Debt Bubble Reaches Critical Mass

Debt BubbleHave you noticed how many debt blogs have sprung up in recent years? Have you noticed how many people are finally realizing that debts must someday be repaid?

This is indicative of the underlying problem, which is, simply put, too much debt. Just how much debt have Americans accumulated? Let’s take a look at the actual numbers.

Between 1996 and 2006 householders added $5.9 trillion to their debts, most of it on their mortgages. From 1999 to 2006, household mortgage debt went from $4.4 trillion to $9.33 trillion. (Mobs, Messiahs, and Markets, p. 262)

What is a trillion? It’s a number too big to fathom. So to get some perspective, all we have to do is see that mortgage debt more than doubled in a period of only seven or eight years. Not good.

But what about the consumer side? What about all those folks who don’t have mortgages? Again, we quote from Bonner and Rajiva’s book.

From 1999 to 2007, household debt went up more than all the debt that households had previously accumulated in the 220-year history of the United States. From 1999 to 2006 consumer credit outstanding, too, rose from $1.6 trillion to about $2.5 trillion. (Mobs, Messiahs, and Markets, p. 263)

The significance of these numbers should not be underestimated.

What happens when American consumers stop spending and start repaying their debts (as they will all be forced to do at some point)? What happens when lending standards are tightened and minimum payments are increased?

It doesn’t take a genius to see that America’s debt problems will have a profound impact on the economy over the next few years. There is simply no way to use credit indefinitely. The debts will have to be repaid. And since the “health” of the American economy depends heavily on the use of credit, it will suffer mightily when consumers stop spending and start repaying.

So why do I share this with you?

Because I want you to see how dangerous America’s debt load has become. And because I want to encourage you not to wait a second longer to begin repaying your debts. The use of credit is the same as borrowing from your future. Learn to live in the present with what you have in the present. Settle accounts with your future now so that when the future comes, you won’t be indebted to it.

Banking Crisis Imminent?

Disaster ImminentHere is an article worth reading…

==> “Mortgage Meltdown” by Sean Olender

I was originally referred to this article by Stephen Jones. My dad sent the link to me, my mom, and my brothers. One brother responded with skepticism for what he perceived as a lack of solid evidence.  He wrote:

Hard to say how much of that’s accurate without doing more research.  I read both the article and a fair amount of the comments on the article and tend to agree with the more skeptical posts about the lack of support in the statements made.  It’s obvious that there were some stupid decisions made in regards to the housing market and the economy in the last several years, but that it’s all been illegal, while not necessarily unlikely, isn’t very well supported in the article.  I haven’t been following the issue however, and certainly don’t know how these foreign investors were lied to by the U.S. banks, since I’m not familiar with how that process works.

It’s an interesting article, but it just seems like the majority of any economic or political articles (including this one) tend more towards sensationalism than a factual report since most people aren’t interested in reading something that sounds like a text book (understandable, but I’d rather have the textbook).

I, on the other hand, was not so skeptical. In fact, I suspect what Olender writes is true. Here is my response:

Basically, the banks sold foreign investors mortgage debt notes. But if a debt note was high risk, the banks lied by saying it was low risk. That’s the gist of it.

Whether it was intentional or not is debatable.

But usually, to determine the truth of these matters, all you have to do is follow the money. Who stood to profit the most? Who stood to lose the most? Answer those questions and you’ll know who is most likely to resort to deception.

Another reason for the run-up in housing prices has been caused by the cozy relationships between mortgage brokers and appraisers. Obviously, a mortgage broker wants to loan money because that’s how he makes money. But he can only lend money when the value of the property supports the amount of the loan. So he needs an appraiser to validate how much the property is worth.

The problem arises when a mortgage broker refers a lot of work to a single appraiser. The appraiser feels indebted and doesn’t want to lose the business. So he might fudge the numbers a little bit to help out the mortgage broker. The broker responds by sending him even more business.

This situation was made worse by the incredible number of people who got into the mortgage brokering business during the boom. They were all desperate for business, so thus more susceptible to violating their own ethics.

Has all this been documented? I don’t know. But it’s mostly common sense. I think the same thing applies to the story in reference. Until we actually see specific cases of high-risk loans being given false low-risk ratings, then we won’t have strong evidence.

But the simple fact that bond investors are considering suing banks for fraud is significant. This is evidence enough that questionable practices have been used to rate and sell mortgage debt.

Consider this paragraph from the article.

“The Goldman report in October suggests that rampant investor demand is to blame for origination fraud – even though these investors were misled by high credit ratings from bond rating agencies being paid billions by the U.S. investment banks, like Goldman, that were selling the bundled mortgages.”

Notice the path of the money.

The bank sells mortgage debt to bond investors who rely on the credit rating provided by the bond agency, which is ultimately paid by the bank!

Can you say “conflict of interest?”

Again, just follow the money and you’ll usually find the truth of the matter.

Two more things worth noting.

Sean Olender is a lawyer in San Mateo county, California. He has probably seen a lot of evidence firsthand.

What’s more, The Baglady has been writing frequently about the deteriorating housing market in San Mateo. She has been publishing statistics every two weeks. You can see her most recent entry here.

Why would I share all this on a blog about debt reduction? Because debt is not just a personal problem. It is also a national problem. I believe we must be aware of what’s happening in the world at large to make better decisions about how we handle debt and money on a personal level.