'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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