'Squatter rent' may benefit the U.S. economy by $50 billion

Mortgage troubles

Tess Vigeland: When putting a roof over your head, you generally have two choices: you rent or you buy. But the housing bust has created a hybrid of the two. People who bought a home, but at some point stopped paying the mortgage either because they can't or because they decided not to. Yet, they're still living in the house.

Michael Feroli has been tracking what's called "squatter rent" and he says it's actually helping the economy to the tune of $50 billion. He's chief U.S. economist at JPMorgan Chase and joins us now. Welcome.

Michael Feroli: Thanks.

Vigeland: So first of all, can you give us a sense of how prevalent this is? What are the numbers of people who are squatting in their own homes?

Feroli: Well, right now you're looking at about 8 percent mortgages outstanding are past due and there are about 44 million mortgages out there. So you're talking about a pretty significant number of people who right now are not paying their mortgage.

Vigeland: Wow. So how did you come up with the estimate of a $50 billion impact here?

Feroli: Right. So there's about $10 trillion in mortgage debt owed by the household sector. So you're looking at about $800 billion in mortgages, which are past due -- average interest rate of about 6 percent or a little above. Most of those mortgages, of course, are in the early stage when it's mostly interest that you're paying. So 6 percent on a little over $800 billion comes out to about $50 billion per year that are free for other purposes.

Vigeland: Wow. That is a chunk of change. So how is that money being spent instead? What's it going toward?

Feroli: Well, no one knows for sure, of course. But presumably these are households that are under a lot of financial stress and presumably are going into necessities. We're not talking about households that have a lot of disposable income and are spending on luxuries. So of course, there are at least some anecdotes that I've heard of that happening -- people being kind of strategic in defaulting. But I would suspect that the vast majority of people who are may have lost a job or are otherwise financially in difficult straits.

Vigeland: Yeah. But so, actually what we're saying here is that mortgage defaults are contributing to the economic recovery, potentially?

Feroli: Well, I think it's one of the shock absorbers that's kind of built into the economy, which is to say that when things turn down there were some offsets and this is one of those. And I think as the economy improves and people are able to pay their mortgages -- and as the job market continues to heal like we saw in the data this morning -- those people who are gaining jobs, maybe part of the income they get is going to go back into paying their mortgage. So it probably plays out a bit in both directions.

Vigeland: Well of course, whenever we talk about strategic defaults or people squatting in their own homes and not paying their mortgage, you get people who question the ethics of that. So who gets hurt when these people do stay in their homes without paying the rent? Obviously the bank, mortgage servicers, but does it have a ripple effect for the rest of us?

Feroli: Well, I mean to the extent you've seen a lot of bank failures throughout the country, particularly a lot of smaller banks, community banks. When that happens, that obviously hurts those communities and the FDIC is left to pick up the tab and so, directly or indirectly, the taxpayer also takes some burden. And an increasing share of these mortgages are ones that the GSE's are on the hook for in one form or another.

Vigeland: That's Fannie Mae and Freddie Mac.

Feroli: Exactly. And so those being now, at least in part, taxpayer supported -- the taxpayer does bear some of the burden here.

Vigeland: All right. Michael Feroli is chief U.S. economist at JPMorgan Chase in New York. Thanks so much for joining us.

Feroli: Thank you.

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Mr Feroli's analysis is flawed. He assumes that the exact amount that "squatters" would be spending on their mortgage - or more specifically the interest - is now being spent on other things instead. First, if the homeowners have the cash, can you assume that all of them would not send it to their lender to get him off their back, rather than go out and blow it? Second, it is almost a given that whatever these homeowners have to spend is being spent on necessities like utilities, groceries and gas. Nothing above what was being spent prior to the mortgage crisis, therefore very little that would improve GDP. Sure, there is some amount that does get diverted from mortgage interest payments to other goods. But nowhere near Mr. Feroli's simplistically calculated number.

Thank You everyone for your great comments. Same situation here. Have lived in our modest, broken down home for 19 years and we are still underwater. Homes are selling for what they were priced 30 years ago in Vegas. Never late on a payment, inquired to Wells Fargo about lowering our interest rate because of financial hardship (job loss)....NO..NO...NO...the banks want you to foreclose because the corrupt truth is they receive TARP money with foreclosure. I just wish some journalists would be gutsy enough to reveal the awful ugly truth about the failing housing market. I will repeat my mantra. There will be no recovering in the housing market until principals are reduced. Investors can buy up all of these empty homes, but it's kind of hard to rent them out to decent tenants when no one has any jobs...

Squatting in my own home!?! How dare you? I stopped making my mortgage payment when there was no choice: I didn't have enough money to make my payment any longer. Now, after 18 months of trying to get my lender, USBank, to MODIFY my loan. I could not qualify for the HAFA program. I finally got modified with the HAMP program. But it's useless -the new payment is also too high. Did you know they only consider your INCOME in the HAMP program & do not calculate your payment amount considering your expenses??? So the new payment is unreasonable - but it staved off the recurring auction dates their foreclosure attorney/department has scheduled. If they had refinanced my loan in the beginning,(in 2009), I would not have been under this mental stress for all this time. But I had a credit score of 701 and needed 710 at the time. Seriously!. The other thing you need to remember is the amount of money I have given the lender in interest alone since I purchased this little house in 1987! They have not suffered by our contract. I got very ill in 2005 and have had excessive and exhorbitant medical bills and medical insurnce premiums to pay. My monthly health insurance premium with another wonderful US corporation, United HealthCare, is now $973 per month with $1000 deductible, and $2000 out of pocket per year???? Squatting in my own house? I am a 62 year old person who worked all her life, never married, and have had no help especially now that I am having health trouble. They will take my house and sell it for way less than I currently owe and I will have lost everything. Is THAT Ethical? I know very few people that are "squatting". But I know plenty of people who are (still) losing their jobs, are struggling to pay for health care and gas and food. You need to put faces and history behind the facts in your stories and statistics. This is AMERICA. What ever happened to equal opportunity? The latest blow I have received is that Cal HFA has a new program called "Keep Your Home California" to help people like me. But the "servicers" (lenders) participate in it voluntarily. And US BAnk is NOT participating. Instead of all the coverage of Yenem and Syria, & Bin Laden, why don't you cover the fraud that being perpetrated on the former US Middle class by the banks? I heard brienfly the Deutsche Bank was being sued by the US Government for mortgage securities fraud. Why havent I heard more about that? That's more important to me than photos of Bin Laden.

The degree to which the local economy is helped by extra spending from people living in houses in default and not paying, is more than countered by the losses to the economy by rents being higher than they otherwise would have been if that housing stock had been permitted back into circulation. You also need to incluse all the housing stock being held idle (vacant) by banks while they are able to borrow capital from the Fed for near zero rates.

Mr. Feroli's bank used bailout money to purchase a large western bank laden with bad mortgage's. And now they complain about it?

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