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May 10, 2024 | Because We’re Still Not Sufficiently Indebted…

John Rubino is a former Wall Street financial analyst and author or co-author of five books, including The Money Bubble: What to Do Before It Pops and Clean Money: Picking Winners in the Green-Tech Boom. He founded the popular financial website in 2004, sold it in 2022, and now publishes John Rubino’s Substack newsletter.

Zero Hedge just posted a long look at how the “buy now, pay later” (BNPL) industry now accounts for about $700 billion of largely unreported “phantom debt”. This, speculates ZH, is why the economy hasn’t fallen into recession.

Now come the unintended consequences:

Pernicious effects of BNPL credit are piling up: the Harris Poll survey conducted last month, provides some crucial clues about how Americans use BNPL. For one, splitting payments into smaller chunks encourages more spending, obviously.

More than half of respondents who use BNPL said it allowed them to purchase more than they could afford, while nearly a quarter agreed with the statement that their BNPL spending was “out of control.” Harris also found that 23% of users said they couldn’t afford the majority of what they bought without splitting payments, while more than a third turned to the services after maxing out credit cards…

…In other words, not only do we not know just how big the BNPL problem is, it is actively masked by credit agencies which can’t accurately calculate the FICO score of tens of millions of Americans, and as a result their credit capacity is artificially boosted with far more debt than they can handle… and that’s why the US consumer has been so “strong” in recent years, defying all conventional credit metrics.

BNPL is obviously dangerous and stupid because the last thing working people need is another way to wrack up more unpayable debt. But it’s not the worst thing the US is considering:


Enter…Government-Funded Home Equity Loans

$3 trillion could be injected into the U.S. economy without any federal spending by tweaking this corner of the mortgage market, ‘Oracle of Wall Street’ says

(Yahoo) – The U.S. housing market is harboring the potential for unprecedented economic stimulus that wouldn’t require any federal spending, according to Meredith Whitney, the one-time “Oracle of Wall Street” who predicted the Great Financial Crisis.

In a column for the Financial Times on Friday, she noted that mortgage finance giant Freddie Mac asked its regulator last month to enter the secondary mortgage market, or home equity loans, which allow homeowners to borrow against the equity in their houses.

Such borrowing can be used for things like vacations, weddings, new cars, investments, medical bills, paying down debt, or starting a business. In other words, it’s more money that could power the economy.

Freddie Mac is best known for its role in buying first-time mortgages, pooling them together, and selling them to investors as mortgage-backed securities. This allows lenders to get those mortgages off their balance sheets, freeing up liquidity for more loans.

Letting Freddie Mac do this for home equity loans could start putting $1 trillion into consumers’ wallets as soon as this summer and $2 trillion by the autumn, Whitney estimated. If fellow mortgage giants Fannie Mae and Ginnie Mac follow along, the potential stimulus could top $3 trillion, she added. “Rarely have I seen such a true win-win scenario for the government, Wall Street, and the U.S. consumer.”

Readers who were paying attention during the housing bubble of the 2000s probably remember the commercials encouraging homeowners to “unlock” their “stranded” home equity. Well, here we are again, late in an expansion with Wall Street and Washington looking for ways to extend the party at the expense of regular people.

Adam Taggart brings a bit of sanity to the discussion by interviewing a real estate expert who sees what’s happening and wants no part of it:

The Big Short 2.0? | Melody Wright

Would allowing government-sponsored entities like Freddie Mac to unleash a flood of new loans risk repeating the sins of the past?

For answers, we’re fortunate to turn to mortgage lending expert & housing analyst Melody Wright. Melody, who was on the frontlines of the meltdown in mortgages during the GFC, is highly concerned this new lending scheme, if enacted, will end up disastrously.

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May 10th, 2024

Posted In: John Rubino Substack

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