No Mortgage = Mo' Money?
April 21, 2010 1:42 PM Subscribe
Do you know anyone who has "Strategically Defaulted" on their mortgage and is instead spending what would be their mortgage payment on consumer goods?
Some more bearish corners of the investing/trading forums I frequent are putting forth the argument that the uptrend in retail sales we're seeing can be attributed to people who are "strategically defaulting" on their mortgages and using the funds that would have gone to paying the mortgage on retail spending instead.
"Strategically Defaulting" defined as financially *able* to afford their mortgage, but choosing not to pay, possibly because the property's market value is less than the mortgage amount. This does not include people who are not making payments because they are unemployed or otherwise can not afford it.
My gut feeling is that this isn't a significant driver of retail sales, but I'd like some anecdotal backup.
If you know anyone who fits the definition and care to share some generic information (country, city/region, approx. income and/or value of the house/monthly mortgage pmt.) but nothing personally identifiable it would be appreciated.
Some more bearish corners of the investing/trading forums I frequent are putting forth the argument that the uptrend in retail sales we're seeing can be attributed to people who are "strategically defaulting" on their mortgages and using the funds that would have gone to paying the mortgage on retail spending instead.
"Strategically Defaulting" defined as financially *able* to afford their mortgage, but choosing not to pay, possibly because the property's market value is less than the mortgage amount. This does not include people who are not making payments because they are unemployed or otherwise can not afford it.
My gut feeling is that this isn't a significant driver of retail sales, but I'd like some anecdotal backup.
If you know anyone who fits the definition and care to share some generic information (country, city/region, approx. income and/or value of the house/monthly mortgage pmt.) but nothing personally identifiable it would be appreciated.
I think your gut is right. That hypothesis is one of the stupidest things I have ever heard.
posted by kindall at 1:51 PM on April 21, 2010 [4 favorites]
posted by kindall at 1:51 PM on April 21, 2010 [4 favorites]
That hypothesis is a somewhat subtle way of impugning homeowners as wasteful spendthrifts who are screwing the honest banker. It's Rick Santelli's bogus CNN rant in a more sophisticated form. Laugh at it.
posted by fatbird at 1:54 PM on April 21, 2010 [3 favorites]
posted by fatbird at 1:54 PM on April 21, 2010 [3 favorites]
I think far more likely is that too much tax was withheld from wages in 2009 on the assumption that individuals would be subject to tax at a marginal rate based on their yearly income. These folks were then fired, fell into a lower tax bracket, and then got a refund when they filed their 2009 taxes this year. Now they're spending those refunds.
I highly doubt the strategic defaulting hypothesis.
posted by Admiral Haddock at 1:56 PM on April 21, 2010
I highly doubt the strategic defaulting hypothesis.
posted by Admiral Haddock at 1:56 PM on April 21, 2010
An alternative form of the same argument is that defaults, strategic or not, free up cash flow previously tied up in mortgage payments. But seriously, consider the sources. They're bearish and they're sharing their opinion with you because they profit when the market agrees with them.
posted by pwnguin at 1:59 PM on April 21, 2010
posted by pwnguin at 1:59 PM on April 21, 2010
My gut feeling is that this isn't a significant driver of retail sales, but I'd like some anecdotal backup.
This seems like it wouldn't make any sense on a fundamental level, regardless of what strategic defaulters do with their money.
For example, California was hit relatively hard in the mortgage crisis, and in the last quarter there were around 80,000 new default notices. Meanwhile there are around 12 million households in California, so without even taking into account people who own multiple homes, the defaults only represent around 0.6% of homeowners.
I assume the numbers are similar in other areas of the country. So it would be nearly impossible for such a small percentage of the population to have a significant impact on total retail sales, even if the core hypothesis that strategic defaulters spend more is true.
posted by burnmp3s at 2:09 PM on April 21, 2010
This seems like it wouldn't make any sense on a fundamental level, regardless of what strategic defaulters do with their money.
For example, California was hit relatively hard in the mortgage crisis, and in the last quarter there were around 80,000 new default notices. Meanwhile there are around 12 million households in California, so without even taking into account people who own multiple homes, the defaults only represent around 0.6% of homeowners.
I assume the numbers are similar in other areas of the country. So it would be nearly impossible for such a small percentage of the population to have a significant impact on total retail sales, even if the core hypothesis that strategic defaulters spend more is true.
posted by burnmp3s at 2:09 PM on April 21, 2010
Response by poster: That hypothesis is a somewhat subtle way of impugning homeowners as wasteful spendthrifts who are screwing the honest banker. ...
Not to start a debate within a question, but no, character assasination on mortgagors is not part of the hypothesis as I understand it.
They're actually being looked at as intelligently taking a legal option in the mortgage contract, that is in their best interest, to not make payments and have the lender foreclose on the property.
Furthermore, it is believed they taking that option with the assumption that foreclosures are undesireable to lenders both economically and politically and will likely result in a lengthy period of "rent-free" occupancy of the property.
posted by de void at 2:10 PM on April 21, 2010
Not to start a debate within a question, but no, character assasination on mortgagors is not part of the hypothesis as I understand it.
They're actually being looked at as intelligently taking a legal option in the mortgage contract, that is in their best interest, to not make payments and have the lender foreclose on the property.
Furthermore, it is believed they taking that option with the assumption that foreclosures are undesireable to lenders both economically and politically and will likely result in a lengthy period of "rent-free" occupancy of the property.
posted by de void at 2:10 PM on April 21, 2010
Not to start a debate within a question, but no, character assasination on mortgagors is not part of the hypothesis as I understand it.
I have yet to see a conversation of mortgage defaults (particularly when combined with the assertions that the mortgagors will "intelligently" get to live rent free and spend the savings on consumer goods) that does not include a heaping amount of opprobrium for the borrowers.
But I think the consensus is that the hypothesis is incorrect. The vast amount of defaults are people who simply don't have the money to cover their payments; you're talking about a minuscule subset who supposedly have sufficient funds, are "rational" enough to stop making payments on an underwater mortgage (and ruin their credit), but also spendthrift enough to take those savings and just blow them on consumer goods.
posted by Admiral Haddock at 2:22 PM on April 21, 2010
I have yet to see a conversation of mortgage defaults (particularly when combined with the assertions that the mortgagors will "intelligently" get to live rent free and spend the savings on consumer goods) that does not include a heaping amount of opprobrium for the borrowers.
But I think the consensus is that the hypothesis is incorrect. The vast amount of defaults are people who simply don't have the money to cover their payments; you're talking about a minuscule subset who supposedly have sufficient funds, are "rational" enough to stop making payments on an underwater mortgage (and ruin their credit), but also spendthrift enough to take those savings and just blow them on consumer goods.
posted by Admiral Haddock at 2:22 PM on April 21, 2010
I don't know anyone personally, but there's a radio interview from The Story about a guy who did just what you're talking about.
posted by dhammond at 2:42 PM on April 21, 2010
posted by dhammond at 2:42 PM on April 21, 2010
Fire up the google and search "jingle-mail," and optionally, "non-recourse."
posted by rhizome at 2:49 PM on April 21, 2010
posted by rhizome at 2:49 PM on April 21, 2010
Presumably, if this notion is novel enough that people are getting profiled for it on the radio, it is not an engine of retail sales growth.
posted by Admiral Haddock at 3:06 PM on April 21, 2010
posted by Admiral Haddock at 3:06 PM on April 21, 2010
I don't know anyone who's done it but this Planet Money podcast talks about it.
posted by grapesaresour at 4:04 PM on April 21, 2010
posted by grapesaresour at 4:04 PM on April 21, 2010
I know someone who gave up on paying his mortgage a few months ago after falling further and further behind, post pay cut, and getting no traction in his efforts to obtain a loan modification. He says he's saving the money he would have put towards his mortgage to prepare for the post-foreclosure move, but I can't help but suspect that his retail spending is up, too.
posted by croutonsupafreak at 5:30 PM on April 21, 2010
posted by croutonsupafreak at 5:30 PM on April 21, 2010
People get their tax returns at this time of year. This is like not remembering that more people move over the summer because kid's aren't in school at that time and it makes it easier to move.
Regarding strategic default, I laugh at the scorn being shoveled onto borrowers. They entered a contract and part of that contract includes the option to walk away and surrender the house. This option is built into the cost of the mortgage. I don't hear people screaming when large corporate entities decide to default on their commercial real estate holdings. Perhaps that would be un-American, I guess.
You can have your credit take a hit for a single digit number of years or be waiting 20 to 30 years for the house to come back to what you paid for it. If it were me, I'd send the housekeys to the bank with a note that says 'Sorry, but this is a business decision. I'm sure you'll understand.'
posted by Skrubly at 6:22 PM on April 21, 2010
Regarding strategic default, I laugh at the scorn being shoveled onto borrowers. They entered a contract and part of that contract includes the option to walk away and surrender the house. This option is built into the cost of the mortgage. I don't hear people screaming when large corporate entities decide to default on their commercial real estate holdings. Perhaps that would be un-American, I guess.
You can have your credit take a hit for a single digit number of years or be waiting 20 to 30 years for the house to come back to what you paid for it. If it were me, I'd send the housekeys to the bank with a note that says 'Sorry, but this is a business decision. I'm sure you'll understand.'
posted by Skrubly at 6:22 PM on April 21, 2010
I'm sorry that I can't find a link, and it doesn't directly answer your question - BUT - this morning (I think) on KQED (the Bay Area's NPR affiliate) I listened to a program in which it was stated that 30% of current mortgage defaults are "strategic." Don't know if it's true but it's a data point...
posted by hapax_legomenon at 8:02 PM on April 21, 2010
posted by hapax_legomenon at 8:02 PM on April 21, 2010
Barry Ritholtz at http://www.ritholtz.com/blog/ (The Big Picture) has written three pretty good critiques of this in the last couple of weeks: first http://www.ritholtz.com/blog/2010/04/are-defaults-driving-retail-spending/, then http://www.ritholtz.com/blog/2010/04/more-on-delinquencies-retail-spending/ and most recently http://www.ritholtz.com/blog/2010/04/honey-i-lost-the-house-time-to-party/
Good stuff; links to original sources, etc.
posted by Tuesday After Lunch at 11:59 PM on April 22, 2010
Good stuff; links to original sources, etc.
posted by Tuesday After Lunch at 11:59 PM on April 22, 2010
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posted by kaseijin at 1:50 PM on April 21, 2010 [4 favorites]