Melissa White and her husband stopped paying their mortgage in May 2008 after it reset to $3,200 a month, more than double the original rate. That gave them extra cash to pay off debts and spend on staples until their Las Vegas home sold two years later for less than they owed.
“We didn’t pay it for about 24 months,” said White, who quit her job as a beautician during that period after becoming pregnant with her first child and experiencing medical complications. “What we had, we could put towards food and the truck payments and insurance and health things I was dealing with.”
Millions of Americans have more money to spend since they fell delinquent on their mortgages amid the worst housing collapse since the Great Depression. They are staying in their homes for free about a year and a half on average, buying time to restructure their finances and providing an unexpected support for consumer spending, which makes up about 70 percent of the economy.
So-called “squatter’s rent,” or the increase to income from withheld mortgage payments, will be an estimated $50 billion this year, according to Michael Feroli, chief U.S. economist at JPMorgan Chase & Co. in New York. The extra cash could represent a boost to spending that’s equal to about half the estimated savings generated by cuts to payroll withholding in December’s bipartisan tax plan.
“We’ve had a lot of government transfers to the household sector; this is a transfer from the business sector to households,” Feroli said. “It’s a shock absorber that has helped the consumer ride out the storm.”
White, 28, now has two children, daughter Makenzie, 2, and son Christian, 1. She and her husband, Shannon, a sheet-metal worker, rent a house for $1,425 a month.
“My credit’s back,” she said. “I’d buy a house again, but I’d get a fixed-rate loan.”
Consumer spending is projected to rise 2.8 percent this year, according to economists in an April Bloomberg News survey, after a 1.7 percent increase in 2010.
Delinquencies and defaults have helped homeowners save more, pay down other debts and move on to more affordable homes, according to Stan Humphries, chief economist at Zillow Inc., a Seattle-based provider of housing data. Owners in default need the savings because degraded credit scores from the default make it more difficult to borrow, he said.
“It’s bad that they’ve lost the home, but household finances have been rearranged in such a way that it’s arguably more sustainable,” Humphries said.
Van Perrault, a home appraiser who defaulted on his Saint Mary’s, Maryland, investment property in 2007 after his tenants stopped paying the rent, used the extra money to take care of late payments on his delinquent credit-card debt.
The additional $1,500 a month “made a difference in my life,” said Perrault, 60, adding that paying down his card balances helped him and his wife limit the damage to their credit scores.
Consumer debt fell to $11.4 trillion in the fourth quarter of 2010, down about $1.1 trillion from the peak in the third quarter of 2008, the Federal Reserve Bank of New York said in February. Mortgage debt dropped 9.1 percent in the period.
A total of 6.3 million homeowners weren’t current on their loans at the end of March, with 2.2 million in the process of foreclosure, according to data from Lender Processing Services Inc., a Jacksonville, Florida-based provider of mortgage-processing services and data. Loans in foreclosure were an average 549 days late.
While many Americans couldn’t make payments because they lost their jobs or earned less during the recession, others made the conscious decision to stop paying -- or carry out a so-called strategic default -- on homes worth less than the outstanding obligation.
About 27 percent of single-family homeowners with mortgages, or about 15.7 million, were “underwater” at the end of last year, according to Zillow, the highest share since the first quarter of 2009, during the recession. Las Vegas led the nation, at 82 percent, followed by 70 percent for Phoenix.
Failing to pay a mortgage bill is “a big moral issue,” said Karl Case, co-founder of a housing-price index that bears his name. “On the other hand, it’s exactly what you would expect given the way we treat and reward behavior in an economic system built for private gain.”
More than a third of mortgage defaults were strategic, according to a June 2010 survey by finance professors Paola Sapienza of the Kellogg School of Management at Northwestern University and Luigi Zingales of the University of Chicago’s Booth School of Business. That was up from 29 percent in a March 2009 survey.
Almost half of Americans surveyed in January “said they would be more likely to default if their bank was accused of predatory lending, even if they’re morally opposed to strategic default,” Zingales said in a telephone interview from Chicago. “One likely reason for this may be related to a psychological notion of retribution.”
Adam Turner, 43, went eight months without making payments on his Las Vegas townhouse after he quit his job as a casino-restaurant wine steward in November 2009. He stopped paying as “a way of sticking it back to the banks” for pushing mortgages on people who shouldn’t have been qualified, he said. He sold the property in a July 2010 short-sale -- when a bank agrees to accept less than the outstanding value of the loan.
Distressed deals -- short sales and foreclosures -- accounted for 40 percent of existing-home transactions in March, up from about one third last year, according to the Chicago-based National Association of Realtors.
With unemployment at 9 percent in April and forecast to average 8.7 percent for the full year -- well above the 4.6 percent average in 2007 before the recession began -- more Americans probably will enter the default pipeline this year. The number of homes receiving a foreclosure notice will climb about 20 percent, reaching a peak for the housing crisis, predicts RealtyTrac Inc., an Irvine, California-based data seller.
Turner, now a waiter and renting an apartment, used the money he saved by not making mortgage payments to take care of electric and phone bills and buy necessities while he was unemployed.
“It definitely boosted my cash flow, which was helpful to move on with my life,” said Turner, who made almost $100,000 a year before the recession. “It was not like I was celebrating and partying. It was a rough time. It represented the American dream that collapsed around me.”