Warning: Declaration of action_plugin_safefnrecode::register(Doku_Event_Handler &$controller) should be compatible with DokuWiki_Action_Plugin::register($controller) in /home/public/dw/lib/plugins/safefnrecode/action.php on line 14

Warning: Declaration of action_plugin_blog::register(&$contr) should be compatible with DokuWiki_Action_Plugin::register($controller) in /home/public/dw/lib/plugins/blog/action.php on line 0

Warning: Declaration of action_plugin_blockquote::register(&$controller) should be compatible with DokuWiki_Action_Plugin::register($controller) in /home/public/dw/lib/plugins/blockquote/action.php on line 0

Warning: Declaration of action_plugin_include::register(&$controller) should be compatible with DokuWiki_Action_Plugin::register($controller) in /home/public/dw/lib/plugins/include/action.php on line 0

Warning: Declaration of action_plugin_popularity::register(&$controller) should be compatible with DokuWiki_Action_Plugin::register($controller) in /home/public/dw/lib/plugins/popularity/action.php on line 0

Warning: Declaration of action_plugin_redirect::register(&$controller) should be compatible with DokuWiki_Action_Plugin::register($controller) in /home/public/dw/lib/plugins/redirect/action.php on line 0

Warning: Declaration of action_plugin_captcha::register(&$controller) should be compatible with DokuWiki_Action_Plugin::register($controller) in /home/public/dw/lib/plugins/captcha/action.php on line 0

Warning: preg_replace(): The /e modifier is no longer supported, use preg_replace_callback instead in /home/public/dw/inc/auth.php on line 656

Warning: preg_replace(): The /e modifier is no longer supported, use preg_replace_callback instead in /home/public/dw/inc/auth.php on line 656

Warning: preg_replace(): The /e modifier is no longer supported, use preg_replace_callback instead in /home/public/dw/inc/auth.php on line 656

Warning: preg_replace(): The /e modifier is no longer supported, use preg_replace_callback instead in /home/public/dw/inc/auth.php on line 656

Warning: preg_replace(): The /e modifier is no longer supported, use preg_replace_callback instead in /home/public/dw/inc/auth.php on line 656

Warning: preg_replace(): The /e modifier is no longer supported, use preg_replace_callback instead in /home/public/dw/inc/auth.php on line 656

Warning: preg_replace(): The /e modifier is no longer supported, use preg_replace_callback instead in /home/public/dw/inc/auth.php on line 656

Warning: preg_replace(): The /e modifier is no longer supported, use preg_replace_callback instead in /home/public/dw/inc/auth.php on line 656

Warning: preg_replace(): The /e modifier is no longer supported, use preg_replace_callback instead in /home/public/dw/inc/auth.php on line 656

Warning: preg_replace(): The /e modifier is no longer supported, use preg_replace_callback instead in /home/public/dw/inc/auth.php on line 656

Warning: preg_replace(): The /e modifier is no longer supported, use preg_replace_callback instead in /home/public/dw/inc/auth.php on line 656

Warning: preg_replace(): The /e modifier is no longer supported, use preg_replace_callback instead in /home/public/dw/inc/auth.php on line 656

Warning: preg_replace(): The /e modifier is no longer supported, use preg_replace_callback instead in /home/public/dw/inc/auth.php on line 656

Warning: preg_replace(): The /e modifier is no longer supported, use preg_replace_callback instead in /home/public/dw/inc/auth.php on line 656

Warning: preg_replace(): The /e modifier is no longer supported, use preg_replace_callback instead in /home/public/dw/inc/auth.php on line 656

Warning: preg_replace(): The /e modifier is no longer supported, use preg_replace_callback instead in /home/public/dw/inc/auth.php on line 656

Warning: preg_replace(): The /e modifier is no longer supported, use preg_replace_callback instead in /home/public/dw/inc/auth.php on line 656

Warning: preg_replace(): The /e modifier is no longer supported, use preg_replace_callback instead in /home/public/dw/inc/auth.php on line 656

Warning: preg_replace(): The /e modifier is no longer supported, use preg_replace_callback instead in /home/public/dw/inc/auth.php on line 656

Warning: preg_replace(): The /e modifier is no longer supported, use preg_replace_callback instead in /home/public/dw/inc/auth.php on line 656

Warning: preg_replace(): The /e modifier is no longer supported, use preg_replace_callback instead in /home/public/dw/inc/auth.php on line 656
Quantifying the stimulus effect of missed mortgage payments [ClearOnMoney]
Top

Site

About
Contact

Warning: preg_replace(): The /e modifier is no longer supported, use preg_replace_callback instead in /home/public/dw/inc/auth.php on line 656
Sitemap

Profile

Warning: preg_replace(): The /e modifier is no longer supported, use preg_replace_callback instead in /home/public/dw/inc/auth.php on line 656
Trace:
Quantifying the stimulus effect of missed mortgage payments

Reference

Main
Updates
Schedule

Warning: preg_replace(): The /e modifier is no longer supported, use preg_replace_callback instead in /home/public/dw/inc/auth.php on line 656

Warning: preg_replace(): The /e modifier is no longer supported, use preg_replace_callback instead in /home/public/dw/inc/auth.php on line 656
Commentary

Quantifying the stimulus effect of missed mortgage payments

2 Mar 2010 by Jim Fickett

Missed mortgage payments are a substantial, though largely unremarked, stimulus. The total is currently running at an annual rate of roughly $40 billion. Government estimates of household spending are overestimated by about the same amount. Thus as the mortgage market normalizes there will be an anti-stimulus of this size, both real and in the GDP accounts.

Estimate of $40 billion saved by skipping mortgage payments

Mortgage delinquencies are at record highs. The money saved by not paying the mortgage can be spent elsewhere, given a hidden stimulus. How much money might be involved? The following is a very rough calculation, but is probably in the right ballpark. Think about the problem in two parts – loans that are in the early stages of delinquency, and those that are seriously delinquent.

First the early stages. According to the most recent Mortgage Metrics report there are about 53 million mortgages total. And according to a recent report from Lender Processing Services (LPS), averaged over the four months Aug-Nov 2009, in each month

  • 1.80% of current mortgages rolled to 30 days delinquent; since 90% of loans were current, this amounts to about 860,000 loans (slides 3 and 23)
  • 29.08% of loans already 30 days delinquent rolled to 60 days delinquent; this makes another 470,000 loans (slides 19 and 23)

Now for the seriously delinquent: Again according the Mortgage Metrics report, scaling up numbers of loans from the universe covered by the report to all mortgages, there are probably about 4,800,000 mortgages overall either 60+ days delinquent or in foreclosure. According to LPS, 46% of the loans 60 days delinquent rolled to 90 days delinquent, on average, in recent months. Homeowners who are in foreclosure make very few payments. So probably at least half of all payments are missed on the set of mortgages 60+ days delinquent or in foreclosure. This makes 2,400,000 missed payments per month. So altogether, early and late stages, we have something like 3,700,000 missed payments per month.

According to the National Association of Realtors, the median home price is $172,900 and the median condo price is $177,300. So a typical payment, in round numbers and at an annual rate, might be $11,000. Putting it all together, the missed payments come in at an annual rate of 3,700,000 times $11,000, which is $40 billion.

Stimulus considerations

The stimulus bill tax credit for individuals cost a total of $116 billion. So the missed mortgage payment stimulus, currently running at an estimated annual rate of $40 billion, and lasting a few years, is comparable in size.

Of course the savings to homeowners are losses to investors. But most mortgage losses will come to institutions, especially the GSEs and the government, and in the main the effects will be delayed for years. So overall this is a current stimulus.

Effect on household spending

According to the methodology underlying the National Income and Product Accounts, from which Personal Consumption Expenditures (PCE, the main measure of household spending) come,

imputed transactions included in the NIPA’s are a limited set of exceptions to the principle that GNP consists of market transactions in goods and services. In order to keep PCE invariant to how certain activities are carried out, imputations are made to place a market value on certain transactions that do not occur in the market economy, and that, therefore, are not observable in its records. In this process, some market transactions are restructured to provide a representation of the activity that is more appropriate for the NIPA’s. …

The imputation for owner-occupied housing creates a business that purchases housing and subsequently sells housing services to persons. The business has a production account that shows the receipts from these sales and the charges against these receipts and a saving-investment account that shows investment in housing and the charges for capital consumption on the housing stock. …

In the production account, purchases of housing services by persons are imputed; these services are measured as space rent, which is estimated by analogy with rental property. …

For each type of dwelling, the estimate of PCE is essentially the product of the number of occupied units and an appropriate rent per unit.

In other words, a homeowner is conceptually split into two entities: (1) a business that buys the house and rents it out, and (2) a person who rents the house from that business.

Why does this matter? Consider a person who misses a mortgage payment. The business half of the household, in the above construct, is failing to meet its obligation, but the renter half of the household is still considered to be paying rent. Thus the money for the rent/missed payment is counted twice – once when it is imputed that the homeowner tenant is paying rent to the homeowner landlord, and once when the money saved from not paying the mortgage is actually spent on something else. (Incidentally, I did verify my interpretation of the methodology with a representative of the Bureau of Economic Analysis.)

Below is a chart of Personal Consumption Expenditures (PCE) for the last five years, courtesy of the St Louis Federal Reserve. Data is monthly, at an annual rate, through Jan 2010.

$40 billion/yr does not vastly change the scale of things, but it is clearly not a trivial amount, either. As the mortgage market normalizes and this distortion unwinds, this will be an anti-stimulus and one more drag on growth.