In a recent article, The New York Times profiled those people who have defaulted on unpaid mortgages of $1 million or more. The author contends that “the rich have stopped paying the mortgage at a rate that greatly exceeds the rest of the population. . . more than 1 in 7 homeowners with loans in excess of $1 million is seriously delinquent. . . about 1 in 12 mortgages below the million dollar mark is delinquent. . . data suggests that many of the well-to-do are purposely dumping their financially draining properties.” The implication is that it is the cold, calculating rich who are removing their primary homes, second homes, and/or investment homes from their investment portfolio as a “strategic default.” And, reading between the lines, it is inferred that the majority of those who are walking away from these seven figure mortgages are quite wealthy. I have a different view.
My data suggests that the majority of people who default on mortgages in excess of $1 million are income statement affluent. They took out million dollar loans at a time when their income was near or above the seven figure level. The majority of these people were once highly compensated corporate executives or business owners who experienced temporary success. Their median age is 48 or about ten years younger than the typical millionaire. Once the economic meltdown began, many of these executives found themselves unemployed, and the business owners saw their businesses flounder or go under. The income statement affluent by definition accumulate little or no wealth. Thus many are forced into foreclosure when times are tough. It is hardly a “strategic default.” Most fit into a subcategory called “LIFO.” They were among the very “last in” to purchase a home at the peak of the residential real estate market. And they were/are among the “first out” of their expensive homes. In an earlier blog, I stated, “In the year 2000, there were only 446,000 owner/occupied homes that had a market value of $1M or more. By 2006, there were nearly 1.6 million homes in this category. Or an increase of about 3 1/2 times in six years.
Who are those who have a mortgage balance of $1 million or more? Only 7.8% of decamillionaires [augmented net worth including equity in home] in America have a outstanding mortgage of $1 million or more. Fifty-eight percent have no outstanding mortgage debt at all. About 1 in 20 of those in the $1 million to under $5 million net worth category have a outstanding mortgage balance of $1 million or more. But the population of this category is more than 8 times the size of the decamillionaire group. Yes, there are those who have or had a net worth of $1/2M to under $2 million and an outstanding mortgage balance of about the same figure prior to the economic reversal. And much of their net worth was predicated on a highly inflated estimate of the equity they had in their home.
In Stop Acting Rich, I mentioned that there were nearly three times more millionaires living in homes valued at under $300,000 than there were those living in homes valued at $1 million or more. I have a suspicion that given the data from The New York Times article the ratio now exceeds more than 3 to 1. From Stop Acting Rich, “. . . the data strongly indicate that wealth building productivity is inversely related to the market value of one’s home. . . once the market value begins to move up beyond the $500,000 level wealth builiding productivity moves into the unproductive range.”