Traditionally foreclosures were an issue for the poor and middle class, confined to job constrained areas like Detroit and Cleveland. In these unprecedented economic times, the rich too feel the sting of foreclosure. Today foreclosure cannot be represented by a demographic (i.e., rich, poor, middle class, etc.) or even a specific location. Any homeowner in the United States could be the new face of foreclosure.
Foreclosures and the High Income Borrower
The high median income borrowers rarely faced foreclosure in the past for several reasons. First, in order to obtain a jumbo mortgage these homeowners were forced to put 10% to 20% down on their homes. This insulated many homeowners from moderate declines in values.
Second, many high median income borrowers experienced significant asset and income growth. Whether it is huge bonuses, large 401ks or ever increasing salaries, high median income households rarely had to stretch to pay their mortgages. Even if the first year stretched their budget, they could count on a big bonus or a raise to give them breathing room next year. Last, these homes traditionally held value well. While they did not increase at the rates of more modest homes, they also did not decrease at the same rate either.
Unfortunately for many, the economic climate turned each of those reasons upside down. Equity evaporated quickly in many markets, leaving many jumbo mortgage homeowners worse off than their counterparts because they lost significantly more equity. High median income borrowers also saw their income plummet. Those expecting large bonuses got very little, if anything and those expecting raises did not receive them. Surprisingly, more expensive homes tended to lose value at a much faster pace, leaving many borrowers with homes worth far less than their mortgage.
Foreclosure Strategies Employed by the Rich
High income borrowers tend to be more financially savvy than low income borrowers, so as expected defaults rose much faster. While there have been very few studies done around strategic walk aways, it would be fair to suggest that many higher income borrowers are simply walking away from their properties. These borrowers have the income to rent properties equal to or better than the properties they currently pay a mortgage on and are not beholden to their credit rating, like their counterparts with less disposable income. Furthermore, many of them still have enough saving to put down the first and last month's rent and a security deposit.
It makes even more sense for a high income borrower to walk away. Traditionally, larger homes require large amounts of money to maintain. Furthermore, these borrowers pay higher property taxes, which can be a huge cost in many neighborhoods.
These borrowers also have no access to the many government programs enacted to stem the tide of foreclosures. These borrowers have a very hard time trying to refinance their debts and have an even harder time trying to convince the bank to do a short sale or some kind of restructure of their payments.
Ultimately many of these borrowers are forced to continue to pay a very large debt on a depreciating asset or simply walk away. Increasingly more and more borrowers are choosing to do the latter. At least 12% of the jumbo mortgage borrowers are 60-90 days late on their payments or twice as many as conforming loan borrowers.
Michael Cook - Michael Cook is currently a Real Estate Investment Banker for Wachovia. He and his partnerstarted their own real estate investment ...
