Outside the Beltway

Ruthless Rich Dumping Mortgages

Those with million dollar plus mortgages are defaulting at almost twice the rate on those smaller loans. Are the rich more ruthless?

James Joyner
27

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The NYT, which has been banging the drum on the Strategic Mortgage Default story for a while now, reports that the rich are at the forefront of the phenomenon.

Whether it is their residence, a second home or a house bought as an investment, the rich have stopped paying the mortgage at a rate that greatly exceeds the rest of the population.  More than one in seven homeowners with loans in excess of a million dollars are seriously delinquent, according to data compiled for The New York Times by the real estate analytics firm CoreLogic.

By contrast, homeowners with less lavish housing are much more likely to keep writing checks to their lender. About one in 12 mortgages below the million-dollar mark is delinquent.

Though it is hard to prove, the CoreLogic data suggest that many of the well-to-do are purposely dumping their financially draining properties, just as they would any sour investment. “The rich are different: they are more ruthless,” said Sam Khater, CoreLogic’s senior economist.

More probable:  The rich are more strategic.  Just as importantly, they’re more able to accept the consequences of acting strategically.

First, the wealthy are more likely to think of their home — and certainly, their second and third home — as an investment whereas those further down the economic ladder simply think of it as a place to live.

Second, the housing bubble almost certainly hit higher end homes — and second homes — the hardest.   If you’re $100,000 under water on your house, it probably makes good sense to ride out the storm rather than accept the pain of default.   But if you’re a million dollars underwater, the incentives for abandoning ship are much greater.

Third, the wealthy are more able to walk away from a mortgage and still have a place to live.  If you’ve already got two houses, though, you can just move into the other one!  For that matter, if you’re wealthy, you’re much more likely to be able to get a second loan on a comparable but cheaper house — levering the housing market’s crash — and then dump the first one.    Those options tend not to be available to people making average incomes.

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27 responses to “Ruthless Rich Dumping Mortgages”

  1. sam Avatar
    sam

    Let me quote John Cole here:

    “I can’t wait to hear how Republicans try to pin this shit on black people and Fannie Mae and Barney Frank.”

  2. Dantheman Avatar
    Dantheman

    Let me also predict that this piece of data will cause a significant change in the attitudes of many towards those who walk away from an underwater mortgage (McMegan, I’m looking at you).

  3. john personna Avatar
    john personna

    There are a raft of ideas associated with this post. But to pick one, they really shouldn’t have used $1M homes as their dividing line. That wasn’t really “rich” territory here in SoCal. Whole neighborhoods moved to $1M medians (even sub-thousand square foot postwar tract homes). The people who bought them were filtered by their idea of what was going to happen next. Sure, they thought, this house sold for $120K in 1985, but it’s $1M now, and could be $2M in my lifetime! When that blew up, those sorts of folks were in desperate straights.

    So, I’d say they are looking at largely “bubbled” homes.

    For what the “rich” are doing, I’m afraid you are going to have to look at homes $30M plus. That’s just the world today.

  4. john personna Avatar
    john personna

    Let me also predict that this piece of data will cause a significant change in the attitudes of many towards those who walk away from an underwater mortgage (McMegan, I’m looking at you).

    Well, to the extent that these were “jumbo” loans, not subsidized by Freddie or Fannie, and not mandated by the Community Redevelopment Act, the news probably should change some minds. If Barney Frank’s fingerprints can’t be found on these loans, some should pause to rethink what really happened in the boom, and bust.

  5. john personna Avatar
    john personna

    As another aspect there is the whole phenomenon of “investor owned” homes. That probably shouldn’t happen at all, in a normal market. Rental rates of houses shouldn’t cover mortgages. Appreciation in a normal market shouldn’t make up for negative cash flow. This is why investors traditionally bought apartment buildings or condos, with their more advantageous rent to cost ratios.

    I don’t know what’s going to happen to the latest round of investor inflows to single-family housing, but I suspect it is dumb money.

  6. ~trumwill Avatar
    ~trumwill

    Let me also predict that this piece of data will cause a significant change in the attitudes of many towards those who walk away from an underwater mortgage (McMegan, I’m looking at you).

    McMegan’s argument was definitionally aimed at those that could pay their mortgages. She said, over and over again, that those that couldn’t pay their mortgages should be allowed to walk away. In fact, she said that part of the reason that she felt the way she does about the first group is that it could have a negative impact on the second. Rather than expecting any shift on her views, I rather expect her to be saying something along the lines of “I told you so” because so many people seemed to equate her opposition to strategic walkaways with an opposition to all defaulting.

  7. Brummagem Joe Avatar
    Brummagem Joe

    Not more ruthless, more financially astute perhaps. As an aside it’s interesting to see how myths of the Acorn and Barney Frank variety persist. Sub prime and alt A mortgages purchased in the secondary market were never more than around 20% of Fannie and Freddie’s portfolio. The vast majority of repackaged sub prime was purchased by the private sector. In fac F/F’s share of the entire secondary mortgage market was only around 20-25% until mid 2007 when the housing bubble was starting to implode and the private market dried up as it always does when there’s a market collapse. The administration who were desperate to avoid a market collapse on a Republican president’s watch then pushed F/F to increase their share and the oped page of the WSJ which had complained about F/F 20% SOM for years suddenly went silent.

  8. john personna Avatar
    john personna

    The administration who were desperate to avoid a market collapse on a Republican president’s watch then pushed F/F to increase their share and the oped page of the WSJ which had complained about F/F 20% SOM for years suddenly went silent.

    True.

  9. Rebecca Burlingame Avatar
    Rebecca Burlingame

    What stands out for me is that those with homes actually worth money in the marketplace are the only ones who can afford the legal bills that make mobility possible. This is wrong, and needs to be changed.

  10. Dantheman Avatar
    Dantheman

    Trumwill,

    “McMegan’s argument was definitionally aimed at those that could pay their mortgages. She said, over and over again, that those that couldn’t pay their mortgages should be allowed to walk away. In fact, she said that part of the reason that she felt the way she does about the first group is that it could have a negative impact on the second. Rather than expecting any shift on her views, I rather expect her to be saying something along the lines of “I told you so” because so many people seemed to equate her opposition to strategic walkaways with an opposition to all defaulting.”

    I will disagree, not with your statement of her argument, but with how she responds to this (if she does).

  11. Trumwill Avatar
    Trumwill

    I will disagree, not with your statement of her argument, but with how she responds to this (if she does).

    She seems to be less active as of late, so she may not say anything. She is fond of saying “I told you so,” though, so I’ll stick by my prediction if she says anything it will be that. Another way to look at it: yes the defaulters are rich, but the banks are in a sense much, much richer. So even if she is inclined to always side with the rich, she can do so without altering her position.

  12. john personna Avatar
    john personna

    Zillow Blog had notes on Lady Gaga renting for $25,000/Month and Tracy Morgan renting for $14,900/Month. That’s rich. A million dollar mortgage is more likely an upper middle class person, over-extended.

    Perhaps they were foolish enough to think themselves rich.

  13. Trumwill Avatar
    Trumwill

    Personna, I think it depends on what part of the country you live. Where I was raised (the urban/suburban south) if you spend $1m on a house, you’re either loaded or supremely reckless. On the other hand, my most recent former area of residence (urban/suburban Pacific northwest) made buying a $1m house pretty easy.

    During my 2-hour morning commute, I used to stop in this little town with so-so houses that felt kinda like where the working class lived where I grew up. The houses there cost half a million dollars. About 1/3 of the neighborhood-of-reference in the south.

  14. john personna Avatar
    john personna

    Right, but in part we are talking about how we feel toward people with $1M mortgages, rather than $1M houses. And what constitutes, rich.

    I actually knew a couple billionaires are one point in my life. When I heard that one was renting my first thought was “he could throw small change for that house.” My second thought was “oh, I should stop thinking that way.” Somewhere on the road to “rich” a house stops being a meaningful investment. It becomes a minor cost.

    I’d say that anyone with a mortgage is middle class. High-middle perhaps, but middle nonetheless.

  15. Brummagem Joe Avatar
    Brummagem Joe

    john personna says:

    “I’d say that anyone with a mortgage is middle class. High-middle perhaps, but middle nonetheless.”

    Not really. I’d say anyone with a net worth greater 10 million is rich even if they are not Trump but they are quite likely to have a mortgage and they’d be crazy not to when when money is so cheap. Imagine such a person. They might live in a 3 million house by the shore in CT or on a quiet road in west LA. Three million buys you quite a nice place in either of these locations but certainly not Versailles. And anyone who is financially sophisticated is going to have a jumbo on such a property.

  16. MarkedMan Avatar
    MarkedMan

    The median cost of homes of the US in the peak year of 2007 was just under a quarter million dollars (US Census Data). I couldn’t find the spread, but I would be very, very surprised if even 5% of the houses in the US exceeded $1M.

    Of course, this whole debate revolves around the definition of “rich”. Having seen this discussion any number of times over the past half century I can predict there will be no agreement. Fortunately, we can define “top 5%” or “top 1%”, so I suggest we just stick to that.

    As for the $30M house, I would be willing to bet a bottle of scotch to a bottle of beer that it falls into the top tenth of a percent category.

  17. john personna Avatar
    john personna

    2 things. First, I did say that I thought the bar was too low. Move it up to $3-4M mortgages and I might agree with you. Second, I’ve been seeing things like this:

    Yes, it takes more than $10 million to be seen as rich these days. It takes more like $25 million. Not only is that the minimum for the red-carpet treatment at a growing number of banks, it is also, in the view of many experts, the sum needed for a truly cushy retirement, one free of financial worry.

    …

    This is entry-level rich, consisting of people with net worths of $25 million to $50 million (counting primary residences). The number of households in this group increased by a factor of four from 1998 through 2006, to 125,000, according to research by Northern Trust, a leading private bank. It bases its estimates on an analysis of net-worth surveys by the Federal Reserve.

    http://finance.yahoo.com/focus-retirement/article/104641/

  18. jwest Avatar
    jwest

    Here’s an alternative scenario that may explain why million dollar mortgages are failing at a high rate.

    Instead of being a ruthless decision to walk away from a bad investment by the idle rich, I suspect most defaults in this range are caused by the lack of credit for small business owners. Most small businesses use the owner’s assets as the basis for operating capital. In this recession, business has slowed at the same time as the owner’s house has decreased in value. Banks have reduced or eliminated open credit lines due to the (now) non-existent equity. Also, credit card lines that at one time had $100,000 limits have been slashed back to a fraction of that figure.

    New loans are unavailable because the lower credit limits on existing notes have made the amount the owner previously owed a higher percentage of their overall credit, thus lowering their credit score.

    Small business owners’ first priority is to keep the business operating. As many know, employees are paid first, necessary suppliers and operational expenses second, then on down the line to finally the owner’s salary, from which the mortgage is paid. In times like these, there is often not enough left over to make that payment.

    Taking this in mind, the vast majority of those higher-end mortgages that are falling into default are the result of good people trying to keep their businesses running until times get better.

  19. john personna Avatar
    john personna

    I agree that small business climate is a huge part of it. Not just credit, but profitability in the consumer contraction.

    FWIW, this link is interesting for the explosion it shows in $1M home sales 2000 to 2005:

    http://moneycentral.msn.com/content/banking/homebuyingguide/p143830.asp

  20. Brummagem Joe Avatar
    Brummagem Joe

    john personna says:
    Friday, July 9, 2010 at 16:12

    Whatever Bessemer Trust thinks most people including your local bank would consider you rich with a Net above 10 million since this would probably put you in the in the top 0.25% of the country. It’s only “not rich” by an abstract comparison with the very rich and super rich who are catered for by institutions like Bessemer or Northern. Measuring wealth relative to maybe 200,000 people with a net worth of over 25 million rather than 200 million people with a net worth of under 10 million is absurd.

  21. john personna Avatar
    john personna

    I think it’s interesting because people in the middle ground tend to get in trouble by thinking they are somewhere else. There are a lot of people who have a million for a year or two, and then not, because they didn’t get the difference. That isn’t limited to lottery winners.

    I remember a guy (doing pretty well riding an IPO) who was asking around for the $20K he needed to make his $1M mortgage application work. It boggled my mind that he thought he was workin’ the million while sweating the 20K.

    He might even be part of our statistic.

  22. john personna Avatar
    john personna

    To recap, my position is that the $1M mortgage boundary was probably populated by upper-middle class buyers, caught in the full force of the housing bubble.

    If you move a ways up from there, sure, you might find some genuinely rich who got themselves in trouble. There is always Mr. McAffee as a famous example.

    http://www.cnbc.com/id/34227568/John_McAfee_s_Painful_Deal_in_the_Desert

  23. steve Avatar
    steve

    I predict this will not be commented upon by those leaning to the right for the most part. They will try to ignore it.

    Steve

  24. tom p Avatar
    tom p

    My heart bleeds for those who can write down the mortgages on their 2nd homes (not to mention their 3rd, or their 4th…)

    However, those DEADBEAT MFer’s trying to skip out on the mortgages of their primary residences…

    String ’em up.

  25. Brummagem Joe Avatar
    Brummagem Joe

    john personna says:
    Friday, July 9, 2010 at 17:03
    “To recap, my position is that the $1M mortgage boundary was probably populated by upper-middle class buyers, caught in the full force of the housing bubble.”

    I don’t disagree with this but such people don’t have net worths of 10 million plus. With a few exceptions the sort of people we’re talking about here are guys/gals who got some big paychecks in finance or technology (250k to 1million) and thought it would last forever. They took on huge mortgages with a low downpayment because they had little capital but a sufficiently large income stream to cover them and purchased nice but fairly modest houses with large price tags ($1-2.5 million) in Palo Alto, Westwood or Chappaqua. One or both of them got laid off and there was no way they could cover the $120,000 a year mortgage payment plus taxes and insurance that would come with say a $1.5 million jumbo mortgage.

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