Saturday, April 10, 2010

Unpaid Mortgages Fueling Consumer Spending

The latest report from Lender Processing Services shows that mortgage delinquencies have reached an all-time high.

More than 7.4 million home loans nationwide are in some stage of delinquency or foreclosure. And another one million properties are either bank-owned or have been sold out of foreclosure.

But what's truly stunning is that 10% of all U.S. loans are delinquent.

And that huge volume of delinquent loans virtually assures another wave of foreclosures.

In addition, as of last fall, 25% of all US mortgages were underwater. Things haven't improved since then.

It's hard to know exactly how many, but a huge number of Americans are no longer paying their mortgages. They are waiting for loan modifications, or for a judge to order them to vacate.

Not making that monthly payment has put a lot more spending money in the hands of many Americans, and that is fueling national spending.

Consumer spending increased 0.3% in February, marking the fifth straight month with an increase.

But unemployment remains uncomfortably high, and even those who haven't lost their job or their home know how challenging this economic environment is for millions of fellow Americans.

That concern, or worry, is why the Conference Board's Consumer Confidence Index stood at 52.5 in March. The economy is considered stable only when the reading surpasses 90.

Though Americans also dipped into their savings to help fuel spending in February, all the money not going into mortgage payments is surely boosting the overall spending numbers.

That's creating a bit of an illusion, albeit one that won't last indefinitely.

To date, most loan modifications haven't worked, and huge numbers of adjustable-rate mortgages that haven't even reset yet are already delinquent or in various stages of foreclosure. By September, $71 billion of interest-only loans will have reset over the preceding 12 months.

That indicates that there will be a lot more foreclosures. And when the sheriff shows up to order people to vacate their premises, the days of living for free will be over.

As that occurs, there be a lot less discretionary spending flowing into the US economy.

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