Sunday, October 31, 2010

Two Extremes: Paying on Underwater Mortgages, and Living in Default

by Bill McBride on 10/31/2010 09:22:00 PM

Earlier posts:

  • Schedule for Week of Oct 31st
  • Summary of last week: Week ending Oct 30th

    The following articles illustrate two extremes we've discussed before. The first is about borrowers with significant negative equity who are still paying their mortgage. They can't refinance. They can't sell. And it is difficult to move for new employment. This is probably a drag on economic growth.

    And at the other extreme are borrowers staying in their homes for extended periods without paying their mortgage or property taxes. This might be providing some "stealth stimulus" for the economy. Note: Some people call this the "squatter stimulus", but I think that term is demeaning since many of these people are facing serious financial problems and living with uncertainty.

    From Don Lee at the LA Times: Millions of homeowners keep paying on underwater mortgages
    Of the estimated 15 million homeowners underwater, about 7.8 million owed at least 25% more than their properties were worth in the first quarter of this year ... More than 4 million borrowers ... were underwater more than 50%.

    ... They still have jobs and can afford to make the payments. ... But they can't refinance because they owe too much.
    The borrowers with negative equity are still receiving the same housing service, and making the same payment, as a few years ago. In that sense it isn't a drag on the economy. However they can't take advantage of low rates to refinance, they can't sell, it is difficult to move, and they are frequently reluctant to invest in home improvements - and they might even forgo needed repairs. And there is probably a negative wealth effect impacting their overall consumption.

    And from Mark Whitehouse at the WSJ: The Stealth Stimulus of Defaulters Living for Free
    Defaulters living in their homes are getting a subsidy worth about $2.6 billion a month, according to a Wall Street Journal analysis based on mortgage data from LPS Applied Analytics and rent data from the Commerce Department.
    For the borrowers in default, many are probably unemployed or facing other serious financial issues. If they weren’t living “rent free”, they’d probably move in with friends or relatives, or even live in their cars or worse. So the "free" housing service they are currently receiving will probably be replaced with another low cost housing alternative. And if even if they move into an apartment, they will probably still be spending the same amount (just on different items). So for many people in this situation, I don't think there is really much "stealth stimulus".

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