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Retail Sales and Mortgage Defaults, Oh My!

A few weeks ago I pondered out loud if millions of troubled homeowners, without the burden of a monthly mortgage payment, were instead spending their money on other things -- and if that might explain at least some of the recent strength in consumer spending. Wow, did that ever open a can of worms. I've since been called brilliant or stupid, not to mention pretty much everything in between. The idea has made it into the mainstream pretty quickly, with economists of the likes of Robert Shiller of the S&P/Case-Shiller Home Price Index and Mark Zandi over at Moody's Economy.com telling CNBC the idea has some merit. Those of you attending the REOMAC conference last week (a real estate show for those specializing in residential default management) might also have also heard economist Christopher Thornberg of Beacon Economics talk about the idea, as well. Others have somewhat predictably panned the idea that distressed borrowers are contributing to either retail spending or consumer spending figures, with well-known financial commentator Barry Ritholtz over at the Big Picture blog taking me to task for suggesting that deadbeat borrowers were having any impact at all. Ritholtz called the idea "ass backwards," and suggested that I needed to consider "doing actual research." Ritholtz's opinion notwithstanding, I stand by the idea, although I think some additional clarification is warranted. In my original column, I highlighted a case study published over at the excellent Calculated Risk blog about a HAMP application at a large servicer, and implied that the spend-happy profile was more than just a single, deviant case. What I didn't do was explain why I believe this to be true. Ritholtz, for one, bases most of his objections on the premise that I "never bothered to ask" the guest poster at Calculated Risk -- code-named Shnaps -- if the HAMP applicant in question was an outlier, as he believes the case to be. What Ritholtz doesn't know (ironically enough, because he didn't ask) is that Shnaps and I have spoken at length and numerous times about this very issue. I also speak to numerous other servicers (beyond just Shnaps' current employer) on a regular basis, as part of running this media platform. Here's the truth: as unfortunate as it may be, there are in fact many mortgage holders in distress that do fit the spending profile at issue here; but precisely how many? No one really knows, since there isn't any real data on it. The sense I get from the servicers and loss mitigators I've spoken with thus far is that "spending the mortgage" is already quite prevalent among aged delinquencies and in certain geographic locations, and is becoming even more common over time as the number of mortgages "held up" in the default pipeline continues to grow. One servicing employee I spoke with this past week told me the following: "It feels almost like one in two [hardships] I see, someone in a household has lost a job or seen a cutback and the old income level is gone. It used to be that we would see a track record of attempting to adjust spending habits, going through savings, loading up credit cards, the usual. Not now. Now, I see more where they [the household] decides the minute the job is lost that so is the mortgage, and other spending keeps on going." I think most Americans, too, if they look at their own neighborhoods, will likely know of someone that may be in default on their mortgage -- and yet can be seen spending heavily on consumer goods. In our neighborhood, for example, I can think of one household defaulting for strategic reasons that just purchased a brand new car. I know I'm not alone on this, either. The point here is that truth, as with most things, most often lies somewhere in between two extremes: not every defaulted mortgage holder is out spending money that might have gone to a mortgage payment or rent, of course. Our nation's jobless rate is through the roof, and as a result many good people simply don't have a job (or enough of one) to pay their mortgage. But the majority of households in the US are now also dual-income -- 80% or so of married households, last I checked, and married households represent roughly 50% or more of all households in most states. So the loss of a job for many certainly will constrain household income, but doesn't necessarily push it all the way to zero. With that in mind, consider that the ratio of total debt payments to monthly gross income is at a median of 77.5% for those borrowers successfully obtaining a modification through HAMP, according to Treasury data. Housing expenses alone represent 44.8% of monthly gross income for this group (prior to modification). And these DTIs apply to the successful HAMP applications; you get one guess to figure out what these ratios look like for the millions more that do not qualify. It doesn't take a PhD in economics to see a few key points here. For these households, the non-shelter Maslow basics -- food, clothing, and so forth -- are able to be met with 22.5% of available monthly gross income. A household facing loss of income can, therefore, rationally lop off 77.5% of its expenses by simply choosing not to perform on its consumer debt, and/or lop off 44.8% of its expenses in one fell swoop simply by defaulting on the mortgage (and still meet household shelter needs, for free). It's quite possible, in fact, that doing so is often more than enough to offset whatever loss of income is being experienced by many households. Retail and food spending for March 2010 came in at $363.2bn, up 1.6% from $357.5bn in February. That's an increase of $5.7bn, month-over-month. I threw around a rough figure of $3.7b per month as the "delinquent spending" figure in my original column (using admittedly back-of-the-napkin math), but have since seen other estimates above that number. All of my years of studying econometrics did manage to teach me one very important lesson: Economics isn't always about whiz-bang analysis of data. At the end of the day, that data is supposed to capture meaningful behavior -- which is what ultimately gives any analysis its context. In this case, we have ample evidence of how households are behaving, even if it's the sort of anecdotal and qualitative evidence that quants tend to discount. In a nascent and fragile economic recovery, choosing to ignore anecdotal evidence simply because it isn't "rigorous enough for real analysis" is a great way to miss an important trend. Paul Jackson is the publisher of HousingWire.com and HousingWire Magazine. Follow him on Twitter: @pjackson

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