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Mortgage rise will plunge a million homeowners into ‘perilous debt’ | Money | The Observer

Mortgage rise will plunge a million homeowners into ‘perilous debt’ | Money | The Observer.

Oxford Street shopping

Around 13 million people paid for their Christmas by borrowing. Photograph: Paul Brown/Rex Features

More than a million homeowners will be at risk of defaulting on their mortgages and losing their properties in the wake of even a small rise ininterest rates, a bombshell analysis reveals. Borrowers who have failed to pay down their mortgages when interest rates have been at record low levels now face being overwhelmed by “perilous levels of debt” when the inevitable hike comes.

Gillian Guy, chief executive of Citizens Advice, warned of a “financial ticking timebomb”: “The rising cost of energy, food and travel has been absorbing any spare income people may have. This means that in some cases there is little or nothing left to cope with larger mortgage repayments.”

According to a new report from an influential thinktank, the Resolution Foundation, even in the most optimistic scenario – in which interest rates rise slowly to 3% by 2018 and economic growth is strong and well-distributed between the rich and poor – 1.12 million homeowners will be spending more than half of their take-home pay on mortgage repayments – this is a widely accepted indicator of over-indebtedness.

If the Bank of England were to raise interest rates more quickly, to 5% by 2018, and growth continues to be slow, around two million households would be plunged into financial trouble – and around half of these would be families with children.

The thinktank’s analysis, based on official Office for Budget Responsibility projections, warns: “Far from being resolved, Britain’s personal debt problem remains a cause for real concern. While record low interest rates have reduced current repayment costs, fewer people than we hoped have used this breathing space to pay off their debts.

“When rates go up, the number in ‘debt peril’ could increase to anywhere between 1.1 million and two million, depending on the speed at which borrowing costs rise and the nature of the economic recovery.”

The warning comes as a survey carried out by Which? reveals that rather than paying off their debts, around 13 million people (25%) paid for their Christmas by borrowing. Overall, more than four in 10 (42%) used credit cards, loans or overdrafts to fund their spending over the festive period, which suggests that Britons have not shed their addiction to debt.

The governor of the Bank of England, Mark Carney, has said he will look at raising the Bank of England base rate, to which lenders hook their mortgages, when unemployment has fallen to 7%.

A recent surge in job creation saw unemployment drop to 7.4% in December, raising expectations that an increase in the Bank’s base rate will come in 2015, and have an impact on lenders’ rates this coming year.

The markets believe the base rate will increase to 3% by 2018, with what the Resolution Foundation describes as “huge social and human cost”. However, the thinktank warns that a hike of just 1 percentage point more than that, to 4% by 2018, would lead to 1.4 million homeowners facing severe financial pressure.

If interest rates rise by two percentage points beyond market expectations – to 5%, still 0.5% below the 2007 base rate – the number of people in substantial and perilous debt would rise to 1.7 million – or as many as 2 million if economic growth continues to be sluggish.

The analysis finds that while people across the social spectrum could be in trouble, lower-income households “look particularly vulnerable”, with one in five of those with debt being in danger.

The thinktank says that while it does not follow that all households in “debt peril” will default on their mortgages, those spending more than half of their income on debt repayments will find their financial position increasingly difficult to sustain.

Matthew Whittaker, senior economist at the Resolution Foundation, said ministers should consider “locking in” cheap credit for those who are heavily indebted. He added:”Even if we take a somewhat rosy view of how the economy will develop over the next few years, the number of households severely exposed to debt looks as though it will double.

“But the levels of debt built up by families in the pre-crisis years are such that even relatively modest changes in incomes and borrowing cost assumptions produce significantly worse outcomes.

“This is an alarming prospect, where a large number of families find themselves struggling with heavy debt commitments, especially among the households who are already among the worst-off. As the Bank of England has acknowledged, even small increases in the cost of borrowing could push a significant number of families over the edge and it is most likely to happen to those with the lowest incomes – who are already spending the biggest share of their budget on mortgage repayments.

“Rather than waiting for a repayment crisis to strike, policymakers and lenders should seriously consider acting now while there’s still the chance to help people reduce their exposure to debt.”

The number of repossessions has been dropping for years, with 30,000 expected by the end of this year, down from 75,500 during the 1991 recession.

Yet one in six households are currently mortgaged to the hilt, servicing home loans that are at least four times the size of their annual salary, in further evidence of the intense vulnerability of many homeowners to rate hikes.

 

Canada’s housing market in good shape: federal housing agency | Canada | Reuters

Canada’s housing market in good shape: federal housing agency | Canada | Reuters.

By Andrea Hopkins and Leah Schnurr

(Reuters) – Canadian condominium construction has surged but population growth has kept oversupply in check, the federal housing agency said in a report on Wednesday that also showed declining mortgage arrears and high home-equity levels.

In its annual report on the housing market, the Canada Mortgage and Housing Corp pointed to steady levels of mortgage debt and an increasing number of households as evidence that residential real estate is in good shape, despite warnings from observers that the market is overheated.

Canada’s housing market avoided the crash experienced in the United States five years ago due in part to more conservative lending standards and a stronger economy. While economists have long predicted an eventual correction in Canada, they are divided over whether prices will drop sharply or simply stagnate in a so-called soft landing scenario.

“The main argument here is just that the Canadian housing market still looks fairly normal,” said Eric Lascelles, chief economist at RBC Global Asset Management in Toronto.

The agency’s report showed that as of June 2013, 0.31 percent of residential mortgages were three or more months in arrears, compared with 0.33 percent 12 months earlier, CMHC said. Arrears averaged 0.41 percent in the decades 1990-2010.

About 31 percent of recent buyers made lump-sum payments or increased their regular payments in 2012 to pay off their mortgage sooner, and 44 percent had set their payments above the minimum, the report showed.

The average amount of equity for homeowners with mortgages was 47 percent, and 71 percent had at least 25 percent equity in their homes. Only 7 percent had less than 10 percent equity as of April 2013, suggesting only about 7 percent of homeowners would be “under water” if prices dropped more than 10 percent.

Some 41 percent of homeowners had no mortgage, while the rest typically had solid equity levels, accelerated mortgage payments or declining arrears.

CONDOS DOMINATE HOMEBUILDING

With the once-booming but cooling condominium market widely perceived to be the weak spot in Canada’s urban housing market, the CMHC said condo construction was far outpacing construction of detached homes. Even so, there were no signs of oversupply yet because of an increase in the number of people living alone as well as population growth resulting from a strong influx of immigrants.

While single-detached dwelling starts rose just 1.5 percent to 83,657 in 2012, multiple-dwelling starts – typically condos – rose 17.6 percent to 131,170 units. Condos comprised 61 percent of all construction in 2012, continuing a trend that began in 2002.

The surge was most notable in Canada’s biggest cities, where cranes dot the skylines and tens of thousands of new units come on line every year. The share of condominium starts out of total starts was highest in Vancouver at 64 percent, followed by Toronto at 59 percent and Montréal at 58 percent.

While the number of starts suggests a huge supply in the pipeline that will come to the market in the next year or two, the building boom has begun to slow and CMHC said inventories so far are not above historical levels.

Still, economists remain concerned about the level of condo construction already underway in some major cities.

“There’s still a huge supply of condos, particularly in Toronto, coming on the market in 2014, 2015,” said Diana Petramala, economist at TD Bank in Toronto.

Housing starts began moderating in the last half of 2012 and the first quarter of 2013, with multiple-dwelling starts declining for three straight quarters before rising modestly in the second quarter of 2013.

In 2012, urban inventories averaged 4.7 units per 10,000 people, CHMC said, only slightly above the long-term average of 4.6 from 1992 to 2012. By the second quarter of 2013, however, inventories were at 5.1 units per 10,000 people.

CHMC said population growth and a shift in the way people are living suggests the demand for smaller housing, including condos, will grow.

Condo ownership rates rose in every age group between 1996 and 2011, but condos were particularly popular with seniors and young adults. In 2011, 19 percent of condo owners were under the age of 35, while 29 percent were 65 and older.

“It does show that some of the demand is being driven by demographic fundamentals, particularly for condos,” Petramala said.

“Some of the over-building may not be as excessive as some people might be warning.” (Reporting by Andrea Hopkins and Leah Schnurr; Editing by Leslie Adler and Peter Galloway)

 

Consumer debt will hit record $28,853, TransUnion says – Business – CBC News

Consumer debt will hit record $28,853, TransUnion says – Business – CBC News.

Credit-monitoring agency TransUnion says the non-mortgage debt of Canadians is likely to set a record next year.

In its first such annual forecast, TransUnion predicts the average consumer’s total non-mortgage debt will hit an all-time high of $28,853 by the end of 2014.

That would be about $1,100 more than the $27,743 of debt consumers are expected to have at the end of this year.

TransUnion says car loans are expected to drive the increase in such debt, which also includes credit card debt, lines of credit, student loans and the like.

On the plus side, the credit-monitoring agency says it expects loan delinquency rates to continue to decline in the coming year, falling to 1.66 per cent at the end of 2014 compared with 1.76 per cent forecast for the fourth quarter of this year

Both figures are down from 1.93 per cent in 2012 and 2.87 per cent in 2009.

“The average Canadian consumer’s total debt is expected to rise by four per cent in 2014, which would be more than $4,500 higher than what we had observed five years earlier in 2009,” Thomas Higgins, TransUnion’s vice-president of analytics and decision services, said in the report.

Higgins noted that while the 2014 increase is much greater than the expected one per cent rise in 2013, it is in line with consumer debt growth of recent years.

“In recent years, the increase in auto sales has helped propel the total debt number and we believe auto captive loans will once again be a driver of this increase in 2014,” he said.

“Instalment loans also have played a major role and we don’t expect there to be a material change in this trend,” he added.

While TransUnion expects delinquency levels to drop next year and remain significantly lower than just a few years ago, “there is a slight concern that delinquencies could rise once interest rates increase,” Higgins said.

However, he added that at this time “we do not believe interest rates will rise enough to materially impact delinquency levels.”

 

The Taper Is On – 8 Ways That This Is Going To Affect You And Your Family

The Taper Is On – 8 Ways That This Is Going To Affect You And Your Family.

Janet Yellen Ben Bernanke Swearing In

The unelected central planners at the Federal Reserve have decided that the time has come to slightly taper the amount of quantitative easing that it has been doing.  On Wednesday, the Fed announced that monthly purchases of U.S. Treasury bonds will be reduced from $45 billion to $40 billion, and monthly purchases of mortgage-backed securities will be reduced from $35 billion to $30 billion.  When this news came out, it sent shockwaves through financial markets all over the planet.  But the truth is that not that much has really changed.  The Federal Reserve will still be recklessly creating gigantic mountains of new money out of thin air and massively intervening in the financial marketplace.  It will just be slightly less than before.  However, this very well could represent a very important psychological turning point for investors.  It is a signal that “the party is starting to end” and that the great bull market of the past four years is drawing to a close.  So what is all of this going to mean for average Americans?  The following are 8 ways that “the taper” is going to affect you and your family…

1. Interest Rates Are Going To Go Up

Following the announcement on Wednesday, the yield on 10 year U.S. Treasuries went up to 2.89% and even CNBC admitted that the taper is a “bad omen for bonds“.  Thousands of other interest rates in our economy are directly affected by the 10 year rate, and so if that number climbs above 3 percent and stays there, that is going to be a sign that a significant slowdown of economic activity is ahead.

2. Home Sales Are Likely Going To Go Down

Mortgage rates are heavily influenced by the yield on 10 year U.S. Treasuries.  Because the yield on 10 year U.S. Treasuries is now substantially higher than it was earlier this year, mortgage rates have also gone up.  That is one of the reasons why the number of mortgage applications just hit a new 13 year low.  And now if rates go even higher that is going to tighten things up even more.  If your job is related to the housing industry in any way, you should be extremely concerned about what is coming in 2014.

3. Your Stocks Are Going To Go Down

Yes, I know that stocks skyrocketed today.  The Dow closed at a new all-time record high, and I can’t really provide any rational explanation for why that happened.  When the announcement was originally made, stocks initially sold off.  But then they rebounded in a huge way and the Dow ended up close to 300 points.

A few months ago, when Fed Chairman Ben Bernanke just hinted that a taper might be coming soon, stocks fell like a rock.  I have a feeling that the Fed orchestrated things this time around to make sure that the stock market would have a positive reaction to their news.  But of course I absolutely cannot prove this at all.  I hope someday we learn the truth about what actually happened on Wednesday afternoon.  I have a feeling that there was some direct intervention in the markets shortly after the announcement was made and then the momentum algorithms took over from there.

In any event, what we do know is that when QE1 ended stocks fell dramatically and the same thing happened when QE2 ended.  If you doubt this, just check out this chart.

Of course QE3 is not being ended, but this tapering sends a signal to investors that the days of “easy money” are over and that we have reached the peak of the market.

And if you are at the peak of the market, what is the logical thing to do?

Sell, sell, sell.

But in order to sell, you are going to need to have buyers.

And who is going to want to buy stocks when there is no upside left?

4. The Money In Your Bank Account Is Constantly Being Devalued

When a new dollar is created, the value of each existing dollar that you hold goes down.  And thanks to the Federal Reserve, the pace of money creation in this country has gone exponential in recent years.  Just check out what has been happening to M1.  It has nearly doubled since the financial crisis of 2008…

M1 Money Supply 2013

The Federal Reserve has been behaving like the Weimar Republic, and this tapering does not change that very much.  Even with this tapering, the Fed is still going to be creating money out of thin air at an absolutely insane rate.

And for those that insist that what the Federal Reserve is doing is “working”, it is important to remember that the crazy money printing that the Weimar Republic did worked for them for a little while toobefore ending in complete and utter disaster.

5. Quantitative Easing Has Been Causing The Cost Of Living To Rise

The Federal Reserve insists that we are in a time of “low inflation”, but anyone that goes to the grocery store or that pays bills on a regular basis knows what a lie that is.  The truth is that if the inflation rate was still calculated the same way that it was back when Jimmy Carter was president, the official rate of inflation would be somewhere between 8 and 10 percent today.

Most of the new money created by quantitative easing has ended up in the hands of the very wealthy, and it is in the things that the very wealthy buy that we are seeing the most inflation.  As one CNBC article recently stated, we are seeing absolutely rampant inflation in “stocks and bonds and art and Ferraris and farmland“.

6. Quantitative Easing Did Not Reduce Unemployment And Tapering Won’t Either

The Federal Reserve actually first began engaging in quantitative easing back in late 2008.  As you can see from the chart below, the percentage of Americans that are actually working is lower today than it was back then…

Employment-Population Ratio 2013

The mainstream media continues to insist that quantitative easing was all about “stimulating the economy” and that it is now okay to cut back on quantitative easing because “unemployment has gone down”.  Hopefully you can see that what the mainstream media has been telling you has been a massive lie.  According to the government’s own numbers, the percentage of Americans with a job has stayed at a remarkably depressed level since the end of 2010.  Anyone that tries to tell you that we have had an “employment recovery” is either very ignorant or is flat out lying to you.

7. The Rest Of The World Is Going To Continue To Lose Faith In Our Financial System

Everyone else around the world has been watching the Federal Reserve recklessly create hundreds of billions of dollars out of thin air and use itto monetize staggering amounts of government debt.  They have been warning us to stop doing this, but the Fed has been slow to listen.

The greatest damage that quantitative easing has been causing to our economy does not involve the short-term effects that most people focus on.  Rather, the greatest damage that quantitative easing has been causing to our economy is the fact that it is destroying worldwide faith in the U.S. dollar and in U.S. debt.

Right now, far more U.S. dollars are used outside the country than inside the country.  The rest of the world uses U.S. dollars to trade with one another, and major exporting nations stockpile massive amounts of our dollars and our debt.

We desperately need the rest of the world to keep playing our game, because we have become very dependent on getting super cheap exports from them and we have become very dependent on them lending us trillions of our own dollars back to us.

If the rest of the world decides to move away from the U.S. dollar and U.S. debt because of the incredibly reckless behavior of the Federal Reserve, we are going to be in a massive amount of trouble.  Our current economic prosperity greatly depends upon everyone else using our dollars as the reserve currency of the world and lending trillions of dollars back to us at ultra-low interest rates.

And there are signs that this is already starting to happen.  In fact, China recently announced that they are going to quit stockpiling more U.S. dollars.  This is one of the reasons why the Fed felt forced to do something on Wednesday.

But what the Fed did was not nearly enough.  It is still going to be creating $75 billion out of thin air every single month, and the rest of the world is going to continue to lose more faith in our system the longer this continues.

8. The Economy As A Whole Is Going To Continue To Get Even Worse

Despite more than four years of unprecedented money printing by the Federal Reserve, the overall U.S. economy has continued to decline.  If you doubt this, please see my previous article entitled “37 Reasons Why ‘The Economic Recovery Of 2013’ Is A Giant Lie“.

And no matter what the Fed does now, our decline will continue.  The tragic downfall of small cities such as Salisbury, North Carolina are perfect examples of what is happening to our country as a whole…

During the three-year period ending in 2009, Salisbury’s poverty rate of 16% was about 3% higher than the national rate. In the following three-year period between 2010 and 2012, the city’s poverty rate was approaching 30%. Salisbury has traditionally relied heavily on the manufacturing sector, particularly textiles and fabrics. In recent decades, however, manufacturing activity has declined significantly and continues to do so. Between 2010 and 2012, manufacturing jobs in Salisbury — as a percent of the workforce — shrank from 15.5% to 8.3%.

But the truth is that you don’t have to travel far to see evidence of our economic demise for yourself.  All you have to do is to go down to the local shopping mall.  Sears has experienced sales declines for 27 quarters in a row, and at this point Sears is a dead man walking.  The following is from a recent article by Wolf Richter

The market share of Sears – including K-Mart – has dropped to 2% in 2013 from 2.9% in 2005. Sales have declined for years. The company lost money in fiscal 2012 and 2013. Unless a miracle happens, and they don’t happen very often in retail, it will lose a ton in fiscal 2014, ending in January: for the first three quarters, it’s $1 billion in the hole.

Despite that glorious track record, and no discernible turnaround, the junk-rated company has had no trouble hoodwinking lenders into handing it a $1 billion loan that matures in 2018, to pay off an older loan that would have matured two years earlier.

And J.C. Penney is suffering a similar fate.  According to Richter, the company has lost a staggering 1.6 billion dollars over the course of the last year…

Then there’s J.C. Penney. Sales plunged 27% over the last three years. It lost over $1.6 billion over the last four quarters. It installed a revolving door for CEOs. It desperately needed to raise capital; it was bleeding cash, and its suppliers and landlords had already bitten their fingernails to the quick. So the latest new CEO, namely its former old CEO Myron Ullman, set out to extract more money from the system, borrowing $1.75 billion and raising $785 million in a stock sale at the end of September that became infamous the day he pulled it off.

So don’t believe the hype.

The economy is getting worse, not better.

Quantitative easing did not “rescue the economy”, but it sure has made our long-term problems a whole lot worse.

And this “tapering” is not a sign of better things to come.  Rather, it is a sign that the bubble of false prosperity that we have been enjoying for the past few years is beginning to end.

 

Spanish Bad Loans Jump To New Record As Banks Come Clean Over Mortgage Defaults | Zero Hedge

Spanish Bad Loans Jump To New Record As Banks Come Clean Over Mortgage Defaults | Zero Hedge.

Spanish loan delinquencies as a percentage of the total have risen for the 8th straight month to a new record high of 13.00% (even as sovereign bond spreads continue to plunge to multi-year lows signaling all is well). With unemployment rates stuck stubbornly high, however, reality is starting to dawn in the Spanish banking system as mortgage defaults are rising following the Bank of Spain’s order for lenders to review their portfolios. As Bloomberg reports, the default rate for Banco Santander alone jumped to 7% (from 3.1%) following its “reclassification” of loans that it had refinanced (never expecting to be repaid) and with home prices still falling, “there is an urgency to come clean” as regulators see the need for banks to cover a further EUR5 billion shortfall in provisions.

The slow-and-steady rise in deliquencies smacks of an industry that is dripping out there problems – hiding facts from reality and the spike for Banco Santander is merely highlighting the mis-statement…

Via Bloomberg,

With Spain’s persistently high unemployment rate now at 26 percent, the couple is among the 350,000 homeowners who may be foreclosed upon by lenders in the next two years as the housing crisis worsens, according to AFES, a Madrid-based association that advises on restructuring debt. Since 2008, about 150,000 families have been hit with a foreclosure.

“We refinanced three years ago, but now the noose is around our necks,” Males, 42, said. “Not only do we still owe more than the original loan. We’re losing our home as well.”

As mortgage defaults rise, lenders will have to set aside money to cover losses, hurting profits, according to Juan Villen, head of mortgages at Spanish property web site Idealista.com. Spanish banks absorbed 87 billion euros ($120 billion) of impairment charges last year after Economy Minister Luis de Guindos forced them to record more defaults on loans to developers. The government took 41 billion euros in European assistance to shore up its failing lenders.

Defaults are rising partly because of changes required by the Bank of Spain that force lenders to book more soured mortgages.

“When the real estate bubble burst in 2008, banks used refinancing en masse to cover up non-performing residential mortgage loans,”

Which led to a broad loan review…

In April, the Bank of Spain ordered lenders to review their portfolios of refinanced loans, including mortgages, to make sure they’re classified in a uniform way. Lenders had 208 billion euros of loans on their books that they’d restructured or refinanced as of the end of 2012, according to the regulator.

The review led the regulator to the preliminary conclusion that classifying all refinanced loans correctly would cause a 21 billion-euro increase in defaults. Lenders would need to generate a further 5 billion euros of provisions to cover the losses.

The default rate for Banco Santander SA (SAN)’s Spanish mortgages jumped to 7 percent in September from 3.1 percent in June as it reclassified loans that it had refinanced.

“As a bank this will be the main focus area, whether you are properly recording your non-performing loans, especially the refinanced ones,” said Alexander Pelteshki, an analyst at ING Financial Markets in Amsterdam. “There is an urgency to come clean.”

But it’s not going to get better any time soon…

“Until Spain starts creating jobs and credit starts flowing again, house prices aren’t going to recover,” Beatriz Toribio, head of research at Fotocasa, said. “We expect further price declines, albeit smaller than in previous years, in 2014.”

 

Is There A Bubble In The Canadian Condo Market? We Drill Down Into The Facts To Find Out | Zero Hedge

Is There A Bubble In The Canadian Condo Market? We Drill Down Into The Facts To Find Out | Zero Hedge.

 

How Big Banks Can Steal Your Home From You Even If Your Mortgage Is Totally Paid Off

How Big Banks Can Steal Your Home From You Even If Your Mortgage Is Totally Paid Off.

 

National Household Survey: Canada’s Diversity Not Reflected In Income Distribution

National Household Survey: Canada’s Diversity Not Reflected In Income Distribution.

 

Canadian House Prices ‘Bubbly,’ The Economist Says As Feds Mull More Mortgage Changes

Canadian House Prices ‘Bubbly,’ The Economist Says As Feds Mull More Mortgage Changes.

 

Canadian Consumer Debt Spikes 6.1% In One Year, But Hey, We’re Paying It Off

Canadian Consumer Debt Spikes 6.1% In One Year, But Hey, We’re Paying It Off.

 

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