Homeowners who do the right thing – even if they are underwater due to sinking home values – and who pay their mortgages on time may actually be harming the economy. It all comes down to where your money is better spent, and in many cases, that’s not your mortgage.
It’s a very unusual and troubling time for homeowners. According to data from TransUnion, we have apparently passed the worst point for delinquent mortgages. TransUnion says “roll rates” – the number of homeowners who roll delinquent mortgage payments from 30 days overdue to 60 and 90 day terms - peaked in July 2009.
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During that time, 37.6% of late-paying homeowners who were 60-days late on their house payments became 90 days late. That means nearly 60% of these people managed to make their payments. But we are not out of the woods yet in terms of problematic mortgages.
F.J. Guarrera, vice president in TransUnion's financial services business unit, explained the numbers. "We noted that roll rates observed in the study reached their apex one month after the end of the recession as officially determined by the National Bureau of Economic Research. This timing is a clear illustration of how credit dynamics can lag economic dynamics: Although we may have left the worst of the recession behind as we entered recovery economically, from a credit perspective, we were just hitting the toughest period for consumer default."
As TransUnion notes, most mortgage holders were determined to catch up and make good on their mortgage payments. But is that really a good idea?
There is a school of thought growing in some economic circles that fighting the good fight against an underwater mortgage actually hobbles the economy.
Here is how the thinking goes: There are millions of Americans whose homes are underwater, meaning their loan balances are higher than the value of their homes. To their credit, most homeowners have kept making their mortgage payments.
But in doing so, underwater homeowners are keeping billions of dollars away from the consumer economy. Take a consumer who’s paying $2,000 for a mortgage he can’t afford. That’s $2,000 that will go most likely go to a big bank which will sit on the cash and not feed it back to the economy.