time lows, growth in real incomes and the savings rate have both deteriorated in recent months, suggesting household finances are worsening. Many economists are predicting a slowdown in what has been robust consumer spending.

This should come as little surprise to our readers as we pointed out earlier this summer that the U.K. auto market had seemingly taken a page from U.S. subprime lenders by offering a brand new car, with no money down, to anyone who walks into a dealership with a pulse (see: Undercover Investigation Exposes Deteriorating Auto Lending Standards In Europe; No Job, No Problem) . As the Daily Mail pointed out, their undercover reporters visited a total of 22 dealerships and were repeatedly offered cars of various values with no money down and despite reporters admitting that they had no job and no source of income.

Reporters visited 22 dealerships in England and Scotland, saying they were in their early twenties and either unemployed, on low incomes or trying to buy a car despite having poor credit ratings. Half of the dealerships – including ones selling Audis, Mazdas, Suzukis, Fords, Vauxhalls and Seats – told them they could have a brand new car without paying a penny up front.

 

In each case they were offered Personal Contract Purchase (PCP) deals – a type of car loan that now makes up nine out of ten car sales bought on finance in Britain.

 

These deals offer smaller monthly payments than traditional car loans.

 

A reporter who said he was working part-time on the minimum wage was offered a £15,000 Seat Ibiza without a deposit at a Seat dealership in Manchester.  Another reporter suggested that he had bad credit, but he was offered an £8,600 Vauxhall Corsa in Birmingham.

 

Kevin Barker, 71, found himself £3,500 in debt when he suffered a heart attack six months into a PCP deal. He said a ‘pushy’ Toyota salesman ‘pressured’ him into taking out a 36-month agreement in November 2014 and he was not told of the repercussions if he fell ill or lost his job.

Of course, excessively levered household balance sheets work wonders for gaming GDP growth...that is, right up until the point that interest rates start to rise and those households realize their ability to "afford" their spending binge was nothing more than a temporary blip courtesy of accomodative interest rate policies...the reversal of which will now render many of them bankrupt.

World"s Longest Bull Market (55 Years) In Australian House Prices Is Over, According To UBS

This morning, CoreLogic released its monthly report on Australian house prices – the world’s longest running bull market. Finally, measures to tighten credit standards and dissuade overseas buyers (especially Chinese in Sydney and Melbourne) are beginning to bite and price rises ground to a halt last month. From the report...

Since moving through a peak rate of growth in November 2016, capital gains across Australia’s housing market have been losing momentum, with national dwelling values unchanged over the month of October. For October, conditions were flat across both the combined capital cities and the combined regional areas of Australia, however over the past twelve months growth in the capital cities (+7.0%) has outperformed the regional areas (+4.9%).

 

CoreLogic head of research Tim Lawless said, “The slowdown in the pace of capital gains can be attributed primarily to tighter credit policies which have fundamentally changed the landscape for borrowers.” 

 

“Lenders have tightened their servicing tests and reduced their appetite for riskier loans, including those on higher loan to valuation ratios or higher loan to income multiples.  Additionally, interest only borrowers and investors are facing premiums on their mortgage rates which are likely to act as a disincentive, especially for investors who are generally facing low rental yields on investment properties. 

 

“In fact, the peak rate of growth in dwelling values lines up closely with the peak growth rate for investment lending in late 2016.   We saw the housing market respond in a similar fashion through 2015, and the first half of 2016 as investors faced tighter credit conditions following the announcement from APRA that lenders couldn’t surpass a 10% speed limit on investment lending.”

The top line in CoreLogic’s summary table below shows that Sydney prices seem to be leading national prices lower.

Following the release of the data, Bloomberg reports that UBS is calling an end to the boom in Australian housing...

The housing boom that has seen Australian home prices more than double since the turn of the century is “officially over,” after data showed prices now flatlining, UBS Group AG said.

 

National house prices were unchanged in October from September, while annual growth has slowed to 7 percent from more than 10 percent as recently as July, CoreLogic data released Wednesday showed. “There is now a persistent and sharp slowdown unfolding,” UBS economists led by George Tharenou said in a report.

 

“This suggests a tightening of financial conditions is unfolding, which we expect to weigh on consumption growth via a fading household-wealth effect.”

 

An end to Australia’s property boom will be welcome news for first-time buyers, who have struggled to break into the market after surging prices propelled Sydney past London and New York to be the second-most expensive housing market. Less impressed may be property investors, already squeezed by regulatory lending curbs that drove up mortgage rates.

 

The cooling housing market may encourage the Reserve Bank to keep interest rates at a record low. A rate hike would be undesirable as it would put further downward pressure on dwelling prices, said Diana Mousina, senior economist at AMP Capital Investors.

The regulatory crackdown on the insanely loose practice of lending on high loan to valuation ratios is well overdue. This was permitting speculators to use unrealized gains on one property as a down payment on another property, then another property as prices roses, and so on. See our post from last month “Australia Mortgage Market Is Now A $1.7 Trillion ‘House Of Cards.’”

As we noted at the times, over a decade ago, the U.S. residential housing market was revealed to be perhaps the biggest ponzi scheme ever created as easy financing enabled people to buy/build countless investment properties, that they were in no way adequately capitalized to own, with no money down all based on the premise that the house could be "flipped" before the first mortgage payment even came due.  It was a classic ponzi that worked great for a while but inevitably turned south when home prices suddenly soured and their was no cash equity backing the trillions of dollars in outstanding mortgage debt. But, if a new report from LF Economics is even directionally accurate, then the bubble currently percolating in Australia could take the residential housing ponzi game to a whole new level courtesy of a "creative" little product called "cross-collateralized residential mortgages."

The Australian mortgage market has “ballooned” due to banks issuing new loans against unrealised capital gains of existing investment properties, creating a $1.7 trillion “house of cards”, a new report warns.

 

The report, “The Big Rort”, by LF Economics founder Lindsay David, argues Australian banks’ use of “combined loan to value ratio” — less common in other countries — makes it easy for investors to accumulate “multiple properties in a relatively short period of time despite high house prices relative to income”.

 

“The use of unrealised capital gain (equity) of one property to secure financing to purchase another property in Australia is extreme,” the report says.

 

“This approach allows lenders to report the cross-collateral security of one property which is then used as collateral against the total loan size to purchase another property. This approach substitutes as a cash deposit.

 

“This has exacerbated risks in the housing market as little to no cash deposits are used.”

Yes, you read that correctly...Australian housing speculators can literally use unrealized gains in investment properties as a "cash substitute" for down payments on other investment properties.  Of course, we"re not experts at "the mathematics," but if you constantly take every dollar worth of equity you accrue and pledge it as collateral toward a new purchase then doesn"t that mean the entire system is built on debt and no actual equity at all?

Earlier this month, the Bank for International Settlements (BIS) released a new working paper,  “Interest rates and house prices in the United States and around the world”.

This identified Australia’s 55-year housing bull market – 50 years from 1961-2010 then 2013-2017 without a downswing in between – as the longest in world. The US housing bull market from 1992-2006 was a mere 15 years. This was the BIS methodology.

Another way to appreciate the persistence of house prices is to contrast the length of their upswings and downswings. We define an upswing (downswing) as a period of house price increases (decreases) sustained in an individual country for three years or more. Based on this definition, periods of upswing accounted for nearly 80% of the advanced economy sample. The up swings lasted on average 13 years; with the longest one, in Australia, still continuing after half a century.

Here are the results in tabular form – Australia is third from bottom...

Since 2000, the BIS found that Australia has seen the second largest increase in real house prices, only exceeded by New Zealand – where the new government has just banned foreign buyers from the market.

 

Our gut feeling is that today’s data signals the beginning of a “Minsky Moment” for the Australian housing market.

How Many Hours Americans Need To Work To Pay Their Mortgage

When it comes to the cost of living in cities, a general rule of thumb is that housing prices are much higher in the country’s economic and population hubs, especially in the cities along the coasts.

As Visual Capitalist"s Jeff Desjardins notes, particularly in recent years, prices have been pushed sky-high in places like New York City or San Francisco through a combination of limited supply of new homes, increasing demand, shifting demographics, and government regulations.

PUTTING IT INTO PERSPECTIVE

Today’s visualization from HowMuch.net applies a common denominator to compare 97 of the biggest cities in the United States. Using a measure of median household income against the average mortgage payment in each city, we get a gauge of how many hours must be worked each month just to pay down the house.

The visualization uses data from the U.S. Census for household income and Zillow for median home listing price, while calculating mortgage payments based on a standard 30-year term.

Courtesy of: Visual Capitalist

THE RESULTS

Using the above method to compare the amount of hours it takes to pay down a monthly mortgage, we see some interesting contrasts in the country.

Here are the five most expensive cities in the United States for housing:

With about 170 hours in a normal work month, the average people in these cities are spending 50% or more of their income just to pay down their mortgages. It’s worst in New York City and Los Angeles, where at least 65% of income is going towards housing.

These cities stand in stark contrast to the five cheapest cities based on hours of work needed:

In a city like Memphis, TN it takes only 18.4 hours of work a month to pay down the average mortgage. That’s equal to only about 10% of monthly household income.

COASTAL DISPARITY

Interestingly, even though coastal hubs have high prices relative to the cities in the middle of the country, they differ quite widely against each other. This discrepancy does not necessarily show in terms of ranking, but more in terms of the actual hours of work needed.

Washington, D.C., for example, requires less than half the hours of work to pay down a mortgage than Los Angeles or New York City. Meanwhile, a popular west coast hub like Seattle only needs 72.8 hours in comparison to New York’s 113.5 hours.

Vulture Investors Swarm To Houston As Flooded Homes Sell For 40 Cents On The Dollar

      "The time to buy is when after there"s blood water in the streets."

As 1,000"s of families along the Texas shoreline continue to struggle with putting their lives back together following the apocalyptic landfall of Hurricane Harvey roughly 6 weeks ago, vulture investors are increasingly swooping in to exploit their misery with offers to buy flooded homes for cents on the dollar.  As Bloomberg points out this morning, one such investor is Bryan Schild who has sourced capital from local "hard-money lenders" to scoop up 30 flooded homes for as little as 40 cents on the dollar.

Bryan Schild drives through the byways of Houston looking for what could be the investment opportunity of a lifetime: homes selling for as little as 40¢ on the dollar. “We Pay Cash For Flooded Homes $$$$$$$$ Don’t fix it, sell it. Quick close,” read the signs piled in the back seat of his Ford pickup.

Schild stops by a ranch-style house where 74-year-old Paul Matlock lives with his wife, disabled from multiple sclerosis. Matlock is desperate to leave and is considering Schild’s offer of $120,000—half the home’s value three weeks earlier. A half-dozen other investors have made offers, one as low as $55,000. “The whole thing makes me feel like there’s a bunch of vultures sitting on my back fence,” Matlock says. “They’re waiting for the dead body to fall over.”

It’s axiomatic on Wall Street that the time to buy is when fear overtakes greed—when blood (or, in this case, water) is in the streets. Now some are eyeing the billions of dollars in hurricane-ravaged property in Texas and Florida and deciding it may be the time to take out their checkbooks. Investors such as Schild figure they can buy low, either fix up and flip the houses or rent them out for several years, and unload them later, doubling their money or more.

And if exploiting the elderly isn"t enough to make you a little queasy, how about taking advantage of a disabled Army vet who has been forced to live out of a hotel room and eat two meals a day just to save a little cash after he lost his home to Hurricane Harvey...

One of Schild’s prospects is Joseph Hernandez, a disabled U.S. Army veteran married to a housekeeper. The couple are living in a hotel and saving money by eating only two meals a day. Schild has made them a painful offer. If they walk away from their two-bedroom house, worth $127,000 before Hurricane Harvey, Schild will pick up the mortgage payments, paying nothing else. Although he says he sympathizes with the Hernandezes’ plight, he thinks the offer is fair because he figures the home is now worth less than its $65,000 mortgage.

Hernandez is in a bind. He didn’t buy flood insurance because his house wasn’t in a high-risk area. He can’t afford to rebuild, and he’s been told he’s eligible for only $23,000 in federal assistance. If he turns over the deed, he’s looking at losing the entire $60,000 in equity he had before the flood. “It’s blurry, what’s coming,” he says. “We’ll probably have to sell to an investor, and that’s not good. We were forced out.”

Hernandez isn’t ready to take Schild’s deal. But Matlock, who rescued his disabled wife from chest-high water, is tempted by the investor’s $120,000 offer. Their home, now stripped to the beams, has flooded twice in two years. Schild says Matlock should be able to recover much of his loss on the house’s value through federal flood insurance. (In past storms, homeowners have complained the program lowballed them.) Before he leaves, he asks Matlock to spread the word. “Anybody looking to sell, tell them to call me,” he says. “I’ll give them a bid.”

But, it"s not just small-time, local investors looking to earn big profits from the misery of displaced Texans.  Nope, wall street investors, led by Bain Capital, are also getting involved.

The cycle begins with small-time investors such as Schild, who’s bought more than 30 waterlogged houses for an average $175,000 apiece. Then Wall Street swoops in. Gary Beasley, former chief executive officer of Waypoint Homes, also sees an opportunity. He’s pitching private equity firms and pension funds on the potential profit in buying flooded homes, repairing them, and renting them back to homeowners.

Bain Capital LP and billionaire Marc Benioff, co-founder of Salesforce.com Inc., are backing Beasley’s two-year-old company, Roofstock Inc. It runs a website where investors can buy and sell single-family rental properties. Beasley thinks owner-occupants may be interested in selling there, too, and that flooded neighborhoods are the Next Big Thing. “It’s much like the housing crisis, when the institutional guys came in to buy homes nobody wanted,” he says. Like other investors, Beasley and Schild view themselves as helping homeowners to move on and Houston to rebuild.

Of course, as Andrea Heuson, a finance professor at the University of Miami, points out, most of the people selling aren"t doing so because of a lack of financial sophistication that impairs their ability to comprehend the fact that they"re getting shafted but rather just a complete lack of alternatives.

Others take a less rosy view. “What worries me is people making pretty dramatic decisions without the education to figure out what the alternatives are and without looking at the situation rationally,” says Andrea Heuson, a finance professor at the University of Miami who specializes in mortgages. Some of those considering Beasley’s strategy don’t want to be named for fear of looking like catastrophe profiteers, Beasley says.

Many homeowners would be forgiven for panicking. During hurricanes Harvey and Irma, wind and water damaged almost 1.8 million homes, causing uninsured flood losses of as much as $57 billion, according to CoreLogic Inc., a real estate data firm. Homeowners without federal flood insurance are most likely to be desperate. Those with policies don’t yet know how much they’ll get for their losses, which is key to deciding whether it makes sense to sell.

On the upside, these displaced families will be able to buy their homes back from Bain at double in the price in 5 years or so...

Millennials Have Never Been More In Debt, And It Is Creating A Major Risk For The Economy

There is a seemingly unlimited number of disconnects in financial markets these days, not the least of which is the shocking divergence in recent years between the ever plunging unemployment rate in the United States and stubbornly rising delinquencies on consumer debt. In fact, according to a note published earlier today by UBS strategist Matthew Mish, that divergence continues to soar to all time highs with each passing month...but why?

As it turns out, the answer to the enigma above may just have something to do with the fact that, despite declining unemployment levels, wage growth remains completely non-existent at a time when consumer leverage, particularly in the form of student loans and auto debt extended to the most financially vulnerable cross sections of the American public, is soaring.  Let"s explore the data from UBS...

Per the charts below, when you break out rising consumer delinquencies into their individual buckets the catalyst for the trend above suddenly becomes more clear.  While delinquency rates on mortgages, HELOCs and credit cards are improving, or at least not deteriorating rapidly, delinquency rates on student loans and auto loans are a completely different story.

90-day delinquency rates on consumer loans are up 20bp to 7.61% Y/Y, led by deterioration in auto loans. Trends in recent loan vintages suggest a negative outlook on balance, but incremental deterioration is shifting from autos to credit cards and student loans. This is worrying as it indicates broader weakness in non-prime consumers.

For one, auto and credit card loan default rates bifurcated by credit quality (e.g., prime, subprime) continue to show sequential deterioration on average. This worsening performance in part can be explained by weaker underwriting standards and risk layering: i.e., higher loan-to-value ratios and longer loan terms. For example, negative equity was a contributing factor explaining home mortgage defaults, and is now one factor influencing rising auto loan delinquencies. Further, multiple interest rate hikes by the Federal Reserve have increased average interest rates in particular on new car loans from finance companies (from a low of 4.4% to 5.6% on 60m loans)) and for rates on credit card balances (from a low of 12.7% to 14.9%, Figure 5).

And who took on all those $40,000, 0%, 80-month loans all so they could drive around in a brand new BMW they couldn"t afford?  Well, if you guessed millennials in the lowest quintile of wages earners in the country then you"re absolutely right!  As Mish points out in Figure 7 below, the median debt-to-asset ratio for Americans under the age of 35 has surged over the past couple of decades from ~40% to a staggering 100%.

Second, aggregate consumer credit metrics mask substantial inequality across consumers. Leverage metrics, e.g., debt to assets, are at or near record levels for lower income and millennials, and the literature draws a clear linkage between lower savings and higher defaults. While interest coverage has improved, it is overstating consumer health. We do not believe these metrics are adjusting for inequality in individual income/ wealth, a decline in the US homeownership rate, and student loans in deferral status.

First we calculated median leverage levels based on debt to assets across income and age cohorts; for lower incomes (0-20, 20 – 40th percentile by income) and younger ages (less than 35, 35-44) the results suggest ratios are at or near record levels (Figures 6, 7). Median leverage measured by debt to incomes (DTI) are also at record levels for lower income households (0 – 40th %ile), while millennial (under 35) debt-to-income ratios are in-line with 2007 levels. Strikingly, DTI ratios for 3544yr olds are materially lower even though prior leverage metrics are near record levels, likely reflecting the reality that middle age households have deleveraged via mortgage debt defaults but now currently have low asset bases (Figures 8, 9).

So what does this all mean for future credit growth?  Apparently, absolutely nothing as UBS figures that banks will just continue with their reckless lending practices until something breaks.

Second, the supply side of credit to consumers is supported materially by federal credit support, primarily mortgage and student loans. We estimate roughly $825bn in net loan creation this cycle in mortgage and consumer-backed loans (2010 – 2017); however, the share of non-government backed loans has actually been negative to the tune of $677bn (vs. government backed loans at $1.5tn, Figure 21). The implication is consumer lending to a large extent is essentially on autopilot, with changes in loan standards likely to be inelastic and lagging severely any rise in delinquency rates.

Third, the supply of credit in consumer loans less impacted by government credit support (e.g., auto, credit card and personal loans) remains relatively accommodative. The rise in delinquency rates has triggered some tightening in underwriting standards (e.g., autos, credit cards), primarily from more conservative lenders including banks. But the magnitude of tightening has been modest (Figure 22) and competition has attracted new lenders to largely fill the void – e.g., in autos finance companies and credit unions13. And any stabilization in delinquency trends should support stable credit supply trends.

Conclusion, lenders will continue to bury their heads in the sand and ride the ponzi wave in student and auto loans until it once again blows up in their faces.

No, Harvey Won't Help America's Flagging Housing Market

Authored by Danielle DiMartino Booth via DiMartinoBooth.com,

Something is up, or more likely down, with the U.S. housing market. And the reconstruction after Hurricane Harvey may not do much to help.

Here"s the evidence:

The latest take on home-builder sentiment showed that buyer traffic stubbornly remains in negative territory, despite some of the highest readings of the current cycle on builders" expectations for sales gains in the next six months.

In addition, recent mortgage rate declines have not led to an increase in applications to buy a home. Over the past few weeks, purchase activity has slumped to a six-month low, even though rates are at their lowest level since November. This defies a central tenet of the housing market that falling rates naturally lead to an uptick in sales.

As for actual sales volumes, both new and existing July home sales missed forecasts by wide margins. At an annualized rate of 571,000, new home sales dropped to a seven-month low, well off their long-term average pace of 727,000. The number of homes on the ground rose to 276,000 units, the highest since June 2009. At July"s pace, it would take 5.8 months to clear the inventory.

The existing home sales report that followed was similarly weak, with closings sliding to the lowest since August 2016. Not only was the 5.44-million annualized pace 110,000 units below forecast, July"s figures reveal the all-important spring selling season was something of a bust, given July"s data captured contracts signed from April through June.

Prices have been and remain the main impediment. The median new home sales price of $313,700 marked the highest July price on record and is up more than six percent over last year"s level. At an annual gain of 6.2 percent, the best that can be said of the median sales price for previously occupied homes is that it"s off the record pace it set in June. Corroborating the slowdown in sales, both the Federal Housing Finance Agency and S&P Case-Shiller home-price indexes have softened unexpectedly.

As has been the case since housing collapsed over a decade ago, the missing contingency in the current recovery is the first-time home-buyer. In a normal market, first-timers comprise 40 percent of buyers. In July, they made up a third of the market, which is one of the highest reads of the current cycle.

What"s certain is that the run-up in home prices has not been helpful for millennials aiming to stop renting or even move out of their parent"s homes. The latest results from the University of Michigan Survey of Consumer Confidence Sentiment speak volumes. While all buyers have expressed dismay at home price gains, those between the ages of 18 and 34 have been particularly alarmed.

The survey also showed an expanding pool of those with a dour perception on housing. Thanks to high prices, both upper- and lower-income cohorts as well as those in the West and the South now say they"re pessimistic about buying a home. Likewise, prime-age buyers (ages 35-54) are now echoing their younger counterparts" laments about prices.

Looking ahead, pending home sales suggest the summer"s data are anything but an aberration. The pending home sales index has fallen in four of the last five months, with July coming in particularly weak, down 0.8 percent compared to the consensus forecast, which called for a rise of 0.4 percent.

For years, Lawrence Yun, chief economist at the National Association of Realtors, has cited constrained inventories of homes as the main driver of any weakness in the sales figures. After the recent spate of disappointments on the pending home sales front, Yun added the following perspective on prices: Over the past five years, median home prices have risen 38 percent while hourly earnings have increased by just 12 percent. This yawning gap has pushed affordability to its lowest level since 2008.

Tellingly, the most recent data from Challenger, Gray & Christmas revealed a jump in construction worker layoffs. The mitigating factor will be the tremendous demand for workers to repair and eventually rebuild Houston and the surrounding region after the devastation wreaked by Hurricane Harvey.

What is less of a certainty is the long-term effect of the storm. About 1.2 million homes in and around Houston were at moderate to high risk for flooding but aren’t in a designated flood zone that would have required insurance. Many will qualify for federal disaster relief. Still, the government program comes in the form of low-interest rate loans to help shoulder the burden of repair costs at a time when many households are already buried in debt with precious little in savings; as the third quarter got underway, the saving rate fell to 3.5 percent, a fresh low for the current cycle.

Although many have drawn comparisons to the aftermath of Hurricane Katrina, Harvey will affect more than twice as many mortgaged properties. According to Black Knight Financial Services, of the 1 million or so mortgaged homeowners in the disaster area, more than 300,000 could become delinquent within two months, and 160,00 are at risk of becoming seriously delinquent inside a four-month period.

As per the Mortgage Bankers Association, homes in foreclosure nationwide totaled 502,437 in the second quarter, exemplifying the very real potential for Harvey to leave a huge scar on the housing market.

It is clear investors are banking on the rebuilding effort becoming its own macroeconomic engine of growth. With housing clearly peaking, the nearer-term risk is that Harvey’s devastation solidifies broader market woes.

Australia Mortgage Market Is Now A $1.7 Trillion "House Of Cards"

Over a decade ago, the U.S. residential housing market was revealed to be perhaps the biggest ponzi scheme ever created as easy financing enabled people to buy/build countless investment properties, that they were in no way adequately capitalized to own, with no money down all based on the premise that the house could be "flipped" before the first mortgage payment even came due.  It was a classic ponzi that worked great for a while but inevitably turned south when home prices suddenly soured and their was no cash equity backing the trillions of dollars in outstanding mortgage debt.

But, if a new report from LF Economics is even directionally accurate, then the bubble currently percolating in Australia could take the residential housing ponzi game to a whole new level courtesy of a "creative" little product called "cross-collateralized residential mortgages."

The Australian mortgage market has “ballooned” due to banks issuing new loans against unrealised capital gains of existing investment properties, creating a $1.7 trillion “house of cards”, a new report warns.

The report, “The Big Rort”, by LF Economics founder Lindsay David, argues Australian banks’ use of “combined loan to value ratio” — less common in other countries — makes it easy for investors to accumulate “multiple properties in a relatively short period of time despite high house prices relative to income”.

“The use of unrealised capital gain (equity) of one property to secure financing to purchase another property in Australia is extreme,” the report says.

“This approach allows lenders to report the cross-collateral security of one property which is then used as collateral against the total loan size to purchase another property. This approach substitutes as a cash deposit.

“This has exacerbated risks in the housing market as little to no cash deposits are used.”

Yes, you read that correctly...Australian housing speculators can literally use unrealized gains in investment properties as a "cash substitute" for down payments on other investment properties.  Of course, we"re not experts at "the mathematics," but if you constantly take every dollar worth of equity you accrue and pledge it as collateral toward a new purchase then doesn"t that mean the entire system is built on debt and no actual equity at all?

As LF Economics points out, just like the American mortgage bubble, the current ponzi scheme in Australia is also completely dependent on constantly rising prices.

The report describes the system as a “classic mortgage Ponzi finance model”, with newly purchased properties often generating net rental income losses, adversely impacting upon cash flows.

“Profitability is therefore predicated upon ever-rising housing prices,” the report says. “When house prices have fallen in a local market, many borrowers were unable to service the principal on their mortgages when the interest only period expires or are unable to roll over the interest-only period.”

And, just like the American bubble, much of the madness is being funded by unsuspecting foreign investors.

LF Economics argues that while international money markets have until now provided “remarkably affordable funding” enabling Australian banks to issue “large and risky loans”, there is a growing risk the wholesale lending community will walk away from the Australian banking system.

“[Many] international wholesale lenders ... may find out the hard way that they have invested into nothing more than a $1.7 trillion ‘piss in a fancy bottle scam’,” the report says.

Meanwhile, there is no shortage of "success stories" from people who make next to no money doing their "day jobs" but have been able to acquire dozens of investment properties with nothing but debt.

Last month, a young Sydney couple revealed how they had racked up $1.2 million in debt on a portfolio of five properties in just two years.

Roy Palleson and Rowena Ebona, appearing on the ABC’s Four Corners, said they had no concerns about their debt — nearly 10 times their combined income of $135,000 — and were hoping to expand their portfolio to 20 investment properties “initially”.

Prominent Sydney property investor Nathan Birch, who accumulated more than 200 properties worth an estimated $55 million by channelling the equity from capital gains into deposits for new purchases, earlier this year announced he was selling off some of his portfolio.

Mr Birch blamed the move on tougher loan serviceability restrictions by the banks. “Anytime you withdraw equity, you need to show income to service that new loan,” he said. “Sadly, the banks don’t value rental income as highly as they once did.”

Eddie Dilleen, a young investor with 10 properties worth about $2 million, last month said he was not fazed by tightening lending environment or talks of a housing bubble.

Mr Dilleen said the majority of his portfolio was positively geared, largely because he avoided borrowing against existing properties, instead saving up for each new deposit by working several jobs.

Conclusion: "Short everything that guy has touched."

Canadians Are Borrowing Against Real Estate At The Fastest Pace Ever

Authored by Daniel Wong via BetterDwelling.com,

Canadian real estate prices have soared, and so did borrowing against that value.

Our analysis of domestic bank filings from the Office of the Superintendent of Financial Institutions (OSFI) shows that loans secured against property has reached an all-time high. More surprising is the unprecedented rate of growth experienced this year.

Total balance of loans secured against residential real estate across Canada, as determined through regulatory filings from all domestic banks. Source: OFSI, Better Dwelling.

Canadians Borrowed Against Over $313 Billion In Real Estate

Loans secured against residential real estate shattered a few records in June. Over $313.66 billion in real estate was used to secure loans, up 3.43% from the month before. The rise puts annual gains 11.16% higher than the same month last year, an increase of $31.51 billion. The monthly increase is the largest increase since March 2012. The annual gain is unprecedented according to an aggregate of domestic bank filings.

Source: OFSI, Better Dwelling.

Over $266 Billion Was For Non-Business Related Reasons

Not all borrowing against residential property is all bad, sometimes it’s a calculated risk. For example, someone may need to secure a business loan, and use the loan for operating risks. It doesn’t mean the property is safe, but it’s a risk that could potentially boost the economy.

Source: OFSI, Better Dwelling.

This is opposed to non-business loans, which is used as short-term financing. This type of financing is often used for things like renovations, and putting a fancy car in the driveway. Experts have observed that more homeowners are using these to prevent bankruptcy. Bottom line, it’s not typically healthy looking debt. So let’s remove loans obtained for business reasons, and take a peek at higher risk debt.

The majority of these loans are non-business related according to bank filings. The current total is over $266 billion as of June 2017, a 1.01% increase from the month before. This is a 4.9% increase from the same month last year, which works out to $12.49 billion more. Fun fact, that’s around $23,763 per minute. The number is astronomical.

Are Canadians Borrowing Time?

Debt experts have expressed concern with the rate homeowners are borrowing against their homes. Hoyes-Michalos, one of Ontario’s largest debt consultancies, recently said more Canadians have been borrowing against their home to avoid filing for bankruptcy. This is a temporary fix that will become much more complicated in the very near future. As interest rates rise to normal levels, the ability to keep making payments becomes harder. Hoyes-Michalos estimates a mild rise in rates could push bankruptcies above 2009 levels.

Increasing equity extraction remains a sleeper threat for Canadian real estate markets. Borrowing against homes increases the chance that a mild shock could impact real estate. This shock could be a correction, recession, or even just higher interest rates. Normal market mechanics have become a threat to the economy, which is pretty disturbing. Bottom line, try not to buy more home than you can afford.

Housing Bubble 2.0: Home Equity Loans Soar To Highest Level Since 2008

It seems as though the practice of using one"s home as a personal ATM machine is making a "yuge" comeback of late thanks, at least in part, to the same aggressive lending terms and attractive teaser rates that nearly sank the world economy just under a decade ago.  According the Wall Street Journal and Equifax, home equity originations soared to $46 billion in 2Q 2017, the highest level since the market collapsed in 2008.

“If customers feel like their home values are stable or increasing, and if they feel like their job prospects are good—that they will have the ability to pay back a loan they take—then they will start to take out more home-equity lines,” said Mike Kinane, head of U.S. consumer-lending products at TD Bank. “That is what we are starting to see.”

Home-equity line originations rose 8% to nearly $46 billion in the second quarter, their highest level since 2008, according to credit-reporting firm Equifax . Borrowing via cash-out mortgage refinances hit $15 billion, up 6% from a year earlier, according to recent data from Freddie Mac.

The main engine driving demand: rising home prices. The median sale price of an existing home rose to $263,800 in June, the highest on record, up 40% from $187,900 at the start of 2014, according to the National Association of Realtors.

But, don"t worry because the banks and loan officers re-inflating the housing bubble are here to assure you that it"s all different this time around...

Banks insist the increased borrowing doesn’t herald a return to housing-bubble days when consumers came to view their homes as cash registers. Banks say they are being more cautious in how they make such loans and some add they are encouraging borrowers to tackle renovations or consolidate debt—uses that are considered investments rather than luxuries.

“We continue to watch what’s going on and the way it’s being done, but it’s much different from before the crisis,” said Tom Wind, head of U.S. Bancorp ’s home-mortgage division. Mr. Wind added that the bank expects this type of borrowing to keep rebounding because the equity in people’s homes is “meaningful and people want things like renovations.”

...because home prices appreciating at over 5x inflation is just "normal."

But perhaps the best example of why "this time is different" is illustrated by the case study of Marc Yu of Atlanta who took out a home equity loan on his family"s home just so he could afford the down payment on an "investment property".  See, completely different this time.

Marc Yu took out a home-equity line to buy an investment property, a house he now rents out at a profit. He has thought about paying off the line early, but instead decided to keep it open as long as interest rates stay relatively low.

“I wanted to use the equity” in the first house, rather than “it just sitting there,” said Mr. Yu, who works in digital forensics in the Atlanta area.

Seems like we"ve seen this movie before...

Bank Of England Warns Of "Spiral Of Complacency" Over Soaring Consumer Debt

A few weeks ago, we wrote a note about how European auto lenders are becoming just about as ridiculously undisciplined as their counterparts in the United States.  Apparently an ever-growing reliance of European millennials on lease financing has auto ABS investors worried about a potential crash in used car prices at some point in the not so distant future...that sound familiar to anyone?  (See: It"s Not Just Americans, Europe"s New Obsession With Auto Leases Is "Catastrophic For Used Car Prices")

Then came an undercover investigation by the Daily Mail exposing just how "undisciplined" the auto lending market has become in England.  Their undercover reporters visited a total of 22 dealerships and were repeatedly offered cars of various values with no money down and despite reporters admitting that they had no job and no source of income. 

Reporters visited 22 dealerships in England and Scotland, saying they were in their early twenties and either unemployed, on low incomes or trying to buy a car despite having poor credit ratings. Half of the dealerships – including ones selling Audis, Mazdas, Suzukis, Fords, Vauxhalls and Seats – told them they could have a brand new car without paying a penny up front.

In each case they were offered Personal Contract Purchase (PCP) deals – a type of car loan that now makes up nine out of ten car sales bought on finance in Britain.

These deals offer smaller monthly payments than traditional car loans.

A reporter who said he was working part-time on the minimum wage was offered a £15,000 Seat Ibiza without a deposit at a Seat dealership in Manchester.  Another reporter suggested that he had bad credit, but he was offered an £8,600 Vauxhall Corsa in Birmingham.

Kevin Barker, 71, found himself £3,500 in debt when he suffered a heart attack six months into a PCP deal. He said a ‘pushy’ Toyota salesman ‘pressured’ him into taking out a 36-month agreement in November 2014 and he was not told of the repercussions if he fell ill or lost his job.

And while offering $20,000 auto loans to unemployed teenagers may not seem like that big a deal to U.S. consumers, in Britain it apparently has a lot of bankers worried.  As Alex Brazier of the Bank of England put it in a recent Liverpool speech, lenders are "dicing with a spiral of complacency."  Per The Guardian:

“Ten years ago, an unsafe financial system caused financial crisis and economic disaster”, he said. “The western banking system had expanded rapidly. Banks – and their regulators – had been blind to the basic fact that more debt meant greater risk of loss.

“Complacency gave way to crisis. Companies and households were unable to refinance their debts. The result was economic disaster. In this country alone, close to a million jobs were lost and more than 100,000 businesses failed. Too much debt made the financial system, and the economy, unsafe. Too many people paid the price when those risks materialised.”

“Lenders have not entered, but they may be dicing with the spiral of complacency,” Brazier said, noting that as credit became cheaper it was taken up more widely and was serviced more easily.

“The spiral continues, and borrowers rack up more and more debt. Lending standards can go from responsible to reckless very quickly. The sorry fact is that as lenders think the risks they face are falling, the risks they – and the wider economy – face are actually growing,” Brazier said.

“By September we will have assessed whether the rapid growth has created any gap in the line. If it has, we’ll plug it,” Brazier said.

Of course, when lending standards enter their "spiral of complacency" phase, it"s not just a single asset class that"s impacted.  As The Guardian notes, loan terms for everything from credit cards to personal loans to mortgages have all participated in the consumer credit mania...

He added that terms and conditions on credit cards and personal loans had become easier. The average advertised length of 0% credit card balance transfers had doubled to close to 30 months, while advertised interest rates on £10,000 personal loans had fallen from 8% to around 3.8%, even though official interest rates had barely changed.

He added that developments in mortgage debt had been much less striking than those in consumer debt and car finance, with lending for home loans up by just 3% over the past year. “But even here there are some tentative signs of boundaries being pushed,” he said.

Strong competition for business was resulting in more lending at higher loan-to-income (LTI) multiples, with the share at an LTI above 4 increasing from 19% to 26% over the past two years.

...all of which has resulted in a stern warning from the BoE that failure to unilaterally reign in reckless lending standards would inevitably result in a new regulations.

The Bank of England has told banks, credit card companies and car loan providers that they risk fresh action against reckless lending as it warned of a looming “spiral of complacency” about mounting consumer debt.

In its toughest warning yet about the possibility of a rerun of the financial crisis that devastated the economy 10 years ago, Threadneedle Street admitted it was alarmed about the increase in the amount of money being borrowed on easy terms over the past year.

“Household debt – like most things that are good in moderation – can be dangerous in excess”, Alex Brazier, the Bank director for financial stability, said in a speech in Liverpool. “Dangerous to borrowers, lenders and, most importantly from our perspective, everyone else in the economy.”

"Lenders have been the lucky beneficiaries of the benign way the economy has evolved. In expanding the supply of credit, they may be placing undue weight on the recent performance of credit cards and loans in benign conditions,” Brazier said.

Of course, if new regulations fail to materialize then British banks can always do what American banks do...simply package up their toxic consumers loans into a nice securitized product and sell it to taxpayer backed pension funds...it"s a much cleaner way to socialize poor lending standards as opposed to waiting around for more overt "bailouts" later on down the road...

When Do We Know These Are Delusional Markets

In his latest investment outlook, Fasanara Capital"s Franceso Filia, who two months ago explained in one chart how the "fake market" operates...

... discuss what happens when a "Twin Bubble meets quantitative tightening" and answers why record-low volatility breeds market fragility and precedes system instability. We"ll have more to share on that shortly, but for now, here is Filia with his take on "when do we know these are delusional markets":

Signs of complacency and disconnect from fundamentals abound. So to sanity check, it may still be helpful to periodically remind ourselves of a few recent ones. In no particular order:

• Argentina uses defaults as a recurrent macro-prudential policy, to tackle debt overloads from time to time. Most recently in 2014, 2001, 1989. Yet, this year, the country issued a 100-year bond for 7.9% yield. Red-hot demand. It was oversubscribed 3.5x.


• The Bank of Japan now owns almost 75% of the entire Japanese ETF equity market. As a result, the BoJ will likely be the major shareholder in 55 companies by the end of 2017 (read). To entrench firm buy-the-dip reflex in the investment community (and their algos), “the BOJ’s ETF purchases help provide resistance to selling pressure against Japanese stocks,” says Rieko Otsuka of the Mizuho Research Institute (read).


• The Swiss National Bank bought $ 100bn between US and European stocks. It now owns 26 million Microsoft shares (read).


• Easyjet is a great company. Still, 1% yield for 7 years is a stretch. Clearly, ECB programs are behind it. However, but, still, come on... The recognition that EasyJet’s bonds owe their valuation entirely to the Central Bank is widespread. Yet, when it comes to equity markets, such recognition is missing, and claims of bubble valuations are easily dismissed.


• US equity at 30X P/E CAPE, despite political/economic policy uncertainty, and 5yr German Bunds sub-zero despite 1.6% inflation and 2.8% PPI, have every right to belong to this list.


• Leverage to buy stocks at the NYSE (margin debt) hit an all-time record of $549bn this year (read), and went up in lockstep with the S&P as both doubled up since 2009.


• Is it 2007 all over again in CLOs? No, way better than that. Covenant-lite loans are over double what they used to be in 2007 (read, read, read). Assuming 2007 was a credit bubble and covenant-lite was one of the thermometers taking temperature, this is twice a bubble, and the thermometers burned.

Cov-Lite Loans In Both EU And The US Reached A Staggering 70% Of All Loan Supply In 2017.
Before the credit bubble burst in 2007, it was 30%.