The annual number of mortgage defaults in the prime housing strata rose from 1% to 4% as job losses from the down economy put stress on so-called “safe”-borrower homeowners. Roughly 56% of the 3.3 million mortgagees in California fall into this prime housing market — they have jobs and good credit. However, as the economy slips and employers (notably the State of California) continue to cut pay and benefits, more and more of these safe borrowers are finding themselves unable to make their payments and slip under water on their mortgages.
first tuesday take: This data comes is no surprise to brokers and agents who have been active in the California economy over the last several years. As always, homeowners must have a steady income (i.e., a job) in order to continue owning or renting their homes. When economic conditions put enough stress on their income stream, borrowers (and tenants) will begin to default. The relative affluence of these prime borrowers has temporarily buffered the effects of the economy, but affluence or great credit scores alone do not shield borrowers when they are faced with a shortage of income and a negative equity situation.
While there are differences between the circumstances leading to a “safe” borrower’s default and a sub-prime borrower’s default, both types of borrowers are protected from any liability by California’s anti-deficiency statute. Regardless of their circumstances, a rational borrower with a negative equity in this market will exercise his “put option” in the trust deed to quit paying, walk away, and force the lender to take the property in exchange of canceling the entire debt.
Re: “Mortgage defaults spread as even ‘safe’ borrowers falter” from Sacramento Bee