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Posted Tuesday, May 11, 2010
The first wave of U.S. mortgage defaults was spurred by lenders who made bad
loans and borrowers who wound up with larger monthly payments than they could
ever hope to manage. Lately, something altogether different has been making an
increasing contribution to soured debt: Americans choosing to stop making
mortgage payments they actually can afford.
defaults are on the rise
"Strategic" defaults accounted for at least 12 percent of all defaults in
February, up from about 4 percent in mid-2007, according to a recent Morgan
Stanley (NYSE:MS - News) report. Analysts led by Vishwanath Tirupattur
classified a default as strategic when a homeowner who hadn't previously been
delinquent made an on-time mortgage payment one month; skipped payments for the
next three months; and stayed current on other consumer debt of $10,000 or more.
Housing analysts say strategic defaults mainly occur when a home's value has
dropped below the balance remaining on the mortgage. A homeowner in that
position may decide that continuing to make payments is throwing money away, or
may default to get the lender to modify the loan. An estimated one in five U.S.
homes with a mortgage has "negative" home equity, according to Zillow.com.
In March the Obama Administration announced it was coming up with a plan to
encourage cuts to the principal on mortgages exceeding the worth of properties.
Previous government efforts did not emphasize principal reduction but focused on
lowering monthly payments.
Whatever you think of strategic defaults from an ethical point of view, they
appear to be aiding the economy, temporarily, at least, by boosting consumer
spending and allowing homeowners to stay current on their other bills. Consumer
spending, which accounts for about 70 percent of economic activity in the U.S.,
rose at a 3.6 percent pace last quarter, more than economists forecast. The
increase, the biggest since 2007, was somewhat puzzling considering that the
underemployment rate was at 16.9 percent in March, near the highest level in at
least 16 years. (The rate includes people without jobs, part-time workers who
would prefer a full-time position, and people who want work but have given up
All told, borrowers who aren't making mortgage payments are probably skipping
roughly $100 billion annually, an amount equal to 1 percent of consumer
spending, according to Mark Zandi, chief economist at Moody's Economy.com. Zandi
likens the money to "a form of stimulus, a little tax cut."
Not all of that "tax cut" is being spent on iPads, vacations, and lattes.
"Presumably these homeowners know they're going to have to start paying again"
to live somewhere, says Zandi. He suggests that falling delinquencies on credit
cards and auto loans may be a sign that homeowners are using mortgage money to
pay down other debt.
The bottom line: By not making mortgage payments on "underwater" homes,
borrowers may be paradoxically helping to boost the economy.
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