Rich People: More Likely To Default On Mortgages Than You Are

Are you a fancy person? Then you have a 1 in 7 chance of defaulting on your mortgage, says a new study of data compiled for the New York Times. Those of you with mortgages of less than a million dollars only have a 1 in 12 chance of defaulting, the paper says.

Why is this happening? The data suggests that rich people are more likely to just dump a house like the poorly performing investment it is.

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.

Meanwhile, in Cook County, IL, the sheriff says he’s going to richy-rich houses in Wilmette, La Grange and Glencoe to throw people out — and they’re already gone.

The occupants are always gone by the time a deputy gets there, a spokesman said, but just barely.

Biggest Defaulters on Mortgages Are the Rich [NYT]

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  1. twophrasebark says:

    Sure. That’s why they’re rich. They have less inhibition regarding ethical decisions which may benefit them as an individual but not society as a whole.

    AKA “nice guys finish last.”

    • sonneillon says:

      You consider an investment an ethical decision? How odd.

      • Mecharine says:

        Why can’t you consider an investment an ethical decision? Would an investment in corporations that peddle in blood diamonds not be considered an ethical decision?

        • sonneillon says:

          Perhaps but people are not dieing as a result of my real estate investment. If I choose not to exercise my options or derivatives and let them expire and thus walk away because the price drops I don’t consider it an ethical consideration I am merely utilizing an investment tool to cut my losses. The bank is exercising their end of the contract and they get the house, and the previous mortgage payments. They weren’t complaining when real estate was appreciating in value 7-10 percent per year and people weren’t making their mortgage payments.

          • illscreech says:

            If I lease a car for $20,000 which in 3 years drops in value to $10,000 assuming I paid $5,000 of it after interest the lender has a right to come after me for the last $5,000 after the repossess and sell the asset. Unless I file for bankruptcy I have to pay it.

            If I mortgage a house for $200,000 which in 3 years drops in value to $100,000 assuming I paid $50,000 of it after interest in MOST states the lender does not have a right to come after me for the last $50,000 after they resell the asset.

            There’s a loophole in the law which says a home is treated differently than any other asset I would borrow money as collateral on. That is the problem, and that is why people strategically default.

            Also if my pension fund invests in mortgage-backed securities (like they pretty much all did), which are decimated by unpaid mortgages the greed of the strategic defaulter isn’t only hurting the banks, it’s hurting me and everyone else.

            • sonneillon says:

              As was mentioned the bank wrote the contract. The bank set the terms. You are fulfilling your obligation under the banks contract to you. By walking away you are upholding the terms of your deal and they get your house. And it’s not a loophole it’s a deliberate inclusion in most state laws. It makes it so that the reverse isn’t true that the bank doesn’t have to pay you for the appreciation of the value of the house. Because houses are expected to appreciate in value there is generally no need for laws to protect the banks. Cars depreciate the second they leave the lot so almost all new cars are underwater.

              Your pension fund was gambling with your money. Poorly. Replace the board of directors. I said this 5 years ago and I still say it. Securities are a shitty way for pensions to put their money. If they want to gamble index funds are a good way to minimize risk. If they want to play it safe municipal bonds.

      • twophrasebark says:

        No. I consider walking away from a debt an ethical decision.

        • hattrick says:

          But they’re not walking away from a debt. They’re exercising an option in their mortgage contract to stop payment, so long as they forefeit their house.

          It’s not like the bank didn’t know the buyer had this option when the bank wrote the contract. The bank WROTE the mortgage agreement!

          Personally, I think it’s sleazy for the bank to pretend these people are behaving immorally. There’s nothing immoral about living up to your side of the deal–and it’s ludicrous for the guy whose team of lawyers came up with the deal to suggest that you’re being immoral because you are giving him exactly what he’s entitled to in the contract that he wrote.

        • Randell says:

          Walking away from debt has NOTHING to do with ethics. That is why they can afford what they do. Take emotions out of the equation, and use logic. When KMart, GM, Enron, and many other companies go bankrupt they follow the LAW to get out from under their debts. Why shouldn’t an individual be allowed to do the same thing?
          The problem with most people is their emotional attachment to their homes and some puritanical belief that paying debts back to corporations that were willing to charge you TRIPLE the amount to loan you the money. They take that risk for the extra money. The bank lost in this situation.

          • Conformist138 says:

            Not paying and being gone when the cops show is NOT the ethical way to deal with things and isn’t always even legal. You waste the time of taxpayer-funded law enforcement, you add more costs to the banks (who are trying to shrug any and all expenses on to consumers), you could waste the time of the courts if the bank needs to regain the rest of the unpaid loan, etc. No, this is wrong. If there is any way at all to pay back your debt, you need to just take your lumps and pay it. No one said you could just walk away from obligations when they stop being profitable.

    • jsl4980 says:

      A bank qualifying a borrower for $1,000,000 during the rise of the housing bubble didn’t mean that the borrower was rich. The fact that many of those borrowers can’t afford their enormous debt isn’t surprising.

      The title of the story should say “Borrowers with more than $1,000,000 debt are more likely to default”

    • Big Mama Pain says:

      Yep, that’s pretty much exactly what the article pointed out.

    • hattrick says:

      Yes, pity those poor banks, tricked into making those loans!

      How could these unsophisticated rubes have foreseen that their contracts could possibly have a downside? All they had on their side were teams of highly paid lawyers, industry experts, and decades of experience! How could they ever have guessed that terribly, terribly unethical people who signed the contracts as written by the banks would actually follow the terms of the bank-written contract? That they would callously follow the law and fulfill the terms of the contract by giving the bank the house rather than by continuing to make payments?

      Seriously, people rationally walking away from loans aren’t the bad guys here. The issue isn’t that rich people don’t care about the good of society, the issue is that banks can’t guilt rich people into thinking they’re responsible for the broader social consequences of banks’ mistakes because rich people are not intimidated by banks.

      Rich people are not able to be guilt-tripped into believing that problems caused by the banks who wrote these loans are somehow their fault as borrowers who signed these loans according to the terms dictated by banks. The bank wrote the contract. The bank saw all the financials. The bank had a guy walk through the freaking house. The banks are the ones who thought they knew how to make money even if loans went bad, so they wrote their loans accordingly. OOPS! The people who must pay the price are banks, or they’ll just do this all over again.

      • DanRydell says:

        Ummm… no. When you sign a mortgage contract, you are agreeing to pay back the loan. Taking the house is the bank’s recourse if you do not do that. The fact that the recourse for violating the contract is stated in the contract does not mean that you have fulfilled the contract if the bank is forced to exercise their recourse.

        In many cases banks can exercise the right to recover the balance of the loan if the house does not sell for enough to cover it – and they would be more likely to exercise that right with someone who can actually afford to pay.

  2. qwickone says:

    I don’t find this surprising at all.

  3. dragonfire81 says:

    I would think it’s because rich people usually own a ton of assets and and a ton of investments, meaning even defaulting on a mortgage won’t hurt their credit that badly as it would you or I.

    • ElleAnn says:

      Exactly. Plus, if you have lots of money, you can always pay with cash, so why care about your credit score.

    • craptastico says:

      keep in mind, even if they default on a mortgage, they still owe the mortgage holder money. it’s not like the loan is forgiven if they default. they still have to make the lender whole (unless they file for bankruptcy and then they’ll be cashing out all of their assets to try to make the lender whole.

      • frank64 says:

        Wrong, at least in my state of Mass. The are called non-recourse mortgages which mean they banks cannot go after any more than the home. Some states allow recourse loans, and I believe there may be other limitations, but at least many times you give them the house and you are all set legally. It still goes on your credit.

        http://en.wikipedia.org/wiki/Nonrecourse_debt

      • illscreech says:

        It’s worth noting that the purpose of the law is to help people who face a sudden hardship and simply cannot pay their mortgage from literally losing everything they own. People who can easily afford the payments but decide not to make them are abusing the system. It’s akin to filing for bankruptcy to relieve massive credit card debt while keeping a swiss bank account with 6 figures.

  4. Loias supports harsher punishments against corporations says:

    For the poor and middle-class, their home is probably 10+ times more expensive than their next single purchase (probably their car); is it the only large investment they deal with. The rich likely deal with many large investments and have a better understanding of how to manage them, including when to cash out on a losing investment. They also have lawyers and/or accountants that manager their investments year-round. Those accountants would be remiss not to point out the failing investment.

  5. areaman says:

    We need a rational default tag.

    This is at least the second story on rational defaults.

  6. osiris73 says:

    That makes perfect sense to me. When I was making much less money, I had a much cheaper house in a crappy neighborhood. Then I got a better job and got a nicer house in a nicer neighborhood. If I were to lose my job now, there’s no way I could make the payments. However, if I had a cheaper house payment, the chances are I could find the money through odd jobs, unemployment, etc. to keep paying my mortgage. The richer you are, the harder and faster you fall when times get bad.

    • WeirdJedi says:

      Agreed. You have more to risk when you pay more into something. As stated above, the opposite can be true too. The risk of defaulting can be so insignificant when you have so much money. It is sad, but it is all about your perspective. Remember the homeless man who had millions?

    • superberg says:

      ” Then I got a better job and got a nicer house in a nicer neighborhood. If I were to lose my job now, there’s no way I could make the payments. “

      Not for nothing, but have you considered that you didn’t have to move, or at least move where you did? There are more than two kinds of neighborhoods. When I changed jobs and raised my pay nearly 24%, I stayed in the same small studio and saved most of the extra income. It’s not the perfect home, but when that same job fell through in a few months, I had enough money set aside to cover me for two months while I looked for another job.

      Just because you make more money doesn’t mean you have to spend it all.

    • illscreech says:

      Being unable to pay the mortgage on your house is what defaulting normally means. IF you were in the situation described you would no longer be considered a “rich person”, so you would actually count against this statistic.

      A better example would be you have a great job and can easily afford to pay your mortgage, but you decide not to because you don’t like the idea that you’re paying more than the asset is worth right now. Maybe you default on it and buy a better house, with enough money down (which you can afford) your atrocious credit won’t even be a barrier.

  7. sonneillon says:

    Everyone is coming down on rich people, but their marker is million dollar mortgages. Back in the day a lot of people could get those jump mortgages who had no business getting them and in some cases things are catching up. There is one thing to be rich and drop a bad investment. There is another thing to be rich on paper and not be able to make payments.

    • jsl4980 says:

      Having a million dollar mortgage only means you’re in debt for a million dollars. With the ease that banks lent money it definitely didn’t mean the borrowers were rich.

      • sonneillon says:

        Right that’s what I’m talking about. I think the problem is they set rich at million dollar mortgage in this article and not at million dollar income.

  8. AnthonyC says:

    “Having a mortgage over a million dollars” and “rich person” are not the same thing.

    Maybe people with million-dollar mortgages are more likely to be in places where the housing bubble was most inflated, and were more likely to have reached beyond what they could rationally afford in the mortgage market, and are now more likely to have experienced large financial problems.

    These may or may not be strategic defaults- that information is not present.

    • B says:

      Suggested new title: People who borrow a lot of money are more likely to default on those mortgages.

  9. DowneMixedBoi says:

    Yeah, I’m sure they could hire a lawyer to get the debit removed from their credit report and it would still cost far less than paying the loan off.

  10. jsl4980 says:

    Being in debt for a million dollars does not mean you’re rich.

    Not being able to pay on a million dollar mortgage does not mean you’re rich.

    It sounds pretty clear that banks lent people way more money than they should have. The people who are in the most debt are the least likely to pay it off.

  11. EverCynicalTHX says:

    Interesting take on the article by some here…

    A number of responses to other articles on Consumerist suggest it’s a smart move to walk away from an underwater mortgage, even if in theory an individual can make the payments.

    However, if a person is classified as rich – they’re unethical to do the same thing…

    Seems like a number of members are all into the class warfare thing here. Maybe a high demographic of young Che Guevara t-shirt wearing hipsters? It’s one of the things that turns me off from about consumerist even though I like the site overall because hey, I’m frugal.

    For the record, I’m not rich (although I’d like to be), I live in a $170k home and make $65k working for a non-profit in the IT field.

    • tungstencoil says:

      You beat me to the punch. I was going to make the same observation:

      When Joe Average contemplates it, it’s a strategic default, and may even be a ‘wise choice’. It’s compared to when corporations make “smart decisions” to dump an underperforming investment.

      When Sue Above-Average does it, apparently they’re rich and greedy and horrible people.

      Remember: “Rich” is someone who has more than you, and is completely relative. Starving people in (fill in location of your choice) would gladly switch places with you, and consider you that obnoxiously wealthy person.

      • econobiker says:

        The uber wealthy usually don’t pay alot of vendors anyhow. That is how they stay wealthy. Hire a trades person to do work and then welch on the complete payoff. What is the vendor going to do- spend the same amount of money suing that he would get back?

        My acquaintance’s family owned a custom cabinet business. They made and installed about $30k worth of custom kitchen cabinet’s with a 50% deposit, into the new build home on the gold coast side of town. Suddenly the home owner’s wife starts to have complaints about the cabinets and the kitchen / home isn’t even completed. Home owner says that the cabinets are wrong color,etc. and says he won’t be paying the 50% balance- tough sue him. T

        he cabinet shop manager suggests an alternative to the cabinet shop owners. Since the home is still under construction and open to trades people, they go into the kitchen, pull off all of the cabinet doors (easy to do with euro type hinges), remove all the drawers and take these back to the shop leaving a note that they were taking the items for “final coating treatment”. Irate owner calls up screaming and the manager tells him that the treatment will be completed the day after the 50% balance is paid. The cabinet shop has their newest and least experienced employee spraying the doors and drawer fronts with Pledge spray furniture polish and wiping them off until the shop got the cashiers check for $15k or so.

    • hymie! says:

      A number of responses to other articles on Consumerist suggest it’s a smart move to walk away from an underwater mortgage, even if in theory an individual can make the payments. However, if a person is classified as rich – they’re unethical to do the same thing…

      Why can’t it be both “a smart move” and “unethical”?

  12. eccsame says:

    fact – fancy people, lads especially, buy a lot of monkeys

  13. sirwired says:

    The ethics of “strategic default” are tricky. On the one hand, it’s perfectly legal to just walk away from your bad investment, and it’s the bank’s job to consider you might do that when they are risk-pricing the loan. (which should, but doesn’t, lead to much higher rates in non-recourse states, that is, states in which the bank cannot collect on the remaining balance after foreclosure) Why should I sacrifice for the bank’s failure to properly price the risk of the loan?

    On the other hand, when you dump a mortgage like that, you are failing to pay back money to real people. Not all mortgages are owned by hedge funds and stereotypical Greedy Wall Street Bankers. Really for non-jumbo mortgages, which are now almost all owned by Fannie/Freddie, you are blowing the tax dollars of your fellow citizens. (NOTE: Commercial loans and jumbo’s like the ones discussed here are not Fannie/Freddie loans.)

    This is another one of the many questions with no pat answer, and good arguments on both sides.

    • Big Mama Pain says:

      Not to mention, you tank the values of your neighbor’s properties, when your foreclosure sits there getting vandalized and falling into disrepair. For that reason alone, it’s a shitty thing to do.

  14. u1itn0w2day says:

    ” the rich are more ruthless ” meaning it’s much easier to make a ‘business’ decision ie walk away.

    I wonder if the dollar amount involved is skewing the statistics a bit. I’ve seen more non millionare homes go into foreclosure over the last several years than I have in decades. It makes you wonder if the millionares greed is a contributing cause to inflation and over priced housing/sales followed by foreclosure.

  15. Nigerian prince looking for business partner says:

    It’s definitely an interesting observation but I’m hesitant to identify people as “rich” due to the size of their mortgage. Just because someone has an in-ground pool, 6 bedrooms, or drives a Lexus doesn’t necessarily mean he’s a multi millionaire.

    He could very well just be in debt up to his eyeballs, which means even the slightest volatility in the economy would cause the house of cards to collapse in on itself. I’ve known many people who relied on stock dividends and annual bonuses to keep afloat and when they went away, they were suddenly spending more than they were making. Many more were banking on projected appreciation to pay off accrued debt and when their property depreciated, suddenly couldn’t roll over debt (as planned) into subsequent mortgages.

  16. A.Mercer says:

    Define rich.

    Do you mean, people with a large amount of assets and savings or people who make a lot of money? Being one generally does not always translate into the other. I read “The Millionaire Next Door”. In there they talked about how there are a lot more wealthy people living in the medium level houses than there are in the million dollar homes. Most of the people in the million dollar homes do not have a net worth in the millions.

    In fact, they talked about how these people who lived in these houses made good money but spent almost every dime of it as they got it and relied on credit to push their spending even further.

    My own personal spin on this is that these people are very image oriented and probably leave before the going gets really rough so they do not have to face their neighbors during the eviction.

  17. Paintmann says:

    I would assume part of this is due to the predatory lending that occurred recently as well. I know for a fact that we had folks in my area getting mortgages for $650,000 ARM on a $12/hr job. The article say nothing about net worth or assets, only about mortgages of $1,000,000 or more. Misleading statement at best.

  18. smo0 says:

    This should title…

    Rich People: Know how to skirt the law and stay rich.

    There are things to be learned here….

  19. BuddhaLite says:

    It’s a no brainer if it’s not your primary residence.

  20. Geekybiker says:

    The rich are rich because they make smart financial decisions. Its no surprise to find them leading strategic defaults.

    • cmdr.sass says:

      Hold your horses, you mean to tell me that’s not because they’re not made of pure evil?

      • Geekybiker says:

        Well money is the root of all evil, and you could say that rich people are made of money. Ergo rich people are made of evil. I’m not sure you can get *pure* out of that though. ;)

  21. Promethean Sky says:

    I’ve totally seen this happen in several lakefront communities in Michigan.

  22. FiorellaMajumdar says:

    You know damned well that the rightwing will ignore this story and keep blaming minorities who got ninja loans and defaulted because Barney Frank ordered banks to give no-doc loans to non-whites, gays and other non-republicans. It’s just reality that this public fraud will continue, and that the more power and influence you have, the more likely you’ll be able to walk away without consequence.

  23. seishino says:

    If I’m reading the data correctly, it only says that people with mortgages over 1 million dollars are more likely to default. This doesn’t necessarily mean that “rich people” are more likely to default, so much as people with larger mortgages are more likely to default. Or possible people with small mortgages saw smaller, more manageable losses.

    1 million here in Cambridge will buy you a small duplex.

  24. khooray says:

    Well, yeah, if you have a lot of money, it’s not a big deal to just move on.