Balky lenders face results of consumer-grade bankruptcies even as rates of wealthy “walk-aways” go through the roof

July 13th, 2010 by Mike Hinshaw

[Editor's Note: This is the first of two parts looking at the difference between home mortgage delinquencies of the wealthy--which are on a dramatic rise--and alternatives for the less well-to-do.]

A recent headline in The New York Times:

Biggest Defaulters on Mortgages Are the Rich

If you’re thinking, yeah, well–what else do you expect from the Times? OK, here’s basically the same story from Fox:

Wealthy Walk Away From Mortgages

Reading both accounts, one will notice a  shared theme, namely the question  “what’s best for the community?”

Community and neighborhood interests are crucially important. Hence our posts about the nonsensical behavior of institutions that lets home after home slide into foreclosure, which affects property values like bombing a pond. Aanymore, this ain’t about ripples from a pebble. What really hurts a neighborhood more? Owner-driven bankruptcy–or bank-driven foreclosure?

Property-value loss cascades through neighborhoods

Foreclosed properties littered through a neighborhood affect property values throughout the entire community, not merely the adjacent homes.

On the other hand we’ve all seen major league bankruptcies, from big players such as The Donald to major automakers. Not to mention the current, wadded-up mess with the Texas Rangers baseball club…

How is it that when “the big boys” do it, it’s a business decision?

Yet, when consumers file for bankruptcy protection, they are somehow…sneaky?

Unemployment data say ‘no progress’

Let’s look at the numbers of the so-called recovery: Since June of last year the unemployment rate is virtually unchanged, whether you look at the so-called “official rate” (row U-3 in the labor department’s Table A-15) of 9.7 per cent in June 2009 versus 9.6 per cent last month. Ok, that’s not “seasonally adjusted.” The seasonally adjusted figures show a slightly better picture: 9.5 percent in June 2009 versus 9.5 per cent last month–which means even when we consider the lesser numbers of jobless people counted in the “official rate,” there’s no change in a year.

And the same holds true for row U-6, which is the actual “total unemployed” rate. The not-seasonally-adjusted rate in June 2009 was 16.8 per cent in June 2009 and 16.7 per cent last month. Again, a .1 per cent difference. The seasonally-adjusted rate was 16.5 per cent in June 2009 and 16.5 per cent last month. Same pattern.

On the bright side, last month’s rate is down in both columns from a peak in April, when the “official rate” was 9.9 per cent and the actual rate was 17.1 per cent.

So we’ve progressed to the point that we’re back to where we were a year ago–with total unemployment actually closer to 20 per cent than it is to the claimed “official rate” of nearly 10 per cent.

Wealthy ditch mansions as business decisions

And now even the wealthy are sending “jingle mail” to their mortgage servicers, sending in the keys to their mansions (some primary, some secondary homes–and some that were intended as investments) and heading off to, well, wherever the rich go. What’s sort of fascinating, though, is that they’re ditching these high-end properties in significantly higher measure than the less well-to-do have been.

According to the July 8 Times piece, “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.”

The article cites data showing that “[m]ore than one in seven homeowners with loans in excess of a million dollars are seriously delinquent” while only “[a]bout one in 12 mortgages below the million-dollar mark is delinquent.”

So basically “homeowners with less lavish housing are much more likely to keep writing checks to their lender.”

Lends a new meaning to “there goes the neighborhood,” doesn’t it? Makes one wonder what the brainiacs behind credit ratings and FICO scores are going to do with these data.

The data were provided by analytics firm CoreLogic to the Times, who says, “Though it is hard to prove, the CoreLogic data suggest that many of the well-to-do are purposely dumping their financially draining properties, just as they would any sour investment.

“ ‘The rich are different: they are more ruthless,’ said Sam Khater, CoreLogic’s senior economist.”

The Fox account shares a similar perspective concerning the data: “As for those investment or second homes, Corelogic says delinquents on those topping the million dollar mark sit at 23%, while it’s just 10% on the cheaper ones.”

But the Fox writer tries a reverse spin: now that the wealthy are acting like the plebe sub-primers, suddenly having mortgage problems isn’t a class sin. But it just goes to show how the salt-of-the-earth middle class endeavors to persevere, against all odds.

“So to me this isn’t just an excuse to bash the wealthy, ” writes Gerri Willis, “… but a testament to the middle class…”They understand the value of a dollar and the value of a contract.

“Many are just too proud to throw up their hands and wave the white flag — for better or for worse.”

In other words, Willis seems to be saying, C’mon guys, even if it makes no business sense and the banks refuse to work with you, keep making those payments and honoring those contracts!

(In Part 2, we’ll have a look at what happened to Del Phillips and his condo.)

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The bankruptcy reform act of 2005 increased the complexity of the law, but if you are overwhelmed by debt, filing for bankruptcy protection may be your most pragmatic alternative. If you are facing foreclosure of your home (sometimes referred to as your “primary residence,” as opposed to a second home, or “vacation home”), bankruptcy protection may be your best route to saving the home. If you are struggling with medical bills, you may be in a special category for setting debt aside, and if you have problems with credit-card debt, you should be aware that some of those laws have changed recently, too. Whatever you do, before making major, life-changing financial decisions, consider consulting a trained, experience attorney. For bankruptcy basics, please see:

Principles of bankruptcy

Basics of bankruptcy

Introduction to Chapter 7

Introduction to Chapter 13