NYT Study: Wealthy Far More Likely to Default on Mortgages
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- Kirk Haverkamp | July 09, 2010
Wealthy homeowners are far more likely to be delinquent on their mortgages than less affluent borrowers, according to a new study by the real estate analysis firm Core Logic.
More than one homeowner in seven with a mortgage in excess of $1 million is seriously delinquent, according to the study, which was produced for the New York Times. By contrast, only one borrower in 12 with a mortgage under $1 million is delinquent, the study found.
A business decision?
Though the study does not specifically address the reasons for the difference, it clearly suggests that wealthy homeowners may simply be more willing to write off their losses on a home that has declined steeply in value, same as they might a soured business venture.
“The rich are different: they are more ruthless,” Sam Khater, CoreLogic’s senior economist, told the Times.
“Those with high net worth have other resources to lean on if they get in trouble,” Khater said. “If they’re going delinquent faster than anyone else, that tells me they are doing so willingly.”
A moral issue?
Most Americans seem to regard paying ones’ personal debts, including a mortgage, as a moral obligation. A July 2009 University of Chicago study found that 81 percent of those surveyed said it would be morally wrong for someone to default on a mortgage they could continue to make payments on, even if their property value had dropped below the balance owed.
However, there are those who suggest that average Americans would be better off taking a more businesslike approach to their mortgages. University of Arizona law professor Brent White has been widely criticized for advocating that many Americans would be better off walking away from their underwater mortgages and writing them off as a bad debt, much like a corporation that stops payments on a loan used to build a failed shopping mall.
"Good customers" defaulting
But it appears strategic defaults, or deliberately stopping payments on a mortgage one could otherwise afford, have an emotional side as well. In a follow-up study, Prof. White found that strategic defaulters tend to be older, better educated and with better credit than most homeowners – who were angered when their lenders refused to work with them despite their longtime status as “good customers” when their property values dropped.
Many of these “good customers” in White’s study were counting on using their home equity to help fund their retirement. As they also tend to be wealthier than average Americans, this might also be a factor in the higher default rate on high-value mortgages reported in the New York Times study.
Middle-class Americans might also have greater financial incentives to avoid default, as a damaged credit rating can make it more expensive and difficult to do such things as use credit cards, buy a car or even obtain insurance. Individuals with very high net worth tend to be less worried about credit scores, because they can secure needed financing backed with other assets they possess.
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