mortgage default rate
Spending Habits of Intentional Home Mortgage Defaulters and Struggling Homeowners
Latest reports show that people who are in a strategic default and hence not keeping up with their home loan help economy more than the battling homeowners. It may be favorable news for shop keepers but mortgage lenders will not be impressed with the story.
Obviously, people struggling with their home loan could not go out and spend cash as they are pretty concerned with their month to month payments. Contrarily, people who are intentionally defaulting their home mortgage seem to have long mortgage and rent free time as mortgage providers can not foreclose those properties rapid enough. Those consumers seem to like their freedom from mortgage payments by rushing out and spending more cash on shops and restaurants.
It could be understandable that those homeowners have at the end made their mind about their home and to some extent relieved just for the fact of reaching to a conclusion. They could be convinced that they have been wasting money on that underwater mortgage and ignoring themselves. As a result they might rationalize hitting the shops to burn the extra cash that they seem to be having in their pocket for the time being.
Certainly the economy should not rely on the people for a long time to come. Many Americans would not be really pushing the spending button until they reduce their debt to an reasonable level. A few people are on the edge of foreclosure scare it looks like. Recent surveys indicate that more than half of homeowners are quite uneasy that they might lose their home in some stage in the coming years. This is a genuine concern for everybody affected including shopping malls.
Recent low mortgage refinance rates appear to do not much in the hope of bringing down debt and uncertainties, even though refinance applications are quite high. Some people might still be holding their breath for a super low rate.
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Given the growing default rate for home mortgages, will banks’ balance sheet be affected?
Banks have a lot of experience with projections of income based on fixed-rate mortgages. But do/did they have enough experience to be able to predict the income from the very, very large number of unconventional mortgages? Given what they know now, do you think they would have projected the same income?
In the long run, it would be very, very difficult for the mortgage lenders to “suffer” as a consequence of defaults. Lending money to someone for a period of ten, fifteen or thirty years is a “self-smoothing” function all on its own, regardless of the prevailing rates, the bulk of a mortgage lenders cashflow is coming from loans that began making payments between 1 and 30 years ago, so it all evens out. Mortgage payments always end up providing the lender with far, far more than the underlying value of the property, but worst case scenario, the lender owns the house and sells it to someone else!
The only real impact is on shareholder equity of the lenders corporation, which is important, of course, but most real investors have a longer view.
Economic Update: Mortgage Default and Delinquency 2011 Forecast