Posts Tagged ‘fha’

Strategic Default Is Only Ok If You’re Rich

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A recent article in the New York Times discussed how the rich are defaulting on their mortgage loans at an increased rate as compared to the rest of the population.  From the article:

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.

By contrast, homeowners with less lavish housing are much more likely to keep writing checks to their lender. About one in 12 mortgages below the million-dollar mark is delinquent.

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.

In fact, the delinquency rate on investment homes with mortgages of a million dollars is more than double the rate of homes where the mortgage was less. For the million dollar homes, the rate is 23% as opposed to 10% for less expensive properties.

Yet, Fannie Mae and Freddie Mac, the largest lenders of residential mortgage loans under $500,000, are stepping up the rhetoric against strategic defaulters and taking steps to penalize them. 

Since Fannie Mae and Freddie Mac cannot take loans of greater than $729k, the result is quite obvious: to penalize the working and middle class for making the same smart money moves that rich people do and take for granted all the time.

Recently, the Republicans added an amendment to a bill that would forbid strategic defaulters from getting FHA financed loans, ever. Who gets FHA loans? Not the rich…these are solidly middle and working class financial instruments. 

Despite all of the moralizing about “keeping your word…you signed on the dotted line that you would pay…” and “foreclosures damage the community,” the real motivator for lenders here is fending off damage to the bottom line.  Let’s be clear:  if a high percentage of mortgage holders with loans under $500K were to default, this would really damage the financial health of the  banks.  It has nothing to do with morality or a sense of community and everything to do with profit. If these banks gave a fig about community or morality, they never would have created the incredible mortgage casino that brought us to this point.

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