Americans Are Deleveraging, But Not Because They Want To

Tyler Durden's picture

As comparisons between US and European debt to GDP levels and the finger-pointing of who is deleveraging more continues, McKinsey notes (in their quarterly Debt and Deleveraging article) that there may be a light at the end of the tunnel for the US as private-sector deleveraging has been rapid since 2008. However, reading on a little, we find that the light at the end of the tunnel may well be the front of the oncoming train of financial distress as some two-thirds of the 4% ($584bn) in US household debt deleveraging is from defaults on home-loans (and other consumer debt)! Of course, with homebuilder stock prices surging (notably rather dramatically relative to lumber or ABS/CMBS), consensus has once again agreed that the bottom in housing is in. McKinsey's initial forecast that the pent-up foreclosures and implicit deleveraging will bring us back to trend by 2013 seems like a pipe-dream and we tend to agree with their more conservative perspective that reversion in household debt will not be to trend but to pre-credit-bubble levels, implying a 22% further reduction (or a couple more trillion dollars of defaults).

The United States: A light at the end of the tunnel

From 1990 to 2008, US private-sector debt rose from 148 percent of GDP to 234 percent (Exhibit 5). Household debt rose by more than half, peaking at 98 percent of GDP in 2008. Debt of nonfinancial corporations rose to 79 percent of GDP, while debt of financial institutions reached 57 percent of GDP.

Since the end of 2008, all categories of US private-sector debt have fallen as a percent of GDP. The reduction by financial institutions has been most striking. By mid-2011 the ratio of financial-sector debt relative to GDP had fallen below where it stood in 2000. In dollar terms, it declined from $8 trillion to $6.1 trillion. Nearly $1 trillion of this decline can be attributed to the collapse of Lehman Brothers, JP Morgan Chase’s purchase of Bear Stearns, and the Bank of America-Merrill Lynch merger. Since 2008, banks also have been funding themselves with more deposits and less debt.

Among US households, debt has fallen by 4 percent in absolute terms, or $584 billion. Some two-thirds of that reduction is from defaults on home loans and other consumer debt. An estimated $254 billion of troubled mortgages remain in the foreclosure pipeline, suggesting the potential for several more percentage points of household debt reduction as these loans are discharged. A majority of defaults reflect financial distress: overextended homeowners who lost jobs or faced medical emergencies and found that they could not afford to keep up with payments. Low-income households are affected most by defaults—in areas with high foreclosure rates, the average annual household income is around $35,000, compared with $55,000 in areas with low foreclosure rates.

Up to 35 percent of US mortgage defaults, it is estimated, are the result of strategic decisions by borrowers to walk away from homes that have negative equity, or those in which the mortgage exceeds the value of the property. This option is more available in the United States than in other countries, because in 11 of the 50 states—including hard-hit Arizona and California—mortgages are nonrecourse loans. This means that lenders cannot pursue other assets or income of borrowers who default. Even in recourse states, US banks historically have rarely pursued nonhousing assets of borrowers who default.

We estimate that US households could face roughly two more years of deleveraging. As noted above, there is no accepted definition of the safe level of household debt, which might serve as a target for deleveraging. One possible goal is for the ratio of household debt relative to disposable income to return to its historic trend. Between 1952 and 2000, this ratio rose steadily—by about 1.5 percent annually—reflecting growing access to mortgages, consumer credit, student loans, and other forms of credit in the United States. After 2000, growth in household borrowing accelerated, and by 2008, growth in the ratio of household debt to income had climbed more than 30 percentage points above the trend line. By the second quarter of 2011, this ratio had fallen by 15 percentage points. At the current rate of deleveraging, it could return to trend by mid-2013 (Exhibit 7).

In the wake of a highly destructive financial crisis, it is reasonable to ask whether a continuous upward trend in household borrowing is sustainable. A more conservative goal for US household deleveraging, then, might be to aim for a return to the ratio of debt relative to income of 2000, before the credit bubble. This would require a reduction of 22 percentage points from the ratio of mid-2011.

Another comparison is with Swedish households in the 1990s, which reduced household debt relative to income by 41 percentage points. By this measure, US households are a bit more than one-third of the way through deleveraging.

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blindfaith's picture

50 years to repair the damage...period

Hi Ho Silver's picture



I've seen the light at the end of the tunnel and it's a freight train.

Smiley's picture

Funny, I thought it was the door to a FEMA crematorium...

Arthor Bearing's picture

That seems about right, but really the damage is more or less permanent, at least until the next watershed socio-historical event. Take East Germany, which experienced an incredible brain drain as the Soviets cut the contry off from the western world and implemented its brand of communism. The East Germans are still defensive about seeming to be second class citizens, they have a reputation for being dumber, and their cities are full of ugly bland soviet buildings which will be there until they crumble. 

Nature's pattern is basically thus: the rich get richer, until their richness poisons them and then another competitor will take the dominant position. Similar to a game of king of the hill. If, like the US will, you get thrown to the bottom of the hill after investing all of your money and energy into fortifying the top, then it will be a long climb before you will ever even see the top again.

blindfaith's picture

Eight dollar a barrel OIL is what brought the USSR to it's knees.  Could no longer afford all the satalites and a big militray too. ( Sorry it was not Reagan, it was $8 oil) that ended the USSR and the wall falling in East Germany there after.

The return of one united  Germany is what made the EU possible, it is what scared the French into cooperating. 

Funny what the catalyst is for any event when you dig into the details.

Sandmann's picture

The return of one united  Germany is what made the EU possible, it is what scared the French into cooperating.

Wrong history book. Germany was divided in 1945 with 4 Powers. George H W Bush was the main ally Kohl had in reuniting Germany - France and Britain opposed. Margaret Thatcher was toppled in November 1990 - the month Kohl put forward his plans for Reunification. Mitterand extracted the Euro as the price for French Agreement ie. the destruction of Deutsche Mark and Bundesbank. Germany used Art 23 of the Constitution the Allies had imposed on Germany in 1949 to unify the two countries rather than Art  146 which says the German People will have a free vote on their own Constitution. Yet it does not happen. Germany is the prisoner of the EU not the other way around., as it was inveigled into the EEC in 1957 (the year it was allowed to re-arm and have an Army at US insistence - but inside NATO) and locked down by France in the Elysee Treaty 1963.

Germany ws occupied until by Allied troops until June 1930 and again from May 1945 and did not regain sovereignty until 1990Oh, and btw blindfaith - the EU was formed in 1957

koperniuk666's picture

Wrong again. France was NOT at the table. The big three were USA, Britain and Russia.

TruthInSunshine's picture

Stay away from the light!


-- Main Stream Media

blindfaith's picture

sorry, the EURO...letters didn't take in typing.  So getting your nickers in a bunch was for a typo....just imagine if we were writting in a different language as well.

Lucius Cornelius Sulla's picture

East Germany is slowly getting better.  Businesses are being attracted by relatively cheap labor, which brings in higher skilled labor to support production.  There is a lot of building going on in Dresden where restaurants in the old town (which has been almost totally rebuilt) are packed with patrons for the dinner rush.  You can definitely tell that things are improving.

Sandmann's picture

Dresden is hardly representative considering how much public money has been invested. When I looked at building factories in the former-GDR the costs were higher for infrastructure than in the West and all the tax breaks required capital-intensity so we weren't going to employ labour, which is expensive and if you wanted to get high productivity you would use lots of capital per worker and employ few workers to keep social charges low. It is cheaper to build labour-intensive plants in Poland or Czechoslovakia than in the former-GDR which is exactly what is happening. The demographics of the former GDR are awful and quoting Dresden or Leipzig is ridiculous when you consider how many Hartz IV Claimants there are in Berlin and how many childen live in poverty - or how many evictions from rented apartments are taking place throughout former-GDR.

People are not looking at Neo-Nazi groups because they revel in abundant prosperity, but simply to kick the political elites in the teeth for rampant corruption and fear of enduring poverty while Merkel funds early retirement in Greece and France as an MP for the poorest state in Germany, Mecklenburg-Vorpommern which has a keen Neo-Nazi following

Lucius Cornelius Sulla's picture

HARTZ4 is part of the problem, IMHO.  Consider how many Turks, Poles, Spaniards, Italians, etc... are working in low wage jobs in Germany.   These industries are competing with welfare checks for workers.  The neo-Nazi punks are probably mostly on welfare with nothing better to do.  Make them work for a living and the problem is practically solved.

ATM's picture

Dresden is doing well because of the Euro. Makes German products relatively cheap - for now. That too will change in short order.

Ruffcut's picture

Default is my delever tool of choice.

rayduh4life's picture

works quite well for the Donald, corp amerca etc.

JLee2027's picture

50 years to repair the damage...period

We can repair things in a couple years with a new metal-backed currency, a complete wipe out/reset of all debts and full liquidation of insolvent companies.  

Jerry Maguire's picture

If you do a debt wipte out there won't be any insolvent companies, just as there won't be any insolvent anything. 

Here's how you'd do it though:


And then see if you can figure out how this might help ease the transition:


WhiteNight123129's picture

Now, deleveraging is like bear market, it takes a long time to form a buble, but it is much faster to have it pop, of course courtesy of central banks everytime the market tries to clear, the Fed is there making matters worse by trying to avoid the short term pain, had they not intervened back in Tequlia crisis and in LTCM crisis and in Dot-Com bubble pop and in Housing bubble pop the economy of the US would be much sounder.


xela2200's picture

50 --> Keynes

15 --> Austrian

Snakeeyes's picture

How about ... NO.

With slow Real GDP growth and slow job creation, household debt increases are not sustainable and the Fed shouldn't be pushing it!

Dr. Richard Head's picture

The banks sure are trying their asses off.  My current bank, with whom I challenged the mortgage, is offering to refi my home from 6 and 1/8 to 3%, drop five years off the loan, and low closing costs.  No appraisal, even though I stated that I am underwater by 20% and state income.  I explained to them that my wife's last day on her retail job is this Thursday, Disney store is closing (Hooray!!!!!), yet they said everything is fine since it will be a stated income through the Making Homes Affordable Act.  Has anyone learned? 

LawsofPhysics's picture

In a word No.  The banks and all the paper-pushing financial fucknuts (who produce NOTHING of real value) want you and your wife to be happy in your debt slavery.  The financial fucks have been overpaid for years, fuck them.  Wage parity, the world over is coming, damn straight these idiots are panicking, they know that the real value of their labor is ZERO.

Harbanger's picture

World wage parity won't be achieved by raising the bottom but by lowering the top.

The Limerick King's picture



It sounds like they want you to lie

To make their new paper trail fly

Just don't pay the crooks

Make them mark-down their books

So this whole wretched system will die

blindfaith's picture

If the GREEDY pigs had done this in 2009 thru 2011 for all the mortages then the current mess might not be as bad as it is.  BUT, they believes themselves to be Kings with all that implies.

Their only hope is to become 'reborn' with the same old ideas and hooks.

God, I hope American have learned something and won't forget. 

  Right.  Sure.  Rub a lamp and make a wish.

Harbanger's picture

HAMP, is a federal program of the United States set up in the context of the ongoing subprime mortgage crisis in the debt markets, continuing from 2008.  They created the SMC and now they will "fix" it, by giving more subprime mortgages.

pods's picture

So you basically have them by the balls and that is the best they can do?

I would hold out for a better deal.

If they want stated income and no appraisal, they are merely trying to have an enforceable lien.  

Don't do them any favors!


Dr. Richard Head's picture

How can I call them out during today's meeting aboutthem not having an enforceable lien?

pods's picture

Have they produced an unbroken chain of title?  That would be the only way for you to know ahead of time if they have standing.  And if MERS is in that chain, it is impaired.

With me, WF was calling and calling asking for me to refi into a fixed rate loan.  Kept telling them I was happy with the ARM (at 2.5% now) and a couple months later I got a note that said they finally registered the note with the county (4 years late).  They tried to make it legal, but I still dont think they have an enforceable lien.  I am staying there and am nowhere near underwater, so it is fine by me.

You can check with the county and see what the last recorded lien is on that property, and I think who it was with.

Not a RE guy though.  Maybe others who have gone further can show you more clues?

With me, if they approach you with a deal that is too good for you, they have nothing.  And wherever MERS was used the most I would say that it is impaired as a general statement.


MachoMan's picture

If you believe that they do not have a valid lien, then you should request documentation to prove it's valid and if they don't cough it up within a certain period of time, file to remove the lien (slander of title, etc.).

What most people don't understand though, is that if I loan you money and you give me a mortgage...  even if it is not perfectly executed...  it will still be good as to you, as mortgagor...  however, if it is not properly executed or filed/perfected, it will be behind any interim filings that are proper...  meaning, you can borrow against the home in the meantime and give someone else a higher priority lien if they will file first...  (presuming some things about your state's recording acts).

I don't think the fact that they filed late has anything to do with whether it is valid...  the whole point is that they're already punished by having their necks on the line, given anyone can come in the meantime and get priority on the collateral.

For quick checking of deeds, you can probably go online to your local assessor's office's website and do a search for your property...  will likely bring up a picture, floorplan w/ dimensions, year built, amount of yearly taxes, and the last ~30 years of filed transfers...  obviously some jurisdictions are a little more high-tech than others...  but you can also call your county clerk and speak to the real estate division (sometimes separate) and ask for a copy of a deed...  many have computerized records now as well...  and you can just go there and within 5 minutes walk out with a copy of the deed.  Remember, being polite will get you a lot further than "demanding your rights."

pods's picture

Thanks Macho, I was thinking of you when I had talked about others above, as you seem to have a wealth of info on the subject.  From what I have read, the use of MERS (not used on mine) was to get around the law of filing every transfer of the deed, was it not? And then when the mortgage was put into the REMIC it had to be named and valid, and the only way that could be backed up was through the register of deeds?

I looked mine up before, my county is pretty good like that.  Has all the stuff you mentioned, lot size, taxes, etc.  Have not checked it lately.  WF did update the records, albeit late.  

My mortgage was a refi, which, correct me if I am wrong, turned the mortgage from a non- recourse loan into a recourse one. So if I were to challenge it, I would have to file bk if I wanted to shed the mortgage anyways.

Like I said before, did not have plans of doing anything, just keeping up on the details, as when I pay off the mortgage, I want to be sure about the lien being able to be removed.


MachoMan's picture

Well, I can't really speculate on what the purpose of MERS was...  given the ambiguity of its success...  but I can say that it was unnecessary for the purpose of avoiding recording fees since many jurisdictions passed model law that allowed assignments without recording.  My guess was MERS was part of the sales pitch/lobbying efforts to get the legislation pushed through (see, like we got a central repository n stuff and it'll all work out and we'll keep track of it all), but I might also be giving our legislators too much credit.  I really, really doubt this conceptual "purpose" for MERS, especially considering the risk should it fall through (as it has)...  save $100/mortgage to eat $100k in other costs?  Again, we seem to fall into the binary trap of deciding whether those in charge are wickedly intelligent or completely fucking retarded.

If your local bank/whomever your initial mortgagee was still holds your mortgage (didn't assign it), then your goose is probably cooked...  if you try and fight that, you'll probably end up like the assholes that claim they don't owe any federal tax because the tax laws weren't properly passed...  best of luck to you, lol.

I can't say anything about the refi-recourse issue...  I practice in a recourse state, so everything is fair game for a deficiency judgment...  It wouldn't make any sense to me for a refi to be a recourse loan if it extinguishes the first, in a non-recourse state...  I could certainly understand a 2nd/HELOC issue being recourse...  but being able to understand policy and necessary checks and balances will only get you the correct guess most of the time, unfortunately... 

Further, practically speaking, when you close on your property, all liens of record will be released/satisfied.  If unknown creditors were popping up from nowhere all the time asserting unrecorded/equitable mortgages on homes, then I might be worried...  but I have never heard of this.  Also, you might have some title insurance or other insurance that would cover you...  and, alternatively, might be able to sue the closing company, etc. for paying the wrong lienholder(s).  Practically speaking, you pay off the note, they quit sending you bills every month...  simple as that.  At some point their right to bring suit on their alleged lien(s) goes away... 

StychoKiller's picture

I believe that MERS was an attempt to computerize a paperwork system (50 of them!)  that was functioning well, just NOT fast enough for the Banksters to roll Mortgages into CDOs.  Computers do have their place, but sooner or later, one realizes that hammers are not the proper tool for driving in screws.  The Law required wet-ink paperwork, NOT digitized records, but rather than change the Law(s), they did an end-around run.

MachoMan's picture

The traditional court filings aren't around necessarily for the "wet ink" paperwork...  you can get around having the original docs to impose liability... 

The traditional court filings are around to have a local, trusted, neutral, and public repository for land records.  I think these aspects had to be mitigated/obfuscated in order to get the underlying products into the "dark" so to speak...  but, it could be just as simple as MERS being an interjected middle man taking a small cut from every transaction for the pleasure, "we'll do it a few bucks cheaper than the county clerk." 

In the end, I lay much more blame on the moral hazard flowing from jiggered interest rates and regulatory desire to pump mortgages and for TBTF and the GSEs to gobble them down than I do to MERS...  nonetheless, MERS shit the bed and no one has come up with a viable remedy (although, I strongly suspect states are going to "fix" the whole mess in less than two years for many of the properties by way of tax sale...  however, the feds are taking swats at state power every day with things like the protecting tenants at foreclosure act...).

Miss Expectations's picture

In the next meeting, having them by the balls might best be demonstrated by tossing the house keys on the desk and telling them you'll be out by Friday.

GeneMarchbanks's picture

'By this measure, US households are a bit more than one-third of the way through deleveraging.'

I'd say even that is pushing it, especially in states like AZ or CA. The whole deleveraging cycle needs to be more abrupt seeing how monetary policy has distorted half of the actual actions taken by the 'middle' class.

mirac's picture

...and what if LA and San Fran have massive earthquakes?

blindfaith's picture



got one scarier than that...

What if Americans suddenly wake up and see the truth.


What if...

mirac's picture

Hmmmmm...some people are waking up but not enough, quickly enough. And what I see scares the sh*t out  of me.

blindfaith's picture

podcast recommendation:

THIS AMERICAN LIFE, their NPR broadcast this weekend about Greece, and the EU crisis is about the best explaination of current status you will find.  If you know someone who just hasn't gotten it yet, this is a good place to start.

Warning, if you think all this world mess is going to end on a good note, avoid the show, because you will clearly hear otherwise.

My only critisism is that they failed to bring up the envolvement of the SQUID>

poor fella's picture

Rebuilding is actually uber-bullish! Right up there with fighting aliens, remember?

StychoKiller's picture

Intelligent, alien life should value intelligence, right?  So, how is it that all these so-called "intelligent" bankers/financiers/politicos NEVER get abducted?  I submit that they're less intelligent than they think they are (the bankers/financiers/politicos, that is!).

Mercury's picture

...we find that the light at the end of the tunnel may well be the front of the oncoming train of financial distress as some two-thirds of the 4% ($584bn) in US household debt deleveraging is from defaults on home-loans (and other consumer debt).

...which means that, at least in this area, individual de-levering=government levering (socializing bad debt) as the individual's bad debt becomes the bank's bad loan and (likely) eventually the government's (aka everyone's) debt when the bank(s) sink and have to be bailed out.

The thrifty are still the suckers.

blindfaith's picture

"The thrifty are still the suckers."

I don't know about that.  I owe nothing, and I feel very good to be so lucky and blessed.

It was not like I was not tempted, but I learned a long time ago that more was not an answer and way to much to take care of, guard, and store.

In the 1980's & 90's I was a mortgage broker.  You did not borrow a dime if you were not credit worthy.  I had one guy who owned 20 Pizza Huts in Texas and could not get him a home loan because his ratos were off.  Then, in 1999, Mr Phil Graham of (R)Texas let the Dogs out, one Christmas eve, and we are paying for it now.

I had retired by then and could not believe what I was seeing happen to consumer protection and banking and thrift lending.

For all of you, may I suggest that you see Consumer Reports August 2005 where you will find a sever warning about risky bank loans, runaway home prices, and stupid greed.

RichardENixon's picture

"I don't know about that.  I owe nothing, and I feel very good to be so lucky and blessed." Actually, you owe plenty, and the plan is to stick you with even more, as private debts are transferred to the public ledger, either by direct transfer, or by currency debasement.

ucsbcanuck's picture

Thanks blindfaith - I put up a warning on my FB page about home prices in Canada. it's probably going to be useless because Canadians want the Canadian dream and think they're oh-so-superior to America. 

xela2200's picture

Funny, my experience with Canadians is not an issue of feeling superior but one of identity. They do not like been confused with Americans or called "buddy."

ucsbcanuck's picture

Talk to Maritimers - if they don't know someone they call them buddy