Related topics: homes, home financing, foreclosure, mortgage, economy
It may sound strange, but sometimes not paying your mortgage can be a good thing. Lenders call it "squatter's rent" -- the money homeowners heading toward foreclosure save by not paying their mortgages while the foreclosure process rolls along. Surprisingly, economists say that squatter's rent is a big boost to the economy.
Of course, any cash not being paid to home mortgages means money that's not being collected by banks and other lenders, and they're not happy about that.
Michael Feroli, the chief economist at JPMorgan Chase, says that while squatter's rent keeps $50 billion away from mortgage lenders, it ends up going into the moribund U.S. economy as struggling homeowners use the cash for daily necessities. In a March interview with National Public Radio, he explained why.
"There's about $10 trillion in mortgage debt owed by the household sector right now," he said. "So you're looking at about $800 billion in mortgages, which are past due, average interest rate of about 6% or a little above. Most of those mortgages, of course, are in the early stage when it's mostly interest that you're paying. So 6% on a little over $800 billion comes out to about $50 billion per year that is free for other purposes."
Feroli estimates the money amounts to about 50% of the savings OK'd by the federal government last year with the temporary 2% payroll tax cut. He calls it a "shock absorber" that has helped consumers ride out the economic storm. These homeowners, he says, have nowhere else to turn for cash and are turning to defaults as a last resort.
"Presumably these are households that are under a lot of financial stress . . . we're not talking about households that have a lot of disposable income and are spending on luxuries," he told NPR. "Of course, there are at least some anecdotes that I've heard of that happening: people being kind of strategic in defaulting. But I would suspect that the vast majority (are) people who may have lost a job or are otherwise financially in difficult straits.
About 6.3 million U.S. homeowners were delinquent on their home loans by the end of March, according to Lender Processing Services of Jacksonville, Fla. That rounds out to a rate of 8.8% of U.S. homes being behind on their mortgages, the company reports.
In addition, approximately 31% of all home mortgage defaults are directly related to strategic defaults -- meaning people are walking away from their homes and not making any more payments on them, according to a 2010 survey (.pdf file) by the Kellogg School of Management at Northwestern University.
In the end, U.S taxpayers, through their investment in Fannie Mae and Freddie Mac, will be left holding the bag, whether that $50 billion in strategic defaults is helping the economy or not.
"We've seen a lot of bank failures throughout the country, particularly a lot of smaller banks, community banks," Feroli said. "When that happens, that obviously hurts those communities and the FDIC is left to pick up the tab, and so, directly or indirectly, the taxpayer also takes some burden."
This article was reported by Brian O'Connell for MainStreet.
