Why defaults might be masking an even worse economy

Reader presents an interesting theory:

If the median homeowner who goes into default is $20,000 behind on payments, and there are roughly 40,000 defaults ... that's $800 million in money that was owed on mortgages and wasn't paid to lenders. That is $800 million that consumers SAVED by not paying their mortgages -- by living, essentially, rent-free. They probably had some portion of the money, but not enough to cover the entire payment. Some portion of that $800 million was freed up to be spent on other things -- food, clothing, transportation, whatever. That ability to spend is temporary -- you can't live forever without paying for your housing, whether in rent or in mortgage payments. So the $800 million, or some large portion of it, is effectively a one-time subsidy/stimulus for the Southern California economy, at the expense of banks. It's money that can be spent on groceries, or car payments, or credit cards, or health care. It's money that can be circulated through the economy. And because it's non-recurring, it's money that makes the economy look better than its underlying fundamentals really are. In other words, the economy is probably worse than it looks ... particularly in these low-cost, low-income areas. Scary thought.

Keep in mind that Socal's economy runs close to $900 billion, give or take, so even if the theory holds true (and I'm guessing it does) the ramifications of this short-term stimulus might not be quite as ominous as it sounds. Well, let's hope so.

Earlier: Trying to make sense of Socal's foreclosure scene