About a year ago, Zero Hedge first floated the then apocryphal idea that the economy is receiving an implicit boost from the money "saved" by squatters: people who no longer pay their mortgage, but due to banks' unwillingness to have a price discovery event on the home (in the form of an auction on REO or foreclosed properties) which would force mark bank assets far lower (due to impairments on the mortgage as opposed to it merely being in "Special Servicing" status), continue to reside in the property. Furthermore we disclosed yesterday, per LPS the average delinquency period is now 573 days meaning the typical deadbeat resides in their home for over a year and a half without paying a single cent. And since there are millions of delinquent mortgages, all this adds up to a lot of money. How much? Well, nobody had been quite able to quantify this huge boost to the economy, which is why the topic never received prominent media notice. Until now. In "Rental income and "Squatter's Rent" JP Morgan's Michael Feroli kills two disinformation birds with one client note: first he debunks all myths that "rental income" is surging, as was reported in glaring headlines in a variety of propaganda media outlets following Monday's personal income report was released. This is patently false. As Feroli explains: "This rise has little to do with landlords getting more from their tenants. In fact, it has very little to do with what speakers of the English language would normally consider "rent." Instead, it mostly reflects mortgage payments of the household sector coming down, in part because of the aggregate decline in household mortgage debt due to net cancellation of mortgages associated with foreclosures." In other words, surging rental income is nothing more than "squatter's rent" saved by not paying one's mortgage. As to quantifying this amount - per Ferroli until recently it was $60 billion a year! This is a stunning 0.5% of GDP. Luckily there is good news: this unethical and artificial "boost" to the economy is finally declining... and is now only $50 billion on an annualized basis.
We will not debate the ethics of this phenomenon. That a typical homeowner can walk away from their mortgage is perfectly normal. After all there is a trade off - a wipe out of one's equity investment (if any), as well as a dramatic impact to one's credit rating. On the other hand continuing to live rent and mortgage free in a squatted property is a different issue altogether. Whether this is to take advantage of a bank's own greed and stupidity is irrelevant: this is capital transfer. And considering that banks continue to be woefully undercapitalized, and one Mark to Market resumption away from total insolvency, the money that one deadbeat squatter is "saving" today, is money that all other taxpayers will have to make up tomorrow when the lender bank blows up at any given point in the future. Yet the enforcement of this process is the bank's prerogative, and there is little that can be done unless a lender is actively pursuing the expulsion of a squatter. But why should they - this process begins an involuntary Mark To Market process on the underlying mortgage which will have a far greater cost than benefit from letting the status quo persist.
In the meantime, said "squatter" benefits by not having the biggest consumption outlay typical for a US individual: residential costs, whether mortgage or rent. In essence what this does is to raise the effective wage of all the squatter households, by some estimates over 10 million of them. Which should force all those who believe there is no real inflationary pressure due to no real increase in wages to re-evaluate their thesis.
The one saving grace is that sooner or later the bank has no choice but to pursue foreclosure actions. Usually this occurs about two years in a mortgage's transition to delinquent. In the meantime the one beneficiary is the US economy, as these same deadbeats go out and buy iPads, consumer products and other non-credit intensive products (by now their credit rating is shot explaining why there is an inflation in necessary products (and iPads) and deflation in everything else). Of course by doing so they make life for everyone else far more complicated, as being perfectly elastic to staples' prices forces those foolishly who still pay their rent and mortgage to pay a greater proportion of their income on items that would otherwise cost less if demand was more elastic. This is yet another externality for the banks, which love nothing more than inflation. The only loser is as always the law-abiding, ethical, taxpayer.
As to the total benefit to the economy from this borderline illegal process: it now amounts to about $50 billion a year. Per JPM: "squatter's rent increased to over a $60 billion annual rate early last year, but with delinquencies declining that has come down recently to just over $50 billion." In other words, the ongoing ability to engage in "squatting" has a comparable impact on the economy as the most recent overhyped fiscal stimulus.
The question then becomes what happens when this ultra-stealthy and highly unethical stimulus goes away? $50 billion today, $40 billion tomorrow, and so forth. In the meantime, inflation will continue due to the abovementioned effect this phenomenon has on real wages, albeit in proportionately smaller doses. And how long before those who dutifully pay their mortgages say enough, or worse yet, turn against that deadbeat(s) in their neighborhood?
Luckily for Bernanke, this process will come to a head long after the Chairsatan, who through his policies is allowing this to take place in the first place, will be long gone on a non-extradition beach, collecting 20%.
Everyone else, however, will still be stuck here.
Full must read Feroli note.
Rental income and "squatter's rent"
Rental income has been soaring. In yesterday’s February personal income report, rental income of persons increased 2.6% on the month to $326 billion. After bottoming at $120 billion in February of 2007, rental income has nearly tripled in the subsequent four years. Even though rental income accounts for less than 3% of personal income, over the past four years it has accounted for over 16% of personal income growth. This rise has little to do with landlords getting more from their tenants. In fact, it has very little to do with what speakers of the English language would normally consider "rent." Instead, it mostly reflects mortgage payments of the household sector coming down, in part because of the aggregate decline in household mortgage debt due to net cancellation of mortgages associated with foreclosures. In this sense, some of this rise in aggregate rental income is related to what some have called "squatter's rent" -- the monetary benefit to the household sector from not staying current on their mortgage obligations -- though most squatter's rent is outside the official data. With delinquencies coming down, rental income should see slower growth in the future.
(Warning: the rest of this note gets a little wonky) About a quarter of rental income is what one would normally consider rent -- the income received by one person from another person to use a dwelling. The other three-quarters, however, is "owner-occupied rent." In one of the odder quirks of national income accounting, the BEA assumes that homeowners are essentially landlords who rent to themselves. (This adjustment insures that the measured output of housing services is invariant as to whether dwellings are owned or rented). Rental income for these owner-occupiers is this gross imputed rent less the costs associated with homeownership, and the largest such cost is mortgage interest. Gross rent has been gradually trending upward, but cannot account for the surge in rental income. Instead, mortgage payments have fallen off relative to trend, boosting measured rental income.
Mortgage interest payments decline when either the interest rate or the debt outstanding declines. In practice, most of the reduction in mortgage interest has been due to lower mortgage balances, and much of the reduction in mortgage balances has been delinquent loans having been foreclosed upon. In the official data, mortgage obligations are only removed from homeowners' balance sheet when the debt has been charged-off. At that point, of course, many homeowners would have been kicked out of their former residence. Generally, whoever buys the foreclosed-upon property takes on less mortgage debt, mostly because foreclosed properties tend to trade for significantly less than properties that have not been in distress. The lower debt and mortgage payments results in higher imputed rental income. The net reduction in mortgage debt due to foreclosures over the past few years could be around a half trillion dollars. This implies about a $30 billion decline in mortgage payments -- which is about $100 billion below the previous trend in mortgage payments -- and a corresponding boost to rental income.
When folks talk about "squatter's rent" they generally refer to the funds that delinquent mortgagers save by not staying current on their obligations: funds that, to the extent they are available, could be used for other purposes such as consumer spending. This phenomenon will not be captured in the official rental income data because mortgage debt is not expunged from the household balance sheet until it is charged-off by the mortgagee. (This is in keeping with international statistical conventions.) For some purposes, however, it may be helpful to look at households on a cash-flow basis, in which case disposable income would include the interest expense saved through delinquent (but not foreclosed-upon) mortgages. This measure of squatter's rent increased to over a $60 billion annual rate early last year, but with delinquencies declining that has come down recently to just over $50 billion.