Too Sad To Be Funny

By: John Rubino | Tue, Jun 7, 2011
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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It's not clear how much cash withdrawn from homes during the boom was used to acquire luxuries such as expensive automobiles, and how much went to basic necessities, including tuition expenses, or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.

Underwater and Out of Equity

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.

The Living Debt

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:

 


 

John Rubino

Author: John Rubino

John Rubino
DollarCollapse.com

John Rubino is author of Clean Money: Picking Winners in the Green Tech Boom (Wiley, December 2008), co-author, with GoldMoney's James Turk, of The Collapse of the Dollar and How to Profit From It (Doubleday, January 2008), and author of How to Profit from the Coming Real Estate Bust (Rodale, 2003). After earning a Finance MBA from New York University, he spent the 1980s on Wall Street, as a currency trader, equity analyst and junk bond analyst. During the 1990s he was a featured columnist with TheStreet.com and a frequent contributor to Individual Investor, Online Investor, and Consumers Digest, among many other publications. He now writes for CFA Magazine and edits DollarCollapse.com and GreenStockInvesting.com.

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