One has to be cautious in invoking cultural stereotypes. However, when the subject of defaults or mortgage mods comes up here and in other forums, almost inevitably some readers will start off on a bit of a rant: “I pay my mortgage/rent, why should these people get a break?” And these discussions often take a personal tone, as in they resent neighbors getting a break, or they claim to know someone who went hog wild spending on their home ATM and have now had their comeuppance (having never met anyone like that, I cannot verify if this pattern is anywhere near as prevalent as it is alleged to be). The problem is that their willingness to see their neighbors suffer, when it really is their neighbors, is cutting off their nose to spite their face, since foreclosures, particularly when homes sit vacant, drag all property values nearby down.
The perverse part is a New York Times article today indicates that the affluent are far less burdened by consideration of morality in their financial decisions, including their mortgages: “’The rich are different: they are more ruthless,’ said Sam Khater, CoreLogic’s senior economist.”
Default rates are highest among plus million dollar properties. The problem with the NYT account is that it discussion of defaults at the high end mixes apples and oranges. Defaults on second homes are mingled with defaults on primary residences. Second homes are the first to go when financial stresses become acute. And because a lot of borrowers claimed that vacation digs were primary residences to borrow on better terms, there isn’t an easy and obvious way to construct clean data sets (as in defaults on primary residences by income level or home price v. those on second homes).
But another factor is at work during the cycle is that the rich both borrowed more than in past cycles and took on more risk to boot. From a March 2007 article by Robert Frank:
Today’s rich have expanded their fortunes and lifestyles in large part by turning to highly risky investments. In the search for ever-higher returns, they’ve doubled their holdings in hedge funds and other “alternative investments,” and poured their money into stocks while draining down cash. At the same time, they’ve dramatically increased their debt.
“The wealthy have taken on much more risk than they had 10 or 20 years ago,” says Steve Henningsen, a partner at Wealth Conservancy, a Colorado wealth-management firm. “They’re probably more exposed to more risk than the average investor because they’ve been the ones buying all these fancy debt products, hedge funds and other investments that their advisers told them to buy.”….
Today’s wealthy also rely more on borrowed money. The nation’s richest 5% held $1.67 trillion in debt, up fourfold from 1989. A large part of that is mortgage debt, but wealth experts say some of the funds have also gone into risky and higher-yielding investments, such as hedge funds. Since hedge-funds themselves are highly leveraged, the double-borrowing could make for a rapid fall should hedge funds start to implode.
While the rich employ sophisticated advisers, sometimes they don’t steer their clients to the safest investments. “A lot of the wealthy have leveraged up their house to put money into hedge funds or do the Japan carry-trade because they could make more than their costs of borrowing,” Mr. Henningsen said. “That desire for yield could come back to haunt them.”
Looks like it did. From the New York Times:
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…
“I’ve never seen the wealthy hit like this before,” Mr. [Ken] Lowman [a real estate agent in Las Vegas] said. “They made their plans based on the best of all possible scenarios — that their incomes would continue to grow, that real estate would never drop. Not many had a plan B.”….
The CoreLogic data suggest that the rich do not seem to have concerns about the civic good uppermost in their mind, especially when it comes to investment and second homes. Nor do they appear to be particularly worried about being sued by their lender or frozen out of future loans by Fannie Mae, possible consequences of default….
“Those with high net worth have other resources to lean on if they get in trouble,” said Mr. Khater, the analyst. “If they’re going delinquent faster than anyone else, that tells me they are doing so willingly.
Yves here. Another message here is that high income borrowers aren’t taking the Freddie/Fannie/bank bluster about strategic defaults seriously. Recall that the latest threat was that they would pursue deficiency judgments, as in sue borrowers who defaulted where the proceeds from the sale of the home, net of expenses, did not cover the mortgage debt. Now in some states that is not permitted (purchase money mortgages in many states are non-recourse, but refis never are). But independent of that, it is expensive to pursue defaulting borrowers, and if the borrower really is broke (say he had medical emergency, a business failure, or a costly divorce) litigation is just a costly wild goose chase. The most obvious group to pursue, nevertheless, would be defaulted owners of big ticket homes in affluent areas. They clearly regard the odds of legal action as low.