rssAre Homeowners Really Skipping Out on Their Mortgages to Spend at the Mall?
Tuesday, May 04, 2010 at 6:00 am
- 27 Comments
The case is now famous. The homeowner had applied for the Home Affordable Mortgage Program, or HAMP, an Obama administration initiative to give distressed and tapped-out borrowers lower monthly payments. Applicants are meant to be just scraping by — they have to file hardship affidavits and the government presumes they have trimmed all the fat from their budgets. But this “HAMPlicant,” the writer on the blog Calculated Risk noted, had given up on a $1,880 a month mortgage and instead had spent hundreds of dollars at a spa, tanning salon, gourmet grocery store and liquor store, capping it all off with $1,700 in charges to mall stores from Baby Gap to Best Buy.
[Economy1] Bloggers seized upon the case, and used it to make a broader argument. Such “foreclosure queens,” to coin a term (and to try to capture some of the scorn heaped on these strategic defaulters on the Internet) are stopping paying their mortgages and taking to the malls in big enough numbers to account for a surprising rise in consumer spending. Put another way: People ditching out on their mortgages are holding up America’s consumption.
Anecdotally, at least, it seems true. Millions of homeowners now owe more on their mortgage than their house is worth (meaning that if even if they sold the house, they would still owe the bank) and therefore have simply stopped paying their mortgages. Mortgage lenders and courts are so backed up with foreclosures — hundreds of thousands of them per month — that the time between the first late payment and eviction now stretches as long as 20 or 24 months in some parts of the country. That means that when a homeowner decides to stop sending off that $1,000 or $1,500 or $5,000 check to the bank, she has that much more spending cash until she needs to move out and find a new home.
But the anecdotes do not yet an economic reality make — and other economists caution that the evidence that the phenomenon is widespread enough to change the macroeconomic picture is thin. Despite that reality, the mortgage-distress and foreclosure blogs have hundreds of such stories of people “relieved” once they decide to default, determining that it makes more sense for the bank to take the house back. One young couple, for instance, wildly overpaid for their home in 2006. Six months ago, they decided to stop sending in checks, and to wait for the bank to contact them. They just returned from a week-long New York City vacation and have not heard a word from the bank.
It was Paul Jackson, the founder of Housing Wire, who first put the economic pieces together and said that strategic defaulters — people walking away from their mortgages — must be the reason consumption is rising despite high unemployment and declining real wages. “[M]illions upon millions of consumers in the U.S. [are] meeting their shelter needs for free, even if only temporarily; and what’s becoming of any extra disposable income, since no rent or mortgage need be paid?” Jackson wrote. “[W]e’re seeing consumer spending head northward, and for five straight months, too…. Put simply: people are spending their mortgages.”
The argument earned some guffaws — from, for instance, prominent economics and housing blogger Barry Ritholtz, who called it “bass ackwards.” People defaulting on their mortgages had run out of credit and still had high debt burdens, he argued. How could they be buying enough to raise consumption on a national scale?
But the idea gained support from some major economists who declared the logic impeccable. Mark Zandi, the chief economist at Moody’s Economy.com and a much-followed economic prognosticator, declared it a convincing case, and did some back-of-the-envelope math to support it. “Some 6 million homeowners not making mortgage payments [are] probably freeing up roughly $8 billion in cash each month,” he said. “Assuming this cash is spent (not too bad an assumption), it amounts to nearly one percent of consumer spending.”
Still, the hypothesis remains a hypothesis say other economists that specialize in housing — and ultimately the numbers do not add up, at least not yet. While the microeconomic phenomenon (of strategic defaulters spending more) is certainly occuring, the macroeconomic one (of strategic defaulters spending enough to lift national consumption rates) is not. Strategic defaulters on the loose in the malls account for just a small fraction of the gains in consumer spending, better explained by pent-up demand, continued low prices and improving sentiment on Main Street.
Christopher Thornberg — an economist, the principal at Beacon Economics in Los Angeles, and an early identifier of the real-estate bubble — calls Jackson’s theory an “urban legend,” compelling but illusory. “I did some calculations, and even being generous, all the money not being spent on mortgage payments equals about 0.7 percent of income, compared to 0.3 percent of income three years ago,” he says. “Consumer spending is rising at a 3 percent annualized pace [meaning] only a small portion of [rising consumer spending] can be explained by strategic defaults.” The rest simply stems from a better economic climate and many wage-earners and families tentatively deciding to open up their wallets.
Dean Baker, the co-director of the Center for Economic and Policy Research in Washington, D.C., agrees. He argues that the rise in consumption is simply a rebound from an unusually deep trough in 2009. “We had such a sharp fall-off last year that to some extent it’s going to be self-correcting,” he notes. “The fact that we’ve somewhat of an uptick is not that surprising to me.” He adds that most of the proponents of the theory on the internet were looking to March purchasing data that was unusually high due to the early Easter. “I’m just not conviced we’ve seen so much of a jump in consumption that we need to explain it,” he adds.
That said, the rising number of defaulters will only increase the backlog for banks and courts. The growing awareness of the phenomenon could further fuel it, as well. And in the next year — with unemployment still high and the foreclosure crisis worsening — the effect of the cash-rich strategic defaulters could become more and more outsize. To see if strategic defaulters are moving the national consumption figure, Baker says, look to to California, Florida, and Nevada – three states with sky-high unemployment and the highest rates of foreclosure. Thus far, consumer spending has not turned around in those three states. And if it does, and sharply, it might be the strategic defaulters to blame.
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27 Comments
Pingback posted May 4, 2010 @ 7:26 am
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Pingback posted May 4, 2010 @ 12:56 pm
[...] Defaults and Consumption Posted in Uncategorized by Mike on May 4, 2010 Annie Lowrey writes “Are Homeowners Really Skipping Out on Their Mortgages to Spend at the Mall?”: It was [...]
Comment posted May 4, 2010 @ 1:29 pm
The March 2010 NFP report data had 15.0 million unemployed persons; the number of “long-term unemployed” rose to 6.5 million — 44.1% of total unemployed. An additional 9.1 million people working part time because full time work was unavailable.
Its reasonable to surmise that there is a huge overlap between the 24 million people either unemployed or under employed, and the 5 million foreclosures, and 6 million+ late mortgage payers. We can reasonably make a connection between a fall in income and foreclosures and defaults.
http://www.ritholtz.com/blog/2010/04/more-on-de…
http://www.ritholtz.com/blog/2010/04/are-defaul…
Pingback posted May 4, 2010 @ 2:30 pm
[...] Are Homeowners Really Skipping Out on Their Mortgages – The Washington Independent.comBloggers seized upon the case, and used it to make a broader argument. Such “foreclosure queens,” to coin a term (and to try to capture some of the scorn heaped on these strategic defaulters on the Internet) are stopping paying their mortgages [...]
Pingback posted May 4, 2010 @ 4:24 pm
[...] Are Homeowners Really Skipping Out on Their Mortgages to Spend at … [...]
Comment posted May 4, 2010 @ 5:04 pm
The theory seems to assume the people defaulting have adequate incomes to pay their mortgages but choose not to, but we know, now that we're mostly through the subprimes, that most defaulters have lost much or all their income. They might have enough to buy daily necessities, but no pay the mortgages. That would explain people being at the mall while not making the mortgage payment. Back when I was long term unemployed and wondering how I could pay my rent, I kept going to the grocery store. I would have looked like I was freely spending.
Comment posted May 4, 2010 @ 6:08 pm
If the stupid banks would hire the right people and get the mods done, people would be back to paying their mortgages again. They keep 'losing' paperwork and saying that necessary paperwork isn't there – dragging out the process for months, then they want to foreclose.
Comment posted May 4, 2010 @ 9:08 pm
It's pretty common for a group to look for scapegoats and fantasy reasons to rationalize the way things are. Teabaggers claim liberals force them to act out inappropriately, some claim the Gypsies really do force right wingers to demand their extermination, and Reagan claimed that poor black women were secretly rich and defrauding the welfare systems so they could drive around in Cadillacs and eat bon bons all day or something. Ayn Rand adherents, conservatives, market cultists all would like there to be an ameliorating factor that would justify the total failure of their ideology.
Pingback posted May 5, 2010 @ 7:10 am
[...] Recovery or Merely Spending Before Bankruptcy? By Monty Pelerin, on May 5th, 2010 Whether or not you believe the economy has turned the corner might depend upon your views on how distorting the Hamp and other housing programs have been on economic behavior. The issue is discussed from both sides in this post at The Washington Independent. [...]
Comment posted May 5, 2010 @ 3:46 pm
It's THEIR money. They can do what they want with it.
The contract states that if the borrower doesn't make payments, the property goes to the lender. So, follow the contract. Were it a corporation redirecting that capital, this wouldn't even make a blip on the news radar.
Only a blood sucking banking industry toad would use the racist term “foreclosure queen” — conjuring up visions of the welfare queen. This is no such thing. It is the lawful execution of a contract between two parties. Get over it.
Comment posted May 5, 2010 @ 5:59 pm
These are all crazy comments. No, it is not their money if they are squatting in a home they are not paying for. It is no different that if they were not paying rent.
Comment posted May 5, 2010 @ 6:02 pm
The above coment is about as much of a non sequitor as it would be be possible to write. The whole point is not scape goats. The point is that by taking money that should go into housing, it is being diverted to consumer sending and hence increasing the total consumer spending giving us a false picture of the economy.
Comment posted May 5, 2010 @ 6:03 pm
Almost all the mods go back into foreclosure. Second, the banks rarely own the mortgage. Someone else does and the banks needs their approval.
Comment posted May 5, 2010 @ 6:05 pm
That theory is exactly the theory of strategic default. Strategic default means the person has a mortgage that is substantially larger than the value of the property, but still has the means to pay the mortgage. The guy is making a strategic decision to not spend any more money on the house. Sheesh. Learn the definitions.
Comment posted May 5, 2010 @ 8:29 pm
Absolutely not, it is simply the social process we use to rationalize the failure of the market system. Most primates react negatively to perceived unfairness but they don't scapegoat.
If we had some statistical background on this (never happen for a variety of reasons) we would have a Venn diagram of people with income overlapping people with underwater houses overlapping people in arrears on mortgages overlapping people in markets where lenders have chosen for their own reasons not to aggressively pursue foreclosure. Original article imputes increase in consumer spending to moral hazard and de facto if not de jure fraud: people welshing on mortgages (which is somehow far worse than businesses making strategic financial decisions to do the same thing). Alternative hypotheses that are much more relevant, like a 22 percent increase in tax refunds, cash for clunkers/energy rebates, and the even more insidious moral hazard of the “last hurrah” where borrowers max out credit cards just before they go to BK court.
In any case, taking a phenomenon with no stats and no likelihood of statistical backup and declaring the entire consumer sector recovery as being due to nefarious underwater mortgage welshers is a fairy tale and not a scientific opinion. It is constructing a narrative for the purposes of deflecting attention from Wall Street and big business by creating an everyman villain, the “we're all sinners” story.
The more you know about 12 step programs, the better you will understand conservatives and Wall Street.
Comment posted May 6, 2010 @ 3:44 am
I get the definitions. You don't get that the theory is mostly unproven.
Pingback posted May 10, 2010 @ 9:22 am
[...] has good reason to worry. Strategic default might be nothing more than a rational calculation for an underwater homeowner. But it might spell disaster for already stressed financial firms in [...]
Comment posted May 11, 2010 @ 1:42 pm
That's even crazier. The bank is free to foreclose. That's the deal. No one is going to “squat” in a foreclosed home — the sheriff will bodily remove them in keeping with the supremacy of the people with money over the people who are their victims.
Comment posted May 31, 2010 @ 2:36 pm
It's happening in my area of California. We fix and flip and the folks that have been living in their homes for months actually brag about stealing from the American Taxpayer. The people are working and living in their homes for FREE. One guy bragged about having $25,000 saved up and how he could now buy another home under his brother Santiago's name. Another guy, Mr. Xiong bragged about how he could have made his house payment but instead paid off all his credit cards, he is a County employee and educated. Thanks for destroying America neighbors. I wonder if it is mostly new immigrants, I wish someone would do stats. It seems like the older generation is more apt to try to do loan modifications and shortsales instead of staying in a home for free. I see mostly minorities pulling that crap, as they have been getting hand-outs so long and with the socialist lifestyle, it is a feeling that they deserve to be supported by the American taxpayer not matter the consequence to the nation.
Pingback posted June 1, 2010 @ 4:06 pm
[...] Annie Lowrey ?????: The case is now famous. The homeowner had applied for the Home Affordable Mortgage Program, or HAMP, an Obama administration initiative to give distressed and tapped-out borrowers lower monthly payments. Applicants are meant to be just … [...]
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Comment posted July 29, 2010 @ 4:08 pm
I see mostly minorities pulling that crap, as they have been getting hand-outs so long and with the socialist lifestyle, it is a feeling that they deserve to be supported by the American taxpayer not matter the consequence to the nation.
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