Americans are increasingly tapping into leverage in an effort to support their strengthening spending habits, as U.S. household debt has surpassed the peak levels of 2008.

Such an increase in leverage has led to an increase in household debt of $149 billion over the first quarter of 2017 to reach $12.73 trillion, according to the Federal Reserve Bank of New York.

While mortgage debt makes up the majority of this number, it remains relatively stable at $8.6 trillion. The same cannot be said of student and auto loan debt, however, which have skyrocketed since the financial disaster of 2008. Student loans now sit at $1.3 trillion, up from $506 billion just 10 years ago, while auto loan debt has hit the $1.2 trillion mark, up from $794 bill...

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High leveraging is almost always linked to a financial crisis, and we could very well be in the tail-end of an asset bubble.

There's plenty of buzz about asset bubbles lately, given the fact that there are certain similarities between today's financial landscape and the one leading up to the Great Recession of 2008.

An asset bubble - which occurs when the prices of assets spike for an extended period of time and exceed asset values based on fundamentals - makes the likelihood of a financial collapse much more likely, at which time the bubble finally bursts. These so-called "bubbles" require leverage and a certain amount of credit. After all, in order for the prices of various types of assets to skyrocket (including prices of real esta...

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Household debt increased 1.2 percent over the first quarter in 2017 from Q4 2016 to $12.73 trillion, passing the $12.68 trillion mark back in 2008 when the Great Recession was just underway.

2017 U.S. Household Debt Q1
($12.73 Trillion)
2008 U.S. Household Debt
($12.68 Trillion)
Credit Card Debt $940.20 Billion $1.02 Trillion
Auto Loan Debt $1.2 Trillion $810 Billion
Student Loan Debt $1.4 Trillion $611 Billion
Mortgage Debt $8.6 Trillion $9.3 Trillion

This was the 11th consecutive quarterly increase in household debt. Such big numbers show that U.S. consumers are certainly borrowing again and are quite confident with spending.

Household debt in the U.S. has been reshaped in such a way that it could realistically impact how financial institutions help manage their clients' liabilities.

On paper, the recent swelling of household debt signifies a strong consumer base. It doesn’t necessarily point to heavy risk compared to what caused the crumble of the financial system nearly a decade ago....

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With mounting consumer debt comes an increase in delinquencies, placing banks at risk for a worsened rating from the FDIC.

With an increase in delinquent loans on banks' balance sheets comes a ding in ratings as per the Federal Deposit Insurance Corporation (FDIC).

After being established decades ago in response to the Great Depression - when approximately 9,000 banks in the U.S. crashed between in 1929 to 1933 - the FDIC system continues to rate banks according to their health, and delinquent loans can have a significant impact on such ratings.

Consumers in the U.S. are increasingly drowning in mounting debt. In Q1 2017, consumer debt reached $12.73 trillion, exceeding the Q3 2008 peak of $12.68 trillion. That's a 1.2 percent increase ...

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The costs associated with zombie properties can mount very quickly for credit unions.

Not only is prolonged foreclosure activity taking its toll on communities and local governments across the country, it's also adversely affecting financial institutions, including smaller credit unions.

Many borrowers who are in the middle of a foreclosure process abandon their homes, which end up becoming much more than eyesores. With a lack of maintenance and supervision, these "zombie properties" also become the target of vandalism, crime, and blight that spreads across the community. Not only does this lower the value of surrounding homes, it also puts downward pressure on the value of the surrounding community.

In terms of financial institutions, ...

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Fannie Mae is ordering all its foreclosures be boarded up with clearboard rather than unsightly plywood.

It's not hard to spot an abandoned home from the unkempt lawns, broken windows, and other signs of deterioration.

Homeowners often choose to abandon their homes as soon as they are notified of foreclosure, leaving them in the hands of lenders who hold the mortgages to either keep up with maintenance or walk away altogether. The problem with the latter is that a myriad of issues can arise, including vandalism, crime, and blight that spreads across the community.

Zombie Homes - A Sore Spot in the U.S. Housing Market

Abandoned foreclosures are not an uncommon concept in the U.S., as the cost of maintaining and repairing these "zombie houses" can be astronomical, especially when factoring in taxes and utilities.

Then, of course, there is the need to rehab these properties and get them prepped for the market to be listed and sold once the foreclosure process has been completed. Combined, these costs can be through the roof, tempting banks to simply walk away from these vacant homes altogether before the foreclosure process ever reaches the end of the tunnel.

One of the most obvious signs of a foreclosed, abandoned home is boarded up windows and doors. In most cases, cheap plywood is nailed to the window and door openings to 'prevent' entry. Not only is this an eyesore, it's also an informal invitation to ravaging and destruction, which all contribute to the decline in value of surrounding properties and the overall neighborhood.

As such, the use of plywood as a means to secure an abandoned property has been recently coming under fire as a result of the spread of blight among communities across the country in the years following the 2008 housing crisis.

Fannie Mae - Changing the Way its Foreclosures Are Boarded Up

In late 2016, Fannie Mae announced at the National Property Preservation Conference (NPPC) changes in the way its pre-foreclosures are to be maintained. Polycarbonate clearboard is now being promoted to be used in place of plywood on foreclosures.

The shift was made in an effort to significantly reduce the incidence of blight across communities as a result of homes that have been abandoned following the initiation of foreclosure. Certainly, clearboard looks much better than rickety plywood over windows and doors, but it's also three times the price, adding to the mounting costs associated with maintaining these properties. As a result, many servicers and vendors have been slow to adopt this material.


The high costs associated with maintaining zombie homes has prompted many lenders to abandon these foreclosures altogether.

However, proponents of the mandate argue that clearboard is actually a lower-cost solution over the long haul, as it has a much longer lifespan compared to plywood and can last all the way through to REO. And the issues that arise from the use of plywood bring on additional costs on top of the cost of the materials that aren't necessary with clearboard.

Working With Experts in the Realm of Selling Risky Mortgages

Still, the challenges that banks face as a result of mortgage delinquencies and zombie property management continue to be a pit on the balance sheet. In addition to rehabilitating a zombie home and listing and selling it quickly to get it off the books, banks should also be prudent when it comes to selling mortgages that are close to default in order to avoid having to deal with zombie properties in the first place.

By selling off risky, profit-draining loans in favor of acquiring more lucrative assets, banks can essentially ward off risk and boost their bottom line.

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The costs associated with maintaining a home that's been vacated after a foreclosure process has already started can be exorbitant for banks.

Zombie houses - properties that have had the foreclosure process started then halted before completion, then vacated by the mortgage holders - are magnets for blight and can have a negative impact on the value of surrounding properties and the overall neighborhood.

Oftentimes banks that abandon the foreclosure process do so because these properties are simply too expensive to maintain. Low property values generally equate to little to no profit for banks that initiate foreclosures. With no financial motivation to see the process through, it's a lot easier for banks to simply wash their hands of low-value homes rather than invest the money rehabilitating and maintaining them, then getting them ready for the market to sell.

Many times banks that have these abandoned "zombie houses" on the books also avoid continuing paying the necessary property taxes, which can lead to further decay of the property. And the longer an abandoned home sits vacant, the more its value continues to dwindle.

While walking away from abandoned homes might save banks money upfront, this inevitably ends up costing neighborhoods and cities as these properties are allowed to continue to deteriorate.

In the years following the housing crisis of 2008, more and more zombie houses sprouted up after homeowners abandoned their mortgages. It's not always clear who actually owns these properties, but one thing is certain: neighbors and local governments complain that these abandoned homes are not just unattractive eyesores, but they are also a target for crime.

Even though the housing market has since improved, zombie houses are still lurking.

Government Incentives to Reduce Effects of Zombie Houses

In an effort to minimize the negative effects of zombie houses on communities and their cities, local and state governments have been introducing programs targeted at this specific issue.

Ohio, for instance, recently introduced Division (A) of Section 2308.031 of Ohio H.B. 463, which prohibits the use of plywood to board up windows after a property has been vacated. Abandoned properties with plywood nailed to window openings have a tendency to attract vandalism and violent crime, as well as the spread of blight.

Legislation in the state of New York was recently signed by Governor Cuomo to combat blight as the result of zombie properties by implementing a pre-foreclosure requirement on financial institutions to continue maintaining these abandoned properties. Banks are also expected to expedite the foreclosure process for vacant properties to get listed on the market as soon as possible.

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