This is What Total Desperation Looks Like

Posted by Ed 45 days ago
No Payment, No Problem: Bizarre New World of Consumer Debt
All kinds of weird records are being broken. But it’s scheduled to expire, and then what?

he New York Fed released a doozie of a household credit report. It summarized what individual lenders have been reporting about their own practices: If you can’t make the payments on your mortgage, auto loan, credit card debt, or student loan, just ask for a deferral or forbearance, and you won’t have to make the payments, and the loan won’t count as delinquent if it wasn’t delinquent before. And even if it was delinquent before, you can “cure” a delinquency by getting the loan deferred and modified. No payment, no problem.

Nearly all student loans go into forbearance, delinquencies plunge.

Student loan borrowers were automatically rolled into forbearance under the CARES Act, and even though many students had stopped making payments, delinquency rates plunged because the Department of Education had decided to report as “current” all those loans that are in forbearance, even if they were delinquent. Yup, according to New York Fed data, the delinquency rate of student loan borrowers, though many had stopped making payments, plunged from 10.75% in Q1, to 6.97% in Q2, the lowest since 2007:
Student loan forbearance is available until September 30, and interest is waived until then, instead of being added to the loan. In a blog post, the New York Fed said that 88% of the student-loan borrowers, including private-loan borrowers and Federal Family Education Loan borrowers, had a “scheduled payment of $0,” meaning that at least 88% of the student loans were in some form of forbearance. Until September 30. And then what?

No payment, no problem for auto loans.

Yup, crazy world. Ally Financial reported in its 10-Q filing with the SEC for the second quarter that about 21% of its auto-loan customers were enrolled in its deferral program where they don’t have to make payments for 120 days. “The vast majority of our loan deferrals for customers in the program are scheduled to expire by the end of August 2020,” it said.

And then what?

Lenders like these types of programs because they can kick the can of delinquencies down the road, and instead they have “performing loans” for which they can accrue interest which makes their investors happy, even though the customers don’t make any interest or principal payments.

Bank regulators normally get nervous about deferral programs. But it appears that bank regulators have been told the shelter at home until further notice.

Across all lenders, about 5.9% of the $1.34 trillion in auto loans – so close to $80 billion – are in forbearance, according to the New York Fed. And as a result, borrowers who cannot make the payment, don’t have to make it, and their loans are still deemed “current,” and the percentage of auto loans that are newly delinquent dropped to 6.29%, a record low in the data – while during the last crisis, the delinquent balances were above 10% for nearly two years: 

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Ed 45 days ago
Why’s the ECB Buying the Debt of So Many Non-EU Companies?
“Companies from outside the euro zone are setting up companies or vehicles to issue debt in euros and thereby qualify for the ECB’s purchase programs.”

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Ed 43 days ago
Bite the Bullet or Extend & Pretend? Unemployment in Europe
 45 million people have been furloughed in Germany, the UK, France, Italy, and Spain, but the “unemployment” rate barely budged because furloughs don’t count. Creating government-subsidized zombie companies & zombie jobs?
 Unemployment in the EU has barely budged since the virus crisis began. In the first four months of the crisis, the official unemployment rate edged up from 6.5% in March, when many lockdowns began, to 7.1% in June, the last month on record. There’s one reason: Furloughed workers are not included in the unemployment stats (all charts via Trading Economics):
Most EU countries have adopted hugely ambitious job retention programs that have saved, at least temporarily, tens of millions of jobs. Each government pays companies, who in turn pay employees between 60% and 84% of their monthly wage. In some cases, the workers work fewer hours for less pay; in others, they don’t work at all.
The workers take a hit to their income but their jobs remain intact, at least for the duration of the program, giving their employers time and financial breathing space to reinvent themselves for the new economic reality that is quickly taking shape.

In Germany, the UK, France, Italy, and Spain, a combined 45 million workers were registered in furlough programs at the end of May — compared to about 32 million Americans who are claiming unemployment benefits under state and federal programs.

The initial duration of the programs differed significantly by country, from nine weeks in Italy to a year in Germany. But governments have begun to extend the duration of the programs.
The hope is that the economic fallout from the virus crisis will gradually dissipate, allowing many of the furloughed workers to return to their still-existent jobs, as happened in Germany during the Global Financial Crisis.
Thanks to Berlin’s “Kurzarbeit” social insurance program, whereby employers reduce their employees’ working hours instead of laying them off, picking up government subsidies in the process, Germany experienced only a modest increase in unemployment, despite having suffered a 6% contraction in GDP.

But this time, the challenge is many orders of magnitude bigger and more complex. Back in 2009, just under 1.5 million workers in the country were furloughed — compared to approximately 10 million workers that applied for the program in March and April this year. In May, as the economy began to reopen, the number fell to 7.3 million, and then to 6.7 million in June.

“The decline is quite slow, and in some sectors short-time work is even increasing,” said Sebastian Link, a labor market expert at the IFO. “Furloughs among metal industry workers, for instance, jumped to 48% in June from 40% in May.”

Normally, Kurzarbeit is restricted to 12 months but it has been lengthened to 21 months since the coronavirus crisis began. Politicians across Europe have sought to do the same with their respective furlough programs.

Italy and Spain’s furlough programs were supposed to end in the coming weeks, but last week they were extended to the end of December. In both countries, public debt is already soaring — the result of three simultaneous processes: massive growth in government spending to counter the virus crisis, a dizzying slump in tax revenues, and a sharp decline in GDP.

But if millions of jobs were destroyed this Autumn and hundreds of thousands of companies hit the wall, the tax revenues and GDP would shrink even faster while defaults on bank loans would soar.

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Ed 35 days ago
Mortgage Delinquencies Jump by Most Ever. 60-Day Delinquencies Hit Highest Level Ever. Record 16% of FHA Mortgages Delinquent. What a Mess
Includes mortgages already delinquent before they were swept under the big federal rug of extend-and-pretend forbearance programs. 
The mortgage delinquency-and-forbearance mess keeps getting messier – in record-setting ways. At the same time, the record-low mortgage rates continue to push certain other segments of the housing industry toward ever greater exuberance. That contradiction became humorously obvious on the Bloomberg News Economics front page, where side-by-side these two headlines appeared: 

The overall delinquency rate for mortgages on one-to-four-unit residential properties soared by nearly 4 percentage points (386 basis points) during the second quarter, and by June 30 reached 8.22% (seasonally adjusted), the highest in nine years, according to the Mortgage Bankers Association’s National Delinquency Survey.

This nearly 4-percentage point jump in the overall delinquency rate was the largest in the history of MBA’s survey going back to 1979.

Instead of the borrower either catching up, or the mortgage going into foreclosure, the mortgage is put on ice during forbearance. The borrower doesn’t need to make payments.
And the lender, after putting the delinquent mortgage into forbearance, may no longer consider the mortgage delinquent, and may therefore still show the mortgages as “performing,” and may still show interest income from it, though no one is making payments. 

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Ed 25 days ago
Subprime Mortgages Fall Massively Delinquent
The Federal Housing Administration (FHA) prides itself in insuring subprime mortgages with, as it says, “low down payments,” “low closing costs,” and “easy credit qualifying” – all true.
Of its active portfolio of 8 million mortgages that it insures, 17% were delinquent in July, the highest rate in FHA history. In many metros, the delinquency rates of FHA mortgages are above 20%; and in two metros, the delinquency rates exceed 27%.

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Ed 25 days ago
The Zombie Companies Are Coming
Through the first half of August – which is normally a quiet period for the bond market in the US – a total of $56 billion in junk bonds and leveraged loans were issued by junk-rated companies, according to S&P Global.
 That was nearly 50% higher than the prior records for the same period in 2012 and 2016, and more than double the amount issued in the entire month of August last year. 
The Fed’s announcement on March 23rd that it would start buying corporate bonds and bond ETFs set off a huge rally in the bond market, including in the junk-bond market. 
The rally started before the Fed ever actually bought the first bond. And then the Fed hardly bought anything by Fed standards. Through the end of July, it bought just $12 billion in corporate bonds and bond ETFs, including a minuscule $1.1 billion in junk bond ETFs. It’s not even a rounding error on its $7-trillion mountain of assets.

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Ed 22 days ago
Devastating Consumer Financial Cliff Coming Right Up

Ominous Picture

This is an ominous picture because the Congressional Covid stimulus expired on July 25.

That's when the last weekly stimulus check of $600 was sent. As of August 28, consumers will have missed 5 weekly checks of $600 each.

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