How Mortgage Defaults Will Actually Help the Economy

The increasing willingness to abandon home ownership in favor of renting could, in a counterintuitive way, be an important step in the economic recovery, some analysts say.

The U.S. home ownership rate has declined to 67.6 percent as of September, down from its peak of 69.2 percent in 2004. Much of the reason for this decline is the number of foreclosures.

Deutsche Bank Securities expects 21 million U.S. households to be underwater by the end of 2010. If 20 percent of these homeowners default, loses to banks and investors could exceed $400 billion.

While these losses are definitely bad for banks, relief from paying a mortgage makes more money available—an estimated $5 billion a month—for consumers to purchase other things.

"It's a stealth stimulus," says Christopher Thornberg of Beacon Economics, a consulting firm specializing in real estate. "The quicker these people shed their debts, the faster the economy is going to heal and move forward again."

Source: The Wall Street Journal, Mark Whitehouse (12/10/2009)