Borrowers Facing Foreclosure Boosting Consumer Spending

June 11, 2008 No Comments »

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Underwater borrowers who have stopped making mortgage payments are actually padding the consumer spending numbers, according to JP Morgan analyst Tom Lee, Reuters reported today.

Lee noted that despite the fact that these types of borrowers are likely stretched beyond their means, not having to make a monthly mortgage payment actually equates to a greater amount of disposable income.

“In a perverse way, people who are leaving homes are actually helping the consumer spending picture,” Lee told the Reuters Investment Outlook Summit on New York.

“If you were under water in a mortgage, and then you walked away, you literally stop paying the mortgage so your actual disposable income goes up,” he said.

He cited same-store sales data in May, which jumped 2.5 percent, or more than twice the average increase projected by economists.

Sadly, those who relied upon home appreciation to fuel their high-cost habits may be finding they can free up their spending power by walking away, and thus, can continue to satisfy their boom time consumption needs.

The problem, however, is that those falling further into debt without a home equity line of credit lifeline will find themselves in a much more severe position, especially when their credit scores take a dive from a foreclosure hit, limiting and/or raising the cost of their future credit use.

(photo: cosmickitty)

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