Will Paying Your Mortgage Hurt the Economy?


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.

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.

A Nov. 1 article from The Los Angeles Times cites data from Moody’s Analytics that shows the potential severity of the problem. According to Moody’s, there are approximately 15 million American homeowners who were underwater on their mortgages in the first quarter of 2010. Of that number, 7.8 million owed at least 25% more money than their homes are worth.

But as the Times points out, those homeowners are boxed in. While most have good jobs and are currently making payments, their credit is shot and they can’t get a decent refinancing deal. Nor do they want to sell their homes at a huge loss. So these homeowners take their monthly dose of harsh medicine and pay up – at the economy’s expense.

Think about it. With no money left after the mortgage payment, and no way to improve their mortgage situation, underwater homeowners have less cash to go out to dinner, to renovate their basements, or to buy a new car. That hurts local restaurants, contractors, and auto dealers – a ripple effect that is being repeated every day in thousands of communities around the country.

What can be done about it? One idea is for banks and lenders to push through refinancing deals for homeowners without good credit, to keep them in their homes and give them some financial breathing room. The Department of Housing and Urban Development (HUD) rolled out a similar program last August.

Consumer advocates have long pointed out that banks and other financial institutions got hundreds of billions of taxpayer-funded bailout dollars. But struggling homeowners didn’t get a penny.

For the good of the economy, that’s going to have to change – and fast.

—For the best rates on loans, bank accounts and credit cards, enter your ZIP code at BankingMyWay.com.

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