From the WSJ:
The mortgage-foreclosure mess could prove expensive for banks and investors. But in some states, it will also prolong an unintended economic stimulus: free housing for millions of defaulters.
Across the U.S., banks are running into problems foreclosing on homes because of flaws in their paperwork. Their main transgression involves the use of so-called robo-signers, bank employees who signed foreclosure affidavits without properly checking the required loan documentation. Major loan servicers—including Bank of America Corp., J.P. Morgan Chase & Co. and Ally Financial Inc.’s GMAC Mortgage—have at least temporarily stopped some foreclosure sales as state attorneys general probe their practices and loan servicers check to make sure their papers are in order.
The problems will be expensive for banks, and for investors in mortgage bonds, in terms of added processing costs and lost interest income. But for the millions of U.S. homeowners who have stopped making mortgage payments or who are already in the foreclosure process, the upshot is that they’ll get to stay in their homes a bit longer. Given that they’re not paying rent, that time has value.
Defaulters living in their homes are getting a subsidy worth about $2.6 billion a month, according to a Wall Street Journal analysis based on mortgage data from LPS Applied Analytics and rent data from the Commerce Department. That’s 0.25% of U.S. personal income, roughly equivalent to the benefit top earners receive from Bush-era tax breaks.
The longer defaulters stay in their homes, the longer the stimulus lasts. The average borrower whose home is in the foreclosure process hasn’t made a payment in nearly 16 months, according to LPS.
In most places, the foreclosure delays are unlikely to amount to more than a couple more months of free rent, says Ivy Zelman, chief executive of housing-market consultancy Zelman & Associates. But she says it could be six or more months in states such as Florida and New York, where the legal bottlenecks are most severe.
“In places where people get an extra month or two, it probably doesn’t have much effect,” Ms. Zelman says. “But in states where it lasts longer, it’s probably stimulative.”