The Myth of the Big-Spending Mortgage Scofflaw: It Doesn't Add Up

There's an intriguing story making the rounds that the recent rise in consumer spending may be the result of free-spending folks who stopped making their mortgage payments.

An anecdotal report from someone claiming to be a mortgage business insider lists all sorts of extravagant expenditures by those in arrears on their mortgages.

The story makes a certain sort of sense. We all know lenders are overwhelmed by the sheer volume of delinquent loans -- about 4.5 million of the 51.5 million mortgages in the U.S. are "seriously delinquent" (90 days or more past due) and some 1.6 million are in the foreclosure pipeline -- so it seems likely enough that some homeowners are taking the opportunity to "game the system" by simply not paying their mortgages. (The U.S. Census Bureau tracks mortgages, and reports there were 51,487,282 housing units with a mortgage of some type and 23,875,803 without a mortgage, as of 2008.)

The nation's foreclosure rate increased in January to 3.19%, up 60.3% from a year ago, while the rate for seriously delinquent mortgages increased in January to of 8.66%, an increase of 56.6% from 12 months earlier.

Many regions are in worse shape: Florida's 90-day delinquency rate is a staggering 19.39%, which means one in every five mortgages in the state is in default. And in March, the nation's foreclosure rate just hit a five-year high.

But, of course, high default rates aren't just a Florida phenomenon. A recent report from Bank of America (BAC) stated that 1.44 million of its mortgage customers are 60 days or more delinquent, roughly 14% of the company's portfolio of 10.4 million first mortgages.

How Many People Could Be Paying, But Aren't?

There is some evidence that not all those who have stopped paying have done so solely because they can't make their mortgage payments. Bank of America also reported that about 500,000 of its delinquent mortgage customers have not supplied information or taken other steps to qualify for mortgage help, such as applying for the nation's centerpiece program to help struggling homeowners, the Home Affordable Modification Program.

About half of these 500,000 struggling homeowners have not made a payment for more than a year, or owe more than 50% of the value of their homes.

As of March, the bank said that about 33,000 of its mortgage customers have received long-term modifications to their mortgages.

There is no way to know how many homeowners are seriously struggling and unable to make their payments versus how many might be "gaming the system" to reap a windfall of free housing. But since the median mortgage payment is about $1,300 per month and the number of delinquent loans is at least 4.5 million, it is straightforward to extrapolate that those not paying their mortgages are "saving" almost $6 billion a month.

All these numbers are for "seriously delinquent" first mortgages, and so they do not include delinquent second mortgages, home equity lines of credit, or those mortgages that are delinquent by just 30 or 60 days.

Where Did Americans Get That Extra $35 Billion?

Consumer spending has been surging for the past few months, and so it would be natural to connect the dots between rising spending and mortgage payments not being made.

To find out if this notion has any merit, I dug into the income, savings and expenditures data issued by the Bureau of Economic Analysis.

In February, personal income increased $1.2 billion. Not much of a rise, and certainly not enough to fuel that month's $34.7 billion increase in personal consumption expenditures.

It also seems obvious that even if the $6 billion in "saved" mortgage payments was spent, that could not account for more than a sixth of the increase in consumer spending logged in February.

Since consumer credit fell by $11 billion in February, then where did Americans come up with the $35 billion in extra cash they spent that month?

One answer is that the government sent out more checks. According to the BEA, "personal current transfer receipts" -- bureaucrat-speak for government outlays such as long-term unemployment insurance payments, tax credits and the like -- increased $16.6 billion in February, or roughly half of the increase in consumer spending.

The BEA also noted that personal saving as a percentage of disposable personal income fell to 3.1% in February, compared with 3.4% in January and 4.3% in 2009.

That translates into roughly $100 billion a year that Americans are spending this year that they were saving last year.

So government transfers to individuals are rising, the savings rate is falling, and the delinquency rate for mortgages is still climbing. True, every dollar that is spent on goods and services rather than being sent off as a mortgage payment obviously adds to consumer spending. But it looks as though higher government outlays and a declining savings rate have more to do with the rise in consumer spending than people who are going to mall to splurge with their house payment money.