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The Wealthy Are Also Defaulting on Their Mortgages

There are many who believe that mortgage delinquencies in their region are concentrated in the middle-to-lower income neighborhoods. Actually, the research shows the number of delinquencies in the higher priced sections are currently exceeding the percentages in less affluent areas.

The most recent Mortgage Monitor issued by LPS reports that the largest increase in both delinquencies and foreclosures, as compared to 2008 levels, are in ‘jumbo’ mortgages. A jumbo mortgage, according to Wikipedia, is:

“a mortgage loan in an amount above conventional conforming loan limits…the limit is $417,000 for most of the US.”

In some parts of the country, that limit can be over $625,000. This type of loan finances the higher priced properties in a marketplace.

According to LPS, the percentage increase in jumbo mortgages is as follows:

  • Delinquencies: increased 281%
  • Foreclosures: increased 589%

Again, these numbers are greater than any other type of loan including Option ARMs and Sub-prime loans.

Strategic Defaults

That doesn’t necessarily mean that the more affluent don’t have the money to meet their mortgage obligations. In some cases, they see their home as a depreciating asset and determine that continuing to put money into it makes little sense. The Washington Post recently reported on this. In the article, they explained:

“The ratings agency Moody’s said that based on its analysis of mortgage-backed bond portfolios, homeowners with jumbos now constitute “greater strategic default risk” than any other type of borrowers, including subprime. That’s because an exceptionally high number of jumbo owners — many in high-cost markets hit by real estate deflation over the past several years — are stuck with persistent negative equity.”

Bottom Line

We often explain that the number of distressed properties in a neighborhood adversely impacts values of other homes in that area. It now appears that even the most affluent areas will be dealing with a supply of discounted properties entering the market as foreclosures.

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3 replies
  1. Rainmaker Kw
    Rainmaker Kw says:

    I believe that you’ll also see those high value homes disappear from the market faster than others as the more affluent crowd will acquire the deeply discounted opportunities that others have walked away from. They have the power of cash or credit to do so.

  2. Jed
    Jed says:

    This begs comment from my home, san Francisco. Everyone, unless you inherit money, has to get a jumbo loan to buy here. Whenever this subject comes up and our lower middle class is refered to as the “rich” I cringe.
    Before my wife and I bought a house we paid huge federal income taxes because we were considered to eb in the top 10% of American earners. I was repairing televisions and my wife worked for a local university. Not rich people.
    A few years ago I did a little looking at what conforming loan (417,000) with 20% down payment on top of that could buy. In Tulsa OK one could get 5,000 SF house on acerage. In the San Francisco Bay Area suburb of San Mateo, one could get under 1,000 SF next to the freeway. The disparity is incredible.


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