Opinion

Felix Salmon

Jingle mail datapoint of the day

By Felix Salmon
July 9, 2010

David Streitfeld has got his hands on new data from CoreLogic. It’s hard to find actual numbers in the article, or any kind of link to the data, so here’s the accompanying chart:

09rich_graphic-popup.gif

You can see how this might have blindsided lenders: the richest borrowers, who historically had the lowest default rates, now have the highest.

“The rich are different: they are more ruthless,” said Sam Khater, CoreLogic’s senior economist.

And, they’re disproportionately likely to live in California, or other non-recourse states where you can default on your seven-figure mortgage without any realistic worry that the bank will come after your other assets. That said, there’s a good chance that many of these delinquencies are forced rather than strategic.

Streitfeld’s piece is bylined Los Altos, California, a town where the median home is $1.5 million. In such towns, you don’t need to be a millionaire to find yourself in a multi-million-dollar home. Let’s say you’re a tech geek who found yourself with $200,000 for a downpayment on a house over the course of the dot-com bubble. So you buy a million-dollar home, and then start up a series of companies. You need to live, of course, and you can’t afford to pay yourself a salary, so you do two or three cash-out refinancings on a home which by 2007 was worth $2.5 million. Before you know it, you’ve got a $2 million mortgage, no way of paying it, and a home which is worth significantly less than the mortgage. Realistically, you have no choice but to default.

Even after accounting for your initial $200,000 downpayment and a series of mortgage-interest payments along the way, you still took out of the house much more money than you put in: the cost of living there over the past 10 years has probably been negative to the tune of well over half a million dollars. Essentially, the house has paid you $50,000 a year — money which is easy to spend, and is now long gone.

In any event, these were jumbo mortgages when they were taken out, and they’re jumbo mortgages now — none of this has anything to do with Fannie or Freddie, except insofar as the homeowning majority of the population might yet wake up and, emulating the rich, default on their underwater homes. And so the GSEs are desperately, and unconvincingly, trying to persuade them not to do so:

Knowing the costs and factoring in the time horizon, some borrowers have made the calculation that it is better to purposely default on the mortgage. While I understand how that might well be a good decision for certain borrowers, that doesn’t make it good social policy. That’s because strategic defaults affect many other families and communities. And these costs – or as they are known in economic jargon, externalities – are not factored into the individual borrower’s calculations.

Well, sure, it’s not good social policy to strategically default. Fine. That doesn’t stop the rich, and it shouldn’t stop the rest of us either. I think it’s pretty clear which direction we’re headed in, and moralistic exhortations aren’t going to turn the tide.

Comments
9 comments so far | RSS Comments RSS

Perhaps this will precipitate an adjustment in prices to more reasonable levels as it did in the outlying neighborhood. To date the most affluent bay area neighborhoods haven’t fallen much.

Posted by grumblecakes | Report as abusive
 

I’m quite surprised that so much of the blame went to sub-prime when non-sub-prime was obviously a much bigger problem.

Posted by pbreit | Report as abusive
 
 

Keep in mind that larger houses trade less frequently, have less buyers, and are typically have less comparables or twins. As a result, the large-home owner has less data to assess the current home’s value (i.e. mark-to-market). In addition, some of the higher-priced homes are purchased without leverage, for cash, further reducing the incidence of forced sales.

All of this means that higher-priced homes tend to lag overall home price indicators, like Case-Shiller, both on the upside and the downside. That is why very high-end neigborhoods haven’t dropped in line with other neighborhoods.

The increase in mortgage-defaults seems to indicate that the owner’s mark-to-market of these higher-priced homes is starting to sink in. If so, expect higher defaults and higher price drops for larger homes relative to other parts of the housing and mortgage market.

Posted by AABender1 | Report as abusive
 

Maybe only the rich should have been allowed to buy those homes … What ever happened to needing credit before owning a home? Did the rich have their own subprime mortgages?

“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,” Mr. White said.

You know, there really is a place for shame. Money buys false pride and seems to strip one of moral obligations. To skip out rather then negotiate is still skipping out… whatever name you wish to call it. While it may be in their financial best interest I hope defaulting at least affects their credit as well so they don’t just skip and get another mortgage. Being Felix says some states can’t even touch your assets, that’s alarming.

Besides a lot of the rich are used to walking away from bad investments, so this is one more excuse? Already 23% are walking away? Well Dahling, then there is no shame! The Joneses are doing it! Look out for an exodus … and once people get a taste for skipping out, who knows what they will think of next.. a ponzi scheme perhaps? There is no tongue in cheek in that statement.

If the lenders were stupid enough to give second mortgages to those who could barely afford the first, let them suffer, but the economy and the neighbourhood is going to suffer too and degrade, quickly and badly! I surely hope the bank regulations have come up with tighter eligibility so those who do default in future will be legitimately unable to pay and then those who do NOT default won’t suffer.

Oddly enough most of us who are not “rich” are wise enough to buy a home we know we can afford so we don’t have to skip out of a contract. Isn’t it great to know our wisdom and foresight,frugality and morals make us the patsy for those who have none? These pseudo “rich” folk are more like grifters in my view.

We were discussing the trickle down effect yesterday and this is the only trickle down economics I have ever seen. Those who have more taking another step on the backs of those with less. (my apologies to the few who actually had medical costs or other true reasons to have to make this decision, but I am willing to bet those same people at least tried renegotiating first)

I know, maybe we should make a house a home instead of giant personal ATM machine. (what a ridiculous old fashioned thing to say I know…)

Posted by hsvkitty | Report as abusive
 

I would think that crushing their credit rating by an appropriate amount would have a greater deterrent effect on the wealthy. Or does having a foreclosure not make a difference any more since “everyone” (ie <5% of the US population) is doing it?

Posted by HotPanini | Report as abusive
 

Fannie Mae has promised that strategic defaults will make a buyer ineligible for FNMA financing (pretty much the only game out there right now) for seven years.

I don’t think they were involved with these million-dollar mortgages, though. Default will still slaughter a credit rating for a few years, but that is less important to the wealthy who are less dependent on borrowing.

Posted by TFF | Report as abusive
 

The 14 months mortgage free living after default, in luxury, means those who could have made payment accumulate more wealth.

It also means the mortgage payments saved are 1 or 2 years rent payments (or more depending on where they choose to rent) in which time they can accumulate more wealth and quickly raise the credit rating back up. Not exactly an austere outcome for someone who stiffs a contract.

Posted by hsvkitty | Report as abusive
 

It is my understanding that an initial purchase mortgage in California is non-recourse, but that once you refinance it that it is no longer non-recourse. Unless I’m mistaken, in the story that you tell, the bank could pursue a deficiency judgment, though of course it’s possible it wouldn’t be worth doing so if the failed entrepreneur simply has nothing else of value to attach or what have you.

Posted by dWj | Report as abusive
 

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