Homeowners Spending Their Mortgage Payments?

According to this Diana Olick article on CNBC.com, Mortgage Defaults May Be Driving Consumer Spending, recent studies show that "Americans are now far more likely to pay their other bills first before their mortgage (which is a big turnaround historically speaking)." As a result, the thought is that many of the nearly 7.4 million homeowners who are not paying their mortgage payments (defined as the total number of delinquent first mortgages plus REO properties - see the most recent mortgage performance data current as of March 31, 2010 in the LPS Mortgage Monitor: April 2010 Mortgage Performance Observations published by Lender Processing Services, a provider of mortgage processing services, settlement services, mortgage performance analytics and default solutions) may actually be spending money that would normally go toward making the monthly mortgage payment on consumer goods and services (i.e. food, clothing, car payments, medical expenses, entertainment, travel, etc.). The article mentions that Paul Jackson, publisher of Housingwire.com, wrote an article, For Consumers, Time to Shop (Until the Mortgage Drops), in which "he describes a case study of someone who applied for the government's Home Affordable Modification Program. The person had an $1,880.00 monthly mortgage payment on which they'd defaulted, but said person's monthly bank statement showed payments to a tanning salon, nail spa, liquor stores, DirecTV bill with premium charges, and $1,700.00 in retail purchases from The Gap, Old Navy, Home Depot, Sears, etc." Jackson goes on to say "Even if you assume that just half of the current 7.4 million currently delinquent mortgages fit this sort of ’spending profile’ (that is, they are spending their mortgage) and you assume a $1,000 median monthly mortgage payment for most U.S. homeowners — you get a $3.7 billion boost per month to consumer spending. It’s certainly enough spending to matter in the overall scheme of things." I find this truly scary, but I do believe that this is happening. In fact, I think this behavioral trend will become even more common as housing prices continue decline leaving more and more homeowners (I use that term loosely since until you have more equity than you have debt on your home the bank "owns" more of the home than you do) in position where they owe more than their homes are worth (i.e. underwater or negative equity). Frankly, I think this behavior is the result of a rather logical decision making process. If you were an underwater homeowner who owned a home and you had a choice between paying your mortgage (when you know you will never see that money again) and buying goods and services that you can enjoy now, what would you do? This is all a matter of economics and mathematics and in that vane paying for a declining asset (i.e. the home) makes no sense. As a result of this you can bet that foreclosures and short sales will continue to occur at high levels for the next several years.

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