Mortgage Squatters Rights (and Wrongs)

by: Charles A. Smith
Caroline Baum at Bloomberg has a column today refuting the “mortgage squatters as big spenders” meme floating around since late last month. Specifically:

“There’s an even bigger problem with the idea that mortgage defaults are driving consumer spending. When a homeowner misses a mortgage payment, “somebody’s not getting a payment” on the other side, said Thomas Lawler, founder and president of Lawler Housing and Economic Consulting in Leesburg, Virginia. A mortgage lender or bank experiences reduced cash flow, which means less money flowing to shareholders who, the last time I checked, were consumers in their own right. Sure, one can argue that the borrower has a greater propensity to consume than the lender, but this is a case of what Lawler calls “single-entry analysis for double-entry bookkeeping” and what I view as an example of Bastiat’s broken window.”

Not so much. The banks aren’t getting the payments, and the numbers prove it. Even though net interest margins are up huge over the past year due to zero interest rate policy (ZIRP), banks have reduced both dividends and new loan volumes. They’re doing it because non-performers (primarily delinquent residential mortgages) continue at very high levels, and are still rising in some geographies. So, a proper “double entry” analysis confirms it; extend and pretend is alive and well. A large number of people are squatting in their houses (maybe not 5 million as Mark Zandi says), and they will spend some portion of a mortgage payment not made.
To be fair, consumers are actually more likely to take a portion of the “non-payment” and pay down other debt. The steadily declining levels of revolving consumer debt and HELOCs would appear to confirm this.
At the same time, banks are very averse to writing down principals on first mortgages. Why might this be? It would mean they would have to write OFF huge amounts of second mortgages and HELOCs, which at the moment are some of their best performing assets.
Disclosure: No positions