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.”
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.
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.