NYT: Biggest Defaulters on Mortgages Are the Rich
LOS ALTOS, Calif. — No need for tears, but the well-off are losing their master suites and saying goodbye to their wine cellars.
The housing bust that began among the working class in remote subdivisions and quickly progressed to the suburban middle class is striking the upper class in privileged enclaves like this one in Silicon Valley.
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.
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Lenders are fearful that many of the 11 million or so homeowners who owe more than their house is worth will walk away from them, especially if the real estate market begins to weaken again. The so-called strategic defaults have become a matter of intense debate in recent months.
Moral hazard -- the risk that parties to a financial transaction won't honor their obligations -- played a major role in the Wall Street crash in the fall of 2008. Now it poses a problem in the jumbo mortgage market: mortgages of $500K on up. Since a lot of these highly leveraged, high end properties lie within the upscale gated communities of Privatopia, they pose a risk for their HOAs as well since these "walk away" homeowners will have no qualms about also walking away from their HOA assessments.
3 comments:
> homeowners who owe more than their house is worth
How is that possible, with all that HOAs have done to preserve property values?!
Moral hazard might be better defined as the possibility that a party insulated from risk might behave differently than the party would behave if fully exposed to the risk.
However, isn't this the kettle calling the pot black? I mean, who is whining - the banks that engaged in a particular course of conduct because the federal government would not allow them to fail?
Who got stuck with the costs - the homeowners whose homes are worth a fraction of what they were while the homeowner is expected to continue paying on the higher mortgage AND bail out the banks with tax money.
I'm not sure where the moral hazard is for the homeowner. Perhaps in states where there is no deficiency - maybe then one could say such states create an moral hazard environment for the homeowners. But then the same banks knew that when they loaned the money in the first place.
> Lenders are fearful that many of the 11 million or so homeowners who owe more than their house
> is worth will walk away from them, especially if the real estate market begins to weaken again.
> The so-called strategic defaults have become a matter of intense debate in recent months.
When the cost of business becomes too high, corporations lay off employees, close plants, and/or re-locate overseas.
Why shouldn't home owners follow the same strategy, and cut their losses when the costs of home ownership become too high? It's an entirely rational business decision.
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