Yet another case of anecdote trumping evidence: I am more than willing to entertain the possibility that squatters are a key component of this economic rebound, if only someone can show me some data that supports it.

However, charts like the following, that calculate liabilities owed, are only half the equation:


7+ Million Homeowners in Default = $8-$12 Billion Per Month, or $100-$150 Billion Annually

Source: T2 Partners


The above chart, from T2 Partners, shows the liability of defaulted homeowners. This is not a measure of cash, or savings, or spending — it only shows the total amounts owed.

Hence, this is a chart of liabilities, and not, as some authors have suggested, of savings and spending.

Would someone please demonstrate what the personal balance sheets of these 5-7 million delinquent people are, we can determine if squatters are driving retail sales. You need to show income earned, cash that is owed — but not paid — rather than the mere chart unfunded obligations.

How many of these squatters are amongst the 15 million unemployed ( ZERO Income) and the 6 million underemployed? My guess is most.

The squatting order that I deduce from the historical timeline and employment, income and default data is as follows:

Unemployment (or reduction of hours)
Reduction in Income
Late Payments
Missed Payments

Squatting !

(eventually) Foreclosure

The Urban Legend — as of yet unsupported by data:

Unemployment (or reduction of hours)
Reduction in Income

Late Payments
Missed Payments

Non-Payment = Extra Income


If anyone thinks they can prove otherwise, by all means, please reveal your data . . .

Category: Credit, Real Estate, Retail

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

71 Responses to “One Last Look at Mortgage Defaults Driving Retail Sales”

  1. dcsos says:

    Barry is onto something here…
    Watch receipts at the “Red Roof Inn” coast to coast.
    If they go up, Barry is right.

  2. SteveC says:

    I’m willing to buy your analysis. I know of 2 people who are currently squatting, waiting for foreclosure, and one of them recently bought a boat with their freed up cash.

  3. R. Cain says:

    misCONstruing data has become a national pastime

    my favourite this week was media raving about ‘Retail Sales Keep Climbing’

    But core sales, which exclude motor vehicle dealers, building materials and supply stores, and gasoline stations, fell 0.2 percent over the month — the first decline since December and following a 0.7 percent increase in March.

  4. DaveB says:

    “retial” ?


    BR: Fat thumbed trader found after all . . .

  5. engineerd1 says:

    Undoubtedly something to this…. The good Lord gave man a wonderful conceptual and physical legacy; things like desire, hunger, contract, reward, and punishment…. but we throw away these blessed tools in favor of solutions that come straight from hell…..(and the south side of Chicago): giveaways funded with borrowed chinese cash, cancelled punishments, unearned rewards.

    I went to lunch with two guys this week BOTH of whom have gross family incomes over 200k who bought subsidized cars in the clunkers program, without a trace of shame. I was actually surprised to learn there was no means testing…. I have a hard time being indignant about govt alms for the needy and suffering, though it is inevitably ham handed and wasteful….My wrath is reserved for middle class entitlements….But from their point of view they were just getting a little of their own back from an insane system….I didn’t try to argue against this rationale.

  6. b_thunder says:

    I want to mention upfront: Barry, I have no statistical evidence.
    However, I think the truth is somewhere between what you list as the “squatting order” sequence of events, and the “urban legend.” One has to consider “strategic defaulters”, i.e. people who can afford paying mortgage, but cut everything else to the bare bone, or they can stop paying, move to a much cheaper rental, and either splurge on iPads and iPhones, or start rebuilding their cash savings.

    Also (and BR will hate this because this is purely anecdotal evidence) I know a person who “walked away” from 2 rental units after he could not “flip” them or rent them out for a price that would make it worthwhile to keep them. He was “subsidizing” these units out of his own pocket for over a year. Now he has a lot more free cash to spend! But who’s counting people like this guy? And how would you structure a survey to capture all kinds of strategic defaulters? And how many of them would admit to a “strategic default” without fear of the lender taking them to court and using their own words against them? (maybe the last statement is stupid – but i’m not a lawyer, and if i’d done a “strategic default” i’d never admit to it)

  7. I am not saying these things aren’t happening — but if you have 7 million defaulters, and we keep hearing the same stories — 100s ? 1000s? Its meaning.

    As the cliche states, the plural of anecdote isn’t data . . . .

  8. flipspiceland says:


    Perhaps if you changed your perspective for a moment and think about why theBamster’s handlers came up with the CfC program you might release your anger, let it go.

    The REAL reason was to partially pay back the United Auto workers’ union (and Management), auto dealers, and other supporters for their hundreds of thousands of votes and not, as you apparently assume, to make buying a new car less expensive for below $200K earners. This was a bribe nothing more, nothing less, paid after the fact.

    The system is not insane at all. In a democratic republic it was, is now and always will be taking the dollars out of Peters’ pockets and giving it to Paulettes’. It was designed that way, right from the beginning with the institution of Taxation.

  9. Julia Chestnut says:

    Add to your list of ways in which it is specious to jump from “obligations” to “savings” the following: not all delinquent homeowners live in no-recourse states. It’s safe to say that the vast majority of voluntary defaults are from states that permit no recourse, probably virtually all of them from the overlapping circles in the venn diagram of those states without recourse and those that had a huge bubble run up. Remember also that anyone who modified almost certainly gave up their “no recourse” status as a result.

    That means that only in a small fraction of the cases of default are the mortgagors in the drivers’ seat. In a high percentage of all other cases, the bank will be able to take any “savings” you might have to the full extent permitted by law.

    I keep hearing about these mythical people who are defaulting despite having no change in income. I believe that there are some such people, especially those whose houses have lost six figures of value and who had almost no money down in the original loan. But do I really believe that there are enough to goose consumption numbers? NO. Instead, I see a financial system that is back to strip mining the balance sheet for bonuses. I smell more wealth transfer, and it ain’t going to squatters.

  10. adbutler007 says:

    Barry, I calculate 7+million homes at a (lowball) average mortgage of $200,000 to be $1.4 trillion in liabilities. Using a 5% average interest rate and an average 20 year amortization schedule, this works out to $7.5 billion in unpaid mortgage payments per month. If 50% of these delinquencies are due to unemployment, and no one in these households is earning income (I think this overstates the impact of unemployment, frankly, as so many households are dual-income), then this amounts to $3.75billion per month of excess consumption, or $45 billion per year.

    Given that retail sales are roughly $365 billion per month (as of April 2010), this amounts to a marginal improvement of over 1% per month using my conservative math. Am I missing something here?


    BR: The vast majority of mortgages are 30 year, so its even less — thought I would use 6% as a more likely interest.

  11. willid3 says:

    flipspiceland, not sure that CFC was a pay back to the UAW as the majority of vehicles sole using it were made either bu NON union workers in the states or by union workers in Japan. I am thinking it was an attempt to pump up the economy (just like some administration did a few years ago by allowing early depreciation of vehicles for tax purposes). that one probably was a bigger sales driver for domestic dealers as they had more qualifying vehicles (seems there was gross weight requirement)
    if we are going to gripe at people who walk away from real estate (or any thing else for that matter) why are we doing the same to businesses who do that too? they have a long history of doing just that.

  12. dss says:

    The cash for clunkers was meant to help the auto companies. If the government thought that means testing was a viable option they would have imposed it, it was targeted at the income group that could actually afford a new car and not default on the payments. Duh.

    There is no means testing for Social Security or Medicare, yet I don’t hear bleating about the fat cats that collect both regardless of their net worth. Not to mention that people are exempt from paying the Social Security tax over $106,800 of income, regardless of net worth.

    Where’s the indignation over the wealthy receiving government handouts?

  13. Marcus Aurelius says:


    The GM drop-down ads at the head of the featured article suck ass.

  14. JayHank says:

    Whoever said Cash for Clunkers was for the poor?

    Anyway, Barry, you’re being too harsh on the “urban legend” theory, which, just mathematically, is very likely to be a component of retail sales.

    John makes $2,000 a month after tax. He has a $1000 a month mortgage. He spends a $1,000 a month on food, clothes, gas, etc. He has $10,000 in savings.

    In October 09 John lost his job. So he’s drawing $500 a month in unemployment (or, if you prefer, underemployment, he works part time at IHOP). He thinks maybe he’ll get reemployed so he starts drawing $800 a month from savings for his mortgage and he slashes his spending to $300 a month. The kids are eating ramen. No new clothes, gas only when needed, etc.

    After six months he’s down to $5,000 in the bank and hasn’t found a job, so he quits paying his mortgage and moves in with his parents.

    Now with his $500 a month he starts buying Campbell’s soup instead of ramen. Buys a $20 tie at Walmart for his job interview. Has his suit dry-cleaned. His retail spending has increased from $200 to $400. I say there’s nothing remotely implausible about this theory. We know people are seeing their debt obligation reduced through default, we know this is a component of a deleveraging cycle, and we know that a reduction in debt obligation frees up cash for deferred purchases.

    It’s not like he’s having a party and buying iPods and flat screens and a Maserati. He’s still living at half the level he was at before, but he’s become a partial component of an m-o-m retail sales increase.

    Nearly every foreclosure would have math somewhat similar to this. When a large debt obligation is erased, the remaining (underemployment or support) income is available for deferred survival spending. March 2010 is still roughly 15 percent below the level of March 2008, so a story of partial retrenchment is consistent as one component of the data.


    BR: His spending just plummeted from $2000 a month to $500. Even if you ignore the money he is no longer paying the bank, his spending is still down 50%

  15. Gene says:

    Even though I am not a financial type, I produce and maintain software for refinancing, postclosing documentation, default management and market timing. I have to agree with Mr. Ritholtz, there just isn’t any real data to support the thesis of mortgage defaults driving retail sales.

    Generally, it seems, most people try to pay their loans or work out a plan with their servicer to keep their homes. I cannot say the same for investment properties.

    As for retail sales, we’ll just have to wait and see what happens.

    Just some unsubstantiated thoughts…

  16. steve from virginia says:

    People are spending because the media keeps telling them the recession is over.

    It’s not just the business media, either.

    Not everyone has lost jobs or house value. Deflation has effected some areas and sectors much moreso than others.

    The rise in fuel costs which are embedded in all goods and services has also raised the numbers …

  17. Understand, I dont assume anything — I am working from the data, and time lines (plus logic).

    -We had a boom/bust cycle in housing, economy.
    -We had massive job losses begining 3 years ago.
    -We had the weakest post-WW2 recession jobs recovery

    Delinquency, default and foreclosures tracked job losses closely (on a sleight delay).

    Unless the data can be shown to prove otherwise, I am going with Occams Razor — the simplets is the most likely explanation — that unemployed people pay their mortgages less reliably than employed people.

    15M + 9M = 26 million people in financial distress.

    Of the 5-7 delinquent mortgage -owers, and the 5 million foreclosures, how significant was job loss/income decrease to their situation?

  18. covel says:

    No doubt it’s happening. Question is magnitude. Free money from squatting, coupled with able bodied people collecting unemployment forever…equals some definite extra economic activity.


    BR: You can collect unemployment forever in the US ?

    Since when?

  19. call me ahab says:

    how ’bout this BR-

    “wow- my house is worth hundreds of thousands less than what I owe- fuck this- I’m going to stop paying- fucking assholes screwed me over- they’ll have to drag me out of here- bastards-”

    ***12 months later***- “wow this is the smartest thing I ever did- talk about freeing up some cash- and they still haven’t kicked me out yet-

    I am a freakin’ genius”

  20. R. Cain says:

    a large portion of the so-called ‘Monthly Payment Savings’ (BR is right) also represents – at this point – an unrecognized loss in interest income by the mortgage holders, including various CDOs.

    will these losses eventually become part of Bailout 2.0?

  21. Reinko says:

    Ha ha ha, the US economy is a strange thing:

    Not only are the foreclosures a good thing in the long haul because it brings back home prices to their historical trend levels.

    Also it is good for retail and boat sellers…

    As usual after the good news on retail comes out; stocks climb a lot and that compensates for all the damage the banks have from the foreclosure pain…

    You keep on laughing until the whole thing cracks through the ice!

  22. willid3 says:

    not sure that being on UE is really all that some think it is. In all most no state are you going to come even close to what you made before. and it is taxable, its not tax free money. and more than likely you will get a maximum of 600. a month. so paying bills has become what of a problem. and just buying food etc to live on is at best tough to accomplish.

  23. kstills says:

    From Dr. Housing Bubble blog, a bunch of attributed charts:

    And I agree with the sentiment expressed above. It’s not just strategic defaults, it’s all defaults. Lots of Inland empire homes that were getting 3.5k per month that aren’t anymore.

  24. mgkurilla says:


    I believe the reason for the lack of data is that much of what people are citing is the aggregate foreclosure data, while the rationale for the consumption contribution is coming from only that subset that represents strategic defaults which is likely harder to quantify since it’s an individual decision to pursue without any mechanism to be captured in accumulating economic info. That’s why most is anecdotal.

  25. wunsacon says:

    >> I was actually surprised to learn there was no means testing

    We should do away with means testing completely, because it requires overhead.

    Don’t want social bennies to benefit the top 5%? Well, first of all, they’re a drop in the bucket for the top 5% anyway. But, I hear you. So, let’s bump up the income tax rates by a small amount to recoup it. This doesn’t require any extra overhead than we have now and yet works well enough.

  26. damonleo says:

    BR: I can tell my story as first hand knowledge. I have no charys or ancedotaly evidence(charts) to back the proclaimed deadbeat bounce. I have not paid my mortgage or monthly common charges (own a condo) for 18 months. That is saving me 4,000 a month which I stuff under the mattress.I can guarantee you because I have reseached and learned the securization of loans and have knowledge of the fraud the servicer has perpetuated upon the court system I will have a figters chance in court when the day comes to challenge the validity to the plaintiffs case. With that said, I have won 2 cases. In dismissmal of credit card debt as the plaintiffs. Could not validate their petition. I am saving over 5,000 a month just from these issues at hand. I am in better financial contion today the I was 18 months ago. I think it is virtually impossible to determine the effect the non payment of bills has had on the supposed economic recovery. But, whatever recovery we have seen in the numbers is illusionary as the past y/o/y #’s are easy to beat. The numbers in the coming 1/4′s and y/o/y will not be. The house of cards that we are experiencing will not last.

  27. Damon leo

    As noted prior, I don’t doubt that some segment of the population is doing this — but we are still looking at a tiny percentage, not the driver of retail sales, as some Perma bears have claimed.

  28. Winston Munn says:

    I can’t afford my house payment so I’ll go to the mall? It is a comfort to know we can count on rational actors to act rationally.

    If indeed a substantial perentage are engaging in this spend-off practice of ignoring bills in lieu of laughter then it reminds me more of the manic spending sprees of the desparate credit card holder just prior to filing bankruptcy.
    Not exactly the sort of thing you would want to hang your GDP rebound on.

  29. The Window Washer says:

    It’s post like these that make you stand out. Keep hammering people on this topic. I’m suprised T2 did such sloppy work.
    This default=CS topic started feeling wrong last summer and I did some numbers early in the year. It doesn’t hold up, every time you do the math if comes out as some tiny percent of Consumer Spending.

  30. JayHank says:

    Barry, that’s exactly my point. You’re talking about month-to-month or year-over-year retail data. We’re still 15 percent below the 2008 peak for retail sales _if you’re talking about level_. So someone who goes from $1000 a month retail spending in 2008 to $200 a month in 2009 to $500 a month in 2010 is showing up in the current statistics as a positive y-o-y or m-t-m change. Level is still down, as you correctly note.

    Mortgage debt is not a component of retail sales, but almost all other spending is. Mortgage debt+ramen soup = $1200 a month total spending, $200 a month retail spending. Mortgage default+ ramen soup + a shirt and tie = $300 a month spending, all of it retail. Thus retail spending increases post-default while total spending plummets. That’s all this is. It’s not controversial.

    The guy in my example is a $300 a month year-over-year March 2010 retail sales increase. (Yes, he’s also a -$800 March 09, but the retail statistics are monthly or annualized not *from peak*. We’re still down 15 percent overall, totally consistent with the storyline that post-job loss defaults are a contributing factor.)

    I truly don’t believe there’s anything controversial in this analysis.

  31. rktbrkr says:

    Just an observation, if strategic default becomes socially acceptable like divorce then the big banks/mortgage holders are in a world of hurt. Instead of being a source of embarassment – defaults & squatting will give street cred.

    How can default be considered morally reprehensible when banks invite defaulters to stay free for 6 mos min “just don’t trash the place”.

    Everybody will assume “everybody is doing it”, then everybody will be doing it.

    But since we’re committed to keeping the 19 largest banks (like GMAC) going regardless we don’t have to worry about massive defaults putting them out of business, their mistakes will be picked up by taxpayers.

  32. Julia Chestnut says:

    What’s driving consumer spending? If you made less than $150,000 this past year, you got a pretty great refund.

    If you line up government transfers with the CS numbers, you get an excellent correlation. It was not squatters who goosed the retail numbers, it was the government.

  33. rktbrkr says:

    OT but this is priceless. Timmy says we have nothing to fear about the Euroland crisis and we’re going to help in a way thats not painful for the US taxpayer. I’ll be able to sleep like a baby tonight knowing Timmy’s on the case!

    Geithner: U.S. won’t be hurt by EU crisis
    By Eric Zimmermann – 05/15/10 09:40 AM ET

    The U.S. will not be harmed economically by the debt crisis in Europe, Treasury Secretary Tim Geithner said in an interview airing today.

    Geithner told Bloomberg’s Al Hunt that the U.S. economy “is getting stronger. We’re seeing a lot of strength, improvement and confidence.”

    The European situation, he said, would not change that.

    Geithner also criticized Republican efforts to block any bailout of European countries.

    The U.S. has a big stake in the IMF, which just negotiated a trillion dollar bailout package with the European Union.

    “We have a big stake in helping Europe manage through these things,” Geithner said. “We’re going to do it in a way that’s sensible for the American economy, the American taxpayer.”

  34. Winston Munn says:

    Try substituting desperate and percentage if you are not fluent in gibberish.

  35. maynardGkeynes says:

    From David Rosenberg 4/16/2010 (or thereabouts, Breakfast With Dave):

    “To repeat, what has driven consumer spending in the past year (retail sales up 9% YoY in March?) at a time when household credit contracted $235 billion and 2.3 million jobs were lost were the following:

    Government income assistance: $243 billion

    Tax reductions: $63 billion

    Government wages: $27 billion

    Decline in savings rate: $22 billion

    Strategic mortgage defaults: $120 billion (courtesy of Gene Balas from Columbia)”

  36. Mannwich says:

    I don’t know about all that, but this sure seems smart (um, no).

  37. easystreet says:

    retailers got squashed last year, now there are some pretty good discounts out there, with 80% of the population still employed the shoppers are enjoying a feeding frenzy, the non mortgage payers are having a little fun too

  38. maynardGkeynes says:

    Sorry, on David Rosenberg, that’s 4/09/2010

    “To repeat, what has driven consumer spending in the past year (retail sales up 9% YoY in March?) at a time when household credit contracted $235 billion and 2.3 million jobs were lost were the following:

    Government income assistance: $243 billion

    Tax reductions: $63 billion

    Government wages: $27 billion

    Decline in savings rate: $22 billion

    Strategic mortgage defaults: $120 billion (courtesy of Gene Balas from Columbia)”

  39. The Window Washer says:


    >Strategic mortgage defaults: $120 billion (courtesy of Gene Balas from Columbia)”

    just using numbers from your comment.

    Off of the top of my head CS number of 300b month.

    $120b would be less than 3% of CS. But that’s the default amount, the payment on 120b at 6%/30yr would be $719m a month and $8billion and change a year. So about.0018% of the last 12 months of CS could have been strategic default.

    Barry’s point and mine show me some macro numbers that add up to anything real against CS.

    My new term for default=CS cheerleaders. Fucking Drama Queens.
    Oh no wait Fucking Drama Queens that can’t add.

  40. snowdude says:

    If anecdotal evidence is useful, here is one with a twist.

    One person I know quite well who was paying a big mortgage in an eastern state decided to give up paying last year and is instead paying on another house – in Canada.

  41. mcrcr4 says:

    Marcus Aurelius, good day.

    Your post of 1:42 P.M. noted the “suck ass” quality of GM’s ads. Firefox has two plug-ins, one, called Adblock does away with annoying ads and popups. The other, called FlashKiller does away with annoying Flash ads. I truly do not see any ads when I log onto this site and that may present a moral hazard to some. As for me, I do not ever click on to ads that annoy me anyway, so Barry’s advertisers lose nothing from me.

    Best regards,

  42. quiddity says:

    While I’m all for a good “the economy is worse than it looks” story, which would include Defaults-Boost-Sales, I agree with Barry that it needs to be proven, not theorized. I think that very, very few who have defaulted are buying much of anything.

  43. VennData says:

    T2 missed the whole run up. They were doom and gloomers throughout, de-crying banks, then home owners, etc.

  44. call me ahab says:


    why decry banks- for real- what have they done wrong? Obviously nothing-

    we owe everything to them and of course the Fed- for this incredible run up-

    because- that makes it all OK- at least in VD’s small mind

  45. realgm says:

    BR: You can collect unemployment forever in the US ?

    Since when?

    Well, the US gov’t didn’t use to pay unemployed people forever, but they kept extending the unemployment benefits a few times already. This almost makes it sounds like “forever”. Who knows when the US gov’t would stop paying these benefits, but right now, they are still paying and hence those unemployed people can still buy food. If not, we will probably see riots everywhere in the US.

  46. Evoo Kermartin says:

    Interesting entry from the HSH Associates blog on 3/1/2010:

    citing this from Housing Wire:

    In what it is calling a historic trend reversal, credit score provider FICO, is seeing more borrowers with a high credit score preferring to pay their monthly credit card bill over their mortgage.

    “We’re identifying lending industry situations in FICO Score Trends that to our knowledge have never been seen before,” said Dr. Mark Greene, CEO of FICO, in a statement. “Economic instability is creating unknown risk in lenders’ credit portfolios as well as counter-intuitive trends in consumer behavior.”

    Also, any links to the “Columbia U study” referenced by David Rosenberg in his 4/9/2010 newsletter? I have been unable to locate anything under George Balas on Scribd or elsewhere. It’s not like Rosenberg to put a big number like $120 billion on the issue unless he saw some supporting data/analysis.

  47. Evoo Kermartin says:

    And here are some key datapoints cited by FICO back in February of this year:

    According to the analysis in FICO Score Trends, recent repayment behavior across the financial services industry has shifted significantly from historical trends. In 2008-2009, bankcard accounts were just 1.6 times more likely to become 90 days delinquent than were mortgage loans. By comparison, in 2005 bankcard accounts were more than three times more likely to become 90 days delinquent. And for borrowers scoring high on the FICO(R) score’s 300-850 score range, the level of repayment risk actually has become greater for real estate loans than for bankcards. In 2009, 0.3 percent of consumers with FICO scores between 760-789 defaulted on real estate loans, compared to 0.1 percent who defaulted on bankcards.

  48. The Window Washer says:


    Oh my goodness this is something that started early 09. Very old news.

    And what does it have to do with the post which is about how the Default=CS talking point.

  49. Marc399 says:

    While all this makes sense I wonder where the losses from all those late/missed/foreclosed properties are sitting? In a free market, the bank would take the loss. I suspect that the government is figuring that by the time all these properties are finally foreclosed on, the mortgages will have been acquired by the government and effectively passed on to the taxpayer. This sucks.

  50. censeo says:

    “The U.S. Census Bureau announced today that advance estimates of U.S. retail and food services sales for April, adjusted for seasonal variation and holiday and trading-day differences, but not for price changes, were $366.4 billion, an increase of 0.4 percent (±0.5%)* from the previous month and 8.8 percent (±0.5%) above April 2009.” (from

    $12 million ‘saved’ amounts to 3.2% of the advanced April estimates. April is stated as an increase of 0.4% over March, which is $1,459,780,056. If all of the so called saving was spent it would account for 12% of April over March increase. Even at 100% the impact would be miniscule.

    I don’t know what M Hanson Advisors or T2 Partners are suggesting, if anything. Your squatting categories are all payments on purchases already made: personal liabilities. ???

  51. rktbrkr says:

    Housing boom in the sand states.Mini boom anyway aided by incentives. People willing to pay more for new vs nearly new foreclosures & short sales.WOW

    “There’s a surprising rebound in the hardest-hit markets,” said Brad Hunter, chief economist with the consultant Metrostudy. “People are buying again.” From the recession’s lows, construction has nearly doubled in Las Vegas, Phoenix and Tucson. It is up 74 percent in inland Southern California and soaring in Florida.

  52. cognos says:

    BR -

    I suspect the “truth” is somewhere in the middle.

    The HUGE positive effect on individuals balance sheets and consumption is from the simple fact of LOW housing prices. One (small) part of this is selective default, another part is actual default and writedown, another part is 3-5% financing rates.

    One year ago, most landlords in NYC we’re accepting offers 20% below ask for rentals, offering 2 free months. Prices are, of course, soft. AND now financing rates are 3.38% for the 5/1 ARM.

    Real Estate buyers… if they have a good private banking relationship and a mixed set of asset collateral can borrow floating credit at 2%. I know real estate types in this bucket who are using the low financing to refi existing underwater projects or buying distressed / defaulted stuff and renting for very cheap. Bc of low financing it all works out.

    But OVERALL… the portion of income going into house payments, interest of mortgages, and savings for downpayments… this must be at record lows.

    John Paulson said recently that housing was the most affordable ever, looks set to do OK going forward, and that the US would have a “V-shaped recovery” on the back of that. I am kinda in that camp.

    If you take something that was 30-40% of the consumption basket and you cut its price by 20% and cut financing rates on it by 20-30%… thats is a big economic tailwind, no?

  53. Evoo Kermartin says:

    @Window Washer:

    I’m agnostic on this one. I would like to see the Columbia study referenced by David Rosenberg. The FICO report is interesting because revolving credit correlates with retail purchases, hence consumers are servicing retail debt before real estate debt. It is not crazy to wonder whether that also suggests a change in spending preference. I honestly have no axe to grind on this point. But I do find that interesting. Not a smoking gun, just trying to contribute to the conversation. Don’t shoot me!

  54. DrungoHazewood says:

    What is the deal with this Rosenberg cult? The guy is worse than a stopped clock. I’ve been reading his bilge for years and to paraphrase Dr Frankenstein ‘my grandfather’s work was doodoo’. I will have to admit that Don Luskin remains the unchallenged high priest of doodoo.

  55. sorry for being slow on uptake, but this meme is perfect for providing cover for this type of G*rbage, found in the “Financial Reform” bill, no?

    “…His latest snooping plan comes from provisions in the banking bill being debated in the Senate. The bill is being pushed by Sen. Chris Dodd, D-Conn., chairman of the Senate Banking Committee. Among other things, the bill is supposed to alert regulators to hazards in the industry to prevent another financial meltdown like the one that started in September 2008, and to make it easier to spot rip-off artists like Bernard Madoff.

    The bill sets up two new supersnooping federal agencies to collect data on ordinary Americans:

    •The Office of Financial Research. This supposedly would predict risk in the system by collecting massive amounts of new financial data, such as patterns of credit card use.

    •The Consumer Financial Protection Bureau. It would collect data, especially on consumer transactions.

    The data are supposed to be “scrubbed” of individual identifiers, so your privacy would be protected. But that might not work, Mark Calabria told us; the director of financial regulation studies at the Cato Institute formerly was a member of the senior professional staff of the U.S. Senate Committee on Banking, Housing and Urban Affairs.

    “If you can link the data to courthouse records of housing sales,” he said, then anyone can find data on others. “Much of this goes beyond what banks do now” to keep data. Under the new law, the government would detail “your charges at Macy’s and car payments. It would be fairly detailed information.”

    Another problem, he added, is that the law “is extremely vague and empowering of the regulators. You as a consumer will have no opportunity to opt out. They’ll be collecting, anyway, and you won’t even know.”

  56. The Window Washer says:


    Sorry if I came off hard. I didn’t recognize the user name and a lot of people stray off topic with an axe to grind.
    A better way to than the Colombia study is to look at Fed Funds Flow. Look at the Mortgage debt, compare it to trend, calculate payments and compare to CS increase. It always ends up being a tiny percentage.

    I admit after this many comments a topic is pretty much an open thread. So to your consumer dept over real estate: I think most people use credit daily and would rather have it and rent. If you can buy a 100k house with credit cards at 17% and pay it off in 5 years you may be better off than staying in a 250k underwater one.

  57. The Window Washer says:


    Interesting variation, is it carrying cost coming down that’s moving CS instead of default?
    I’m out the door for the day or I’d work it out.
    Take the average rate in 08 and figure the payment difference to average rate in 09. You’d have a number to work with.
    I’d presume most of the payment savings went to paying down personal debt in the first 6months then to CS. So then I’d compare it to the personal credit trend line.
    Which moves it to the argument of whether it’s improvement in balance sheets or banks pulling lending and drinking ZIRP.
    See every argument end with Bailout Nation.

  58. adbutler007 says:


    I’m curious about why you are so dogmatic on this issue. My napkin math (above) clearly shows a measurable contribution to retail sales of about 1% marginal improvement vs where retail sales would be without these strategic defaults. This assumes that 50% of defaults are a function of dual unemployment within the household, while the other 50% are choosing to not make mortgage payments despite one ore more employed persons in the home. I chose an average OUTSTANDING mortgage amortization schedule of 20 years, though admittedly most are 30-years, so this attenuates the impact a little.

    Either way, we can safely say that retails sales are about 1% higher than they would otherwise be due to defaults, and the timing og these defaults is skewed to the last three months, so the second derivative of this consumption boost is likely to be even more impactiful through Q1, and may even by accelerating as strategic defaults become more socially acceptable.

    This is a real, measurable impact that is boosting sales at the margin.

    Further, per Calculated Risk, fully 100% of the increase in PCE in Q1 is explained by government transfers and withdrawals from money market funds. As these transfers expire, watch for retails sales to slow considerably, unless the rate of non-employment related strategic defaults picks up considerably – a significant possibility in my book.

  59. rktbrkr says:

    Just thinking there must be a completely bifurcated market with foreclosures and short sales going all cash route and new home sales going conventional route. If I was a banker sitting on a big pile of shadow inventory waiting to feed it onto the market and I read that new home construction was (semi) booming I wouldn’t be feeling so good – unless I worked for one of the Immortal 19 quasi-banks.

    How fukked up is government policy that subsidies are promoting a mini-construction boom in the most overbuilt areas? Just unbelieveable.

  60. wally says:

    There is a difference between ‘driving’ retail sales and ‘supplementing’ retail sales which you seem to be stubbornly and unreasonably refusing to recognize. I’m not sure what your issue is here, but you have gotten yourself on the opposite side from common sense in this case.

  61. Thor says:

    My question is – how long have people been strategically defaulting? Years, not the months we’ve been reading about it in the MSM. IF strategic defaulters are indeed increasing the retail sales numbers, I would argue that this is something that has been going on for a good part of this recession. This isn’t a new phenomena.

  62. R. Cain says:

    despite many media headlines this week:
    ‘Foreclosures down in April’


    ‘US home repossessions set record in April’

    Banks in the US repossessed 92,400 homes in April, a record number and 45 percent higher than in April 2009. At the present rate … more than 1 million American homes will be repossessed this year. In 2009, 918,000 repossessions took place.

    … 5 million delinquent home loans will probably end up in the foreclosure process, in addition to the 1.2 million homes already taken back by lenders.

    bar graph of foreclosures by month:×283-26324.png

    recall ‘foreclosure’ is not the same as ‘repossession’
    foreclosure filings = default notices, scheduled auctions and bank repossessions

  63. tradeking13 says:

    I am on neither side of this argument, but I just read an interesting note from Annaly Capital Management:

    What is interesting to us is the significant increase in residential mortgage delinquencies with the rise in unemployment, while credit card delinquencies have remained more muted. Going back to 1991, credit card delinquencies have always been higher than residential mortgage delinquencies. No more. Whereas conventional wisdom had held that when push came to shove a debt-burdened consumer would choose to pay his mortgage before his credit card, now it appears that it is far less costly (with far less embarrassment) for a borrower to simply stop paying on his mortgage.


  64. lalaland says:

    So, what yer sayin is if the homeowner has the ability to pay but doesn’t, he saves the money – that will be a certain percentage

    but if the homeowner doesn’t have the ability to pay, there is no savings – that will be the larger percentage.

    Correct me if I’m wrong but we’ve generally passed the defaults based on extreme liar loans and speculation – for a while now the the data has been pointing to people losing their jobs and simply not being able to afford their mortgages (or much of anything else); i.e. no savings.

    Also, even in less trying times most people do want to be in their homes or, even as speculators, retain their credit ratings. It’s fair to assume there will be many more of the latter than the former.

    Re: SteveC – If the guy who bought a boat used credit he might be smart because he won’t be able to do that in the future with any ease; if he spent cash well, he’s an idiot (unless he really, really always wanted a boat and loves to fish in which case fuckit, if you’re going to go down might as well have your boat).

  65. R. Cain says:

    non-payment/default of a residential mortgage is a function of:

    • loss of employment
    • re-set of ARM teaser rate
    • being ‘underwater’ (1 in 6)

    bar chart:
    % homeowners in Negative Equity, by State, Q1 2010;contentBody

  66. benesposito says:

    “Strategic” defaults accounted for at least 12 percent of all defaults in February, up from about 4 percent in mid-2007, according to a recent Morgan Stanley (NYSE:MS – News) report. Analysts led by Vishwanath Tirupattur classified a default as strategic when a homeowner who hadn’t previously been delinquent made an on-time mortgage payment one month; skipped payments for the next three months; and stayed current on other consumer debt of $10,000 or more.

  67. benesposito says:

    “A study by the Amherst Securities Group takes a different approach. It shows that in areas where
    homeowners generally weren’t underwater, under 1.5 percent of subprime mortgages became
    nonperforming each month during the third quarter of 2009. But in areas where the average mortgage
    exceeded the current value of a house by 20 percent or more, the rate of monthly subprime defaults was
    4.5 percent. The difference between the two rates probably isn’t due to homeowners’ ability to pay,
    because the study corrects for unemployment. The assumption, therefore, is that it’s due to
    homeowners’ willingness to pay when they see how much more expensive their mortgages are than
    their houses. The difference between the two default rates—the 1.5 percent “natural” rate and the 4.5
    percent rate in areas where home prices dropped significantly—suggests that in those areas, two-thirds
    of defaults seem to be strategic.”

  68. benesposito says:

    “The most convincing evidence comes from a study by Experian and the consulting firm Oliver Wyman
    that tries to measure strategic default by identifying people who go straight from having always been
    current on their mortgages to being 180 days late—while staying current on all their other debt
    obligations, such as credit cards and auto loans. The idea is that if somebody pays the credit card but
    not the mortgage, it’s probably because he wants to default on the mortgage, not because he must. The
    study estimates that in 2008, 17 percent of all U.S. defaults were strategic, though that figure differs
    tremendously across groups and regions. For instance, 27 percent of defaults among people with high
    credit scores appear to be strategic, a figure that jumps to 40 percent in California.”

  69. fugazzi says:

    Barry, i don’t see why you’re so bent against this issue…at least for strategic default, if a household is struggling to get even on a cash flow basis each month, while paying 1500$ a month on their mortgage on an underwater homes, and suddenly decide to stop paying, they’ve just freed up 1500$ a month (assuming they are in a non-recourse state)…they can use that for savings, conso, rent (not even necessary if the bank is slow in quicking them out)…MS the other day was estimating strategic default a 13% if i remember correctly, so that’s not insignificant…and JPM was warning against this phenomenon in their last quarterly report…basically, those cash flow should appear as loss for the bank, but don’t necessarily if the banks are slow to recognize the loan as defaulted upon and continue marking to fantasy those loans, while the transfered cash appears somewhere (conso, savings, rent)…basically, we now have Two FED printing money out of thin air…finance is so much fun…

  70. DeDude says:

    Considering how housing equity was cashed out and used for spending, the least he could have done was countering those numbers with the total loss of residential real estate value. What he is charting is just the actual realization of those lost trillions of housing value. If he wants to book that as income when it is transferred from the consumer to the investors, he should book it as outlay when it is transferred from the market to the consumer.

  71. mtlippincott says:

    BR – for the chart in your post from T2 to go from forgone liabilities to actual dollars to spend probably depends on the unencumbered assets of the person not paying their mortgage before they defaulted, how much income loss actually contributed to them defaulting, what they income/expenses look like excluding their mortgage and if the lenders have no-recourse.

    The problem is, as you note, no one can get you the balance sheet and income data for those 7 million in default. I can’t really help there sadly, but there are some more stats in that T2 presentation that might help triangulate a little.

    First, your main claim is that income loss drives defaults. In that same presentation, T2 shows the main driver of default is actually equity left in the home. Here are the stats for Cumulative Defaults as of April 2009

    Mark-to-Market Loan-to-Value of > 120%: 12+%
    MTM LTV between 100% – 120%: 10+%
    MTM LTV between 80% – 100%: 7.5+%
    MTM LTV < 80%: 5+%

    So it seems that it's what your house is worth relative to your loan, not your income, that would determine default. And if that's the case, then the forgone mortgage payment might indeed be simply money saved and ready to spend.

    There is another slide that shows the transition rates to different stages of deliquency (30 to 60 to 90 to foreclosure) plotted against the unemployment rate and plotted against MTM LTV ratios, and clearly it is MTM LTV that is the overwhelmingly driving deliquency and hence default, not employment.