Friday, December 18, 2009

Rich Folks Hitting the Mortgage Default Iceberg at "Twice" the National Average

Bloomberg is reporting that homeowners with mortgages greater than $1 million are defaulting at almost twice the national average. With people's income having taken a huge hit, it is getting harder and harder for them to continue servicing a large mortgage. According to the report:
Payments on about 12% of mortgages exceeding $1 million were 90 days or more overdue in September, compared with 6.3% on loans less than $250,000 and 7.4% on all U.S. mortgages, according to data from First American CoreLogic Inc. The rate for mortgages above $1 million was 4.7% a year earlier. “The rich aren’t as rich as they used to be,” said Alex Rodriguez, a Miami real estate agent with JM Group USA Inc. People have reached the point where they can’t afford the carrying expenses of a $2 million home.”
There are 114,000 home loans of more than $1 million, according to First American. About a quarter of all mortgaged homes in the U.S. have loan balances bigger than their current value. The number of U.S. households with a net worth of more than $1 million, not counting primary residences, fell to a five-year low of 6.7 million last year from a record 9.2 million in 2007, according to Spectrem Group, a Chicago-based consulting firm.
[And while Wall Street banks are getting ready to pay out record bonuses], year-end bonuses for people at hedge funds, asset- management firms and insurance companies probably will drop an average 20 percent, the firm said. “There’s a lot of distress,” said Tracy McLaughlin, co- owner of Morgan Lane Real Estate in Ross, California. “You have hedge-fund guys whose funds evaporated and a year-and-a-half later they’re still not working.”
“The reason the low end stopped falling is because the government stepped in with affordable loans,” said Scott Simon, managing director at PIMCO., a firm that runs the world’s largest bond fund. “There is no political will to bail out a million-dollar house.”
[And although the Fed has lowered 30-year mortage rates to 4.71% by purchasing ~$1.25 trillion of Fannie and Freddie backed conforming mortgages], the Fed purchases haven’t affected the high end of the market because they exclude so-called jumbo loans. Mortgages above the $729,750 limit set by Congress for the nation’s highest-priced markets cost almost 1 percentage point more than conforming loans, according to Keith Gumbinger, vice president at HSH Associates, a mortgage-data company in Pompton Plains, New Jersey. “There is no refinance market for you if you are underwater and outside the Fannie and Freddie framework,” Gumbinger said. “High-end neighborhoods are all suffering from the same problems of diminished income at a time when there is little equity to work with.”
Luxury home prices probably will drop another 5 percent before reaching a bottom in September 2010, according to Sam Khater, senior economist at First American.
Those declines may lead to losses on jumbo mortgages that dwarf the “haircut,” or discount to full value, that banks take on short sales or foreclosures of moderately priced homes, said Rodriguez, the agent with JM Group in Miami. “When the bank takes a loss on a $3 million property it’s a lot bigger than the loss on a home with a $150,000 mortgage,” Rodriquez said.
The banking and housing crisis is far from over and no amount of accounting shenanigans will be able to cover it up. This view was loudly expressed by investors in their rejection of the Government's attempt at pulling out of Citigroup.

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