Opinion: Two views of the post-housing bubble apocalypse

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On Monday, my colleague Don Lee and Mark Whitehouse of the Wall Street Journal both took up the issue of how problems with mortgages are affecting the broader economy. But their approaches to the issue are so radically different, it’s almost funny.

Whitehouse taps a familiar vein of outrage, writing about the economic boost received by millions of homeowners who defaulted on their mortgages but have yet to be kicked out of their homes:

Defaulters living in their homes are getting a subsidy worth about $2.6 billion a month, according to a Wall Street Journal analysis based on mortgage data from LPS Applied Analytics and rent data from the Commerce Department. That’s 0.25% of U.S. personal income, roughly equivalent to the benefit top earners receive from Bush-era tax breaks.

In short, foreclosure delays are roughly equivalent to tax breaks for the rich. But that’s not all -- according to Whitehouse, some of the folks who have defaulted ‘are cashing in by renting out their homes.’ Hmm. Perhaps at least some of those evildoers are landlords, whose properties in some areas are defaulting faster than owner-occupied homes?

But I digress. Whitehouse’s basic point is that the foreclosure delays (which he terms an ‘unintended economic stimulus’) favor consumer spending at the expense of banks, investors and governments that rely on property taxes -- not exactly the three most sympathetic representatives of victimhood. He also states that the defaulters’ spending is ‘not going to drive a recovery.’ But he doesn’t explain why he thinks that to be the case; instead, he just quotes an analyst saying consumers are merely shifting payments from one set of bills to another.

Maybe so, but it’s also possible that defaulters are shifting money away from a financial black hole and into something productive. This is the point that Lee makes, albeit indirectly, in an article that discusses the economic harm for borrowers who don’t default on homes that are worth less than their mortgage’s outstanding debt.

In particular, borrowers whose homes have lost 25% or more of their value have few good options for improving their outlook unless and until they default. They can’t sell their homes without losing a substantial amount of money -- banks have little reason to approve a short sale if the borrower isn’t falling behind on the loan. They can’t refinance the loan to a lower interest rate because the collateral (i.e., the home’s value) isn’t sufficient. Instead, they’re stuck pouring good money after bad, unlikely ever to recover their investment.

Granted, one of the basic risks of home-buying is that the property might lose value. But the cataclysmic devaluation of the past few years is unheard of, at least in the lifetime of anyone younger than 90 (see this great chart from economist Robert Shiller, courtesy of the New York Times).

Lee’s piece argues that the trapped borrowers have less cash available to spend, and significantly less motivation to spend on home improvements, than they would if they weren’t paying off the investors who own their mortgage. The only potential relief would be to default, which would wreak havoc on their credit and lower the aforementioned investors’ returns.

So there you have it -- two alternative windows into the post-housing bubble apocalypse. It’s an undeserved boon to defaulters, or it’s a nasty trap for those who stay current on an investment that will never yield a positive return. But of course, it’s both.

-- Jon Healey