I have written a number blog posts about strategic defaulters where owners choose to not pay their mortgage even though they can afford to pay. When the real estate market began its downward slide it mostly comprised of sub-prime mortgages. Analysts warned of "A rated" and prime mortgage defaults were looming on the horizon. The Emerald Coast and Scenic 30A has an abundance of $1mil+ properties and appears that well-healed or wealthy homeowners are defaulting on their mortgages at a higher rate than other segments.
LOS ALTOS, Calif. – July 9, 2010 – Wealthy homeowners are defaulting on their mortgages at a higher rate than other segments of the population, according to the research firm CoreLogic.
More than one in seven borrowers with home loans of $1 million or more are seriously delinquent, according to research, compared to just one in 12 with mortgages for less than $1 million. The bottom line is the rich have stopped paying the mortgage on their residential, second home and investment properties at a rate that greatly exceeds the rest of the population.
According to the New York Times, CoreLogic economists speculate that well-off borrowers are making calculated moves to shed poorly performing real estate, just as they would any other soured investment. “The rich are different: they are more ruthless,” said Sam Khater, CoreLogic’s senior economist. Though hard to prove, the CoreLogic data suggest that the rich do not appear to be particularly worried about being sued by their lender or frozen out of future loans by Fannie Mae, possible consequences of default.
The delinquency rate on investment homes where the original mortgage was more than $1 million is now 23 percent. For cheaper investment homes, it is about 10 percent.
With second homes, the delinquency rate for both types of owners was rising in concert until the stock market crashed in September 2008. That sent the percentage of troubled million-dollar loans spiraling up much faster than the smaller loans.
“Those with high net worth have other resources to lean on if they get in trouble,” said Khater. “If they’re going delinquent faster than anyone else, that tells me they are doing so willingly.”
The rich and successful often come naturally to this sort of attitude, said Brent T. White, a law professor at the University of Arizona, who studied strategic defaults.
“They may be less susceptible to the shame and fear-mongering used by the government and the mortgage banking industry to keep underwater homeowners from acting in their financial best interest,” White said.
I've heard about his before, but always thought the bank had the ablitiy to collect on the remaining debt once the asset was sold. Perhaps I'm wrong. So for those that didn't have any assets, and were upside down on their mortgages, it made no sense for the bank to pursue; you can't squeeze blood from a stone. But for a rich person that had other assets, why wouldn't the bank just go after those assets like any other debt. Am I missing something?
Erika -
You have a great point on strategic defaults. The lenders do have the right to pursue deficiencies. Strategic defaults are called “strategic” as the defaulter strategically re-aligns their assets and income stream to give the illusion to the lender that their financial situation is catastrophic. If you are a independent business owner or can control your debts and income during the short sale process, one can make their financial outlook very grim to the lenders when in reality it is not.
Obviously not the most ethical path to take…
Craig Baranowski