Whether financing residences, second homes or investment properties, homeowners with million-dollar mortgages are defaulting on their loans at a rate greatly exceeding that of the rest of society. One in seven million-dollar mortgages (14%) are in serious delinquency; by comparison, only one in 12 for mortgages below the million dollar mark (8.3%) are seriously delinquent.
For homes held for investment, mortgages in excess of a million dollars have a delinquency rate of 23%, in comparison to a 10% delinquency rate for investment homes with lower-priced mortgages. The delinquency rates of million-dollar properties purchased as a second home rose in tandem with lower-tier second homes until the stock market crash in September 2008. Since then, million-dollar mortgage holders began defaulting at a much faster rate than other second homeowners.
In Los Altos, CA, where the median home price is $1.5 million, the number of defaults in the first half of the year came close to 16%, up from 15% in the same period of 2009 and 4% in 2008.
Eight NODs were recorded for million dollar properties in the East Bay suburb of Orinda, where the median home price is $882,000. This is up from five during the same period last year. San Francisco’s Nob Hill had four NODs, up from one.
first tuesday take: The wealthy buy property for the same reasons people of lesser means buy property: they believe their income will increase and real estate values will rise. Now that their homes are underwater (just like all other California real estate with a 2005 loan to value (LTV) ratio exceeding 50%) many owners are choosing to strategically default. A default is a homeowner’s exercise of the “put option” set out as a contract provision in all trust deeds. It allows the homeowner, by a default, to force the lender to take the property in full compensation for the remaining unpaid balance on purchase-assist home loans — as they are non-recourse loans.
Considering the high net worth of the majority of million-dollar homeowners, most are probably walking away by choice – it no longer pays to retain ownership to property that has a negative equity with no chance it will go positive within the decade. Also, the wealthy are far less susceptible to the government and lender-induced theocratic stigma associated with strategic default.
Especially when it comes to investment or second homes, the wealthy seem to have no qualms about walking away, and these are recourse loans. The less wealthy homeowners would do well to adopt this more rational mental discipline.
Re: “Biggest Defaulters on Mortgages Are the Rich” from the New York Times
Re: “DQNews – California home sale price median by county and city” from DataQuick