FedUpUSA

Archive for June 1st, 2010

The great American debt purge – Americans more stressed out about debt. Mortgage, credit card, student loan, and auto loan debt up to $13.5 trillion. Average debt per household at over $120,000.

Posted by mybudget360

Every man, woman, and child would owe an average of $43,000 if we divided up mortgage, credit card, student, and auto debt in the United States.  Of course, this is based on the current population of 309 million.  But we know this isn’t exactly accurate since an infant really didn’t charge up a credit card or take out a HELOC.  We should break this down to each individual household.  If we average this figure out over all U.S. households the amount comes out to over $120,000 per household.  When 1 out of 3 Americans have no savings, how do you think many will be able to pay off their debt?  For decades, the model has revolved around servicing debt and not necessarily paying the initial balance off.  But many American families are feeling the deep psychological strain of an economy largely built on debt.

The emotional strain of debt is showing up in large numbers:

Source:  MSNBC

I think when we see surveys like this, some will tend to underestimate the amount of debt carried by each household.  For example, not everyone has a mortgage and by far mortgage debt is the largest line item for consumer debt.  We know that in the U.S. 51 million mortgages are outstanding.  The latest Federal Reserve flow of funds shows mortgage debt at over $10.2 trillion.  So run these numbers:

$10.2 trillion / 51 million mortgages = average mortgage debt of $200,000

Now the interesting thing is the median home price across the U.S. is slightly above $170,000.  With that said, recent housing surveys have found that one-third of all these mortgages are attached to homes that are worth less than the actual mortgage.  They are underwater.  It is clear that the average American would feel incredible amounts of stress if they were living in a home that had fallen in value so much, that the attached debt was larger than the market sale price of the home.  And most Americans that have a home have a generally good sense of what their home is worth.  Many of course have their optimistic “dream” price but many deep down have a better sense of the real price.  This is probably derived from recent home sales and other comparable properties in the area.

If we want to break down household debt, this is what we get:

The grand total of mortgage, credit card, student loans, and auto loan debt is a stunning $13.5 trillion.  The tipping point came when total household debt aligned itself with the annual GDP of the United States.  And this number seems to be reflected in the average income data.  The typical household takes in approximately $52,000 per year and this is much lower than the $120,000 of debt each household would be responsible if we were to divide the debt share up today.  What does this number tell us?  We have spent far more than we earn and we earn at a level that is near the top globally.

I was fascinated that the survey was split nearly down the middle in terms of debt related stress.  You have half of U.S. households worried about debt while another half seems to be comfortable with their debt.  There are many households with no mortgage or that rent.  You have others that pay off their credit card balance off each month.  Others have paid off cars and no auto debt.  What appears to happen with some American families is that they have a penchant for taking on inordinate amounts of debt.  Confusing access to debt with wealth was also a large epidemic.

In California during the peak days of the housing bubble, a colleague was talking about how they refinanced out $100,000 from their home.  This money was used for a lavish vacation and other “toys” that filled up their garage.  When we talked, the perception was that the $100,000 home equity loan was actual free money.  They failed to make the connection that the $100,000 would have to be paid off at a certain point.  And many went down this road as evidenced by mortgage equity withdrawals:

Source: Calculated Risk

The great hoax was creating an atmosphere that made people believe that this money was actually free.  I remember seeing many letters that had an actual check attached with the sum of $50,000 or higher as if it were a novelty gag.  All you needed to do was sign and cash the check at a local bank.  It really had the symptoms of a once in a generation mania.  The perspective from Wall Street and banks was that there would always be someone willing to pay a higher more inflated price and willing to take on more debt to make the purchase happen.  Around 2006 many insiders started getting out slowly while talking up to the public that all this wild debt was somehow sustainable.

Now as a county we have always been comfortable with mortgage debt.  In fact, a 30 year fixed mortgage with a decent down payment was the bread and butter of our economy for decades.  Consumer debt on the other hand is really an astonishing concept.  Think of credit cards.  You are allowed to spend money you don’t have.  Would you allow someone, completely unsecured, to spend your money on the promise they will pay you back?  Maybe and this is largely how the system has been built.  Banks have given Americans $850 billion in credit card debt.  Some can pay it back but with the current recession, many cannot.  We can see the purge going on in this sector rather clearly:

Since the peak in 2008 of $975 billion in revolving debt, $123 billion in credit card debt has been purged.  Much of this has come through bankruptcies and write-offs as banks deal with poor performing loans.  Ironically when Wall Street in 2007 and 2008 asked for trillions in U.S. taxpayer dollars, it was under the implicit notion that it was to keep the lending channels alive.  Look at the above chart and you can clearly see that this is not the case.  Credit card offers have dwindled to a trickle and credit lines have been slashed on even good standing customers.

I found this interesting article dated 1986 when interest rates were relatively high:

“(LA Times) Charles Newcomer, spokesman for General Motors Acceptance Corp., General Motors’ auto-finance subsidiary, said, “All the traditional assumptions about the auto-finance market are not necessarily true today.” He noted that just as home buyers are increasingly picking 15-year mortgages over 30-year loans-despite the fact that shorter maturities require larger monthly payments-some customers are also asking for shorter-term auto loans, possibly reversing the trend of recent years toward longer terms.”

It is amazing that today, many dealers offer 72 month financing.  Just like housing, Americans have taken on too much debt to finance auto purchases.  It seems that we reached a point where we simply could not expand terms and pile on more and more debt.  This is a debt purge that is likely to take a decade or even longer.

The current flushing out of debt is coming through many different avenues.  Foreclosures are one large way of flushing out debt.  Bankruptcy is another.  And these have been at elevated levels going on for a few years now.  It is hard to say where the balance will occur.  If the economy picks up and picks up quickly, then many Americans will be able to service their debt again.  Yet all market indicators have shown that a real debt purge is occurring and is likely to continue for years to come.

Consumers Learning From Banksters

Posted by Karl Denninger

Owners Stop Paying Mortgages, and Stop Fretting

ST. PETERSBURG, Fla. — For Alex Pemberton and Susan Reboyras, foreclosure is becoming a way of life — something they did not want but are in no hurry to get out of.

Foreclosure has allowed them to stabilize the family business. Go to Outback occasionally for a steak. Take their gas-guzzling airboat out for the weekend. Visit the Hard Rock Casino.

“Instead of the house dragging us down, it’s become a life raft,” said Mr. Pemberton, who stopped paying the mortgage on their house here last summer. “It’s really been a blessing.”

A growing number of the people whose homes are in foreclosure are refusing to slink away in shame. They are fashioning a sort of homemade mortgage modification, one that brings their payments all the way down to zero. They use the money they save to get back on their feet or just get by.

This type of modification does not beg for a lender’s permission but is delivered as an ultimatum: Force me out if you can. Any moral qualms are overshadowed by a conviction that the banks created the crisis by snookering homeowners with loans that got them in over their heads.

“I tried to explain my situation to the lender, but they wouldn’t help,” said Mr. Pemberton’s mother, Wendy Pemberton, herself in foreclosure on a small house a few blocks away from her son’s. She stopped paying her mortgage two years ago after a bout with lung cancer. “They’re all crooks.”

Foreclosure procedures have been initiated against 1.7 million of the nation’s households. The pace of resolving these problem loans is slow and getting slower because of legal challenges, foreclosure moratoriums, government pressure to offer modifications and the inability of the lenders to cope with so many souring mortgages.

The average borrower in foreclosure has been delinquent for 438 days before actually being evicted, up from 251 days in January 2008, according to LPS Applied Analytics.

While there are no firm figures on how many households are following the Pemberton-Reboyras path of passive resistance, real estate agents and other experts say the number of overextended borrowers taking the “free rent” approach is on the rise.

There is no question, though, that for some borrowers in default, foreclosure is only a theoretical threat for a long time.

More than 650,000 households had not paid in 18 months, LPS calculated earlier this year. With 19 percent of those homes, the lender had not even begun to take action to repossess the property — double the rate of a year earlier.

In some states, including California and Texas, lenders can pursue foreclosures outside of the courts. With the lender in control, the pace can be brisk. But in Florida, New York and 19 other states, judicial foreclosure is the rule, which slows the process substantially.

In Pinellas and Pasco counties, which include St. Petersburg and the suburbs to the north, there are 34,000 open foreclosure cases, said J. Thomas McGrady, chief judge of the Pinellas-Pasco Circuit. Ten years ago, the average was about 4,000. “The volume is killing us,” Judge McGrady said.

Mr. Pemberton and Ms. Reboyras decided to stop paying because their business, which restores attics that have been invaded by pests, was on the verge of failing. Scrambling to get by, their credit already shot, they had little to lose.

“We could pay the mortgage company way more than the house is worth and starve to death,” said Mr. Pemberton, 43. “Or we could pay ourselves so our business could sustain us and people who work for us over a long period of time. It may sound very horrible, but it comes down to a self-preservation thing.”

They used the $1,837 a month that they were not paying their lender to publicize A Plus Restorations, first with print ads, then local television. Word apparently got around, because the business is recovering.

The couple owe $280,000 on the house, where they live with Ms. Reboyras’s two daughters, their two dogs and a very round pet raccoon named Roxanne. The house is worth less than half that amount — which they say would be their starting point in future negotiations with their lender.

“If they took the house from us, that’s all they would end up getting for it anyway,” said Ms. Reboyras, 46.

Alex Pemberton and Susan Reboyras stopped paying the mortgage on their house in St. Petersburg, Fla., last summer.

One reason the house is worth so much less than the debt is because of the real estate crash. But the couple also refinanced at the height of the market, taking out cash to buy a truck they used as a contest prize for their hired animal trappers.

It was a stupid move by their lender, according to Mr. Pemberton. “They went outside their own guidelines on debt to income,” he said. “And when they did, they put themselves in jeopardy.”

His mother, Wendy Pemberton, who has been cutting hair at the same barber shop for 30 years, has been in default since spring 2008. Mrs. Pemberton, 68, refinanced several times during the boom but says she benefited only once, when she got enough money for a new roof. The other times, she said, unscrupulous salesmen promised her lower rates but simply charged her high fees.

Even without the burden of paying $938 a month for her decaying house, Mrs. Pemberton is having a tough time. Most of her customers are senior citizens who pay only $8 for a cut, and they are spacing out their visits.

“The longer I’m in foreclosure, the better,” she said.

In Florida, the average property spends 518 days in foreclosure, second only to New York’s 561 days. Defense attorneys stress they can keep this number high.

Both generations of Pembertons have hired a local lawyer, Mark P. Stopa. He sends out letters — 1,700 in a recent week — to Floridians who have had a foreclosure suit filed against them by a lender.

Even if you have “no defenses,” the form letter says, “you may be able to keep living in your home for weeks, months or even years without paying your mortgage.”

About 10 new clients a week sign up, according to Mr. Stopa, who says he now has 350 clients in foreclosure, each of whom pays $1,500 a year for a maximum of six hours of attorney time. “I just do as much as needs to be done to force the bank to prove its case,” Mr. Stopa said.

Many mortgages were sold by the original lender, a circumstance that homeowners’ lawyers try to exploit by asking them to prove they own the loan. In Mrs. Pemberton’s case, Mr. Stopa filed a motion to dismiss on March 17, 2009, and the case has not moved since then. He filed a similar motion in her son’s case last December.

Mark P. Stopa is a lawyer who says he has 350 clients in foreclosure, each paying him $1,500 a year in fees.

From the lenders’ standpoint, people who stay in their homes without paying the mortgage or actively trying to work out some other solution, like selling it, are “milking the process,” said Kyle Lundstedt, managing director of Lender Processing Service’s analytics group. LPS provides technology, services and data to the mortgage industry.

These “free riders” are “the unintended and unfortunate consequence” of lenders struggling to work out a solution, Mr. Lundstedt said. “These people are playing a dangerous game. There are processes in many states to go after folks who have substantial assets postforeclosure.”

But for borrowers like Jim Tsiogas, the benefits of not paying now outweigh any worries about the future.

“I stopped paying in August 2008,” said Mr. Tsiogas, who is in foreclosure on his house and two rental properties. “I told the lady at the bank, ‘I can’t afford $2,500. I can only afford $1,300.’ ”

Mr. Tsiogas, who lives on the coast south of St. Petersburg, blames his lenders for being unwilling to help when the crash began and his properties needed shoring up.

Their attitude seems to have changed since he went into foreclosure. Now their letters say things like “we’re willing to work with you.” But Mr. Tsiogas feels little urge to respond.

“I need another year,” he said, “and I’m going to be pretty comfortable.”