Guest Post: Why Do The Rich Default on Their Mortgages? Because In California and Arizona, They Can

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Submitted by David Fiderer

Why Do The Rich Default on Their Mortgages? Because In California and Arizona, They Can

Why throw away good money after bad? It’s a frequently-asked question in the five most expensive real estate markets in the mainland United States--San Jose, San Francisco, Orange County, Los Angeles and San Diego--where over a million home mortgages are under water. That’s nine times the number in all of New York State. In fact, that’s more than 30 other states combined.

“If you default, your credit score will take a hit,” advises Jane Bryant Quinn on CBS MoneyWatch. “But as long as you pay all your bills on time, both before and after the default, your walk-away will become less important after a couple of years.”  No one is counting on a strong recovery of home prices any time soon.  Even during normal times, real estate markets go through multi-year cycles. The value of a typical home purchased in Los Angeles in 1990 fell by 25% within five years; by 2000, the cumulative home price appreciation after a decade was exactly zero.

Of America’s 11 million homeowners with negative equity, a majority live in the four sand states where the real estate bubble was concentrated--California, Florida, Arizona and Nevada. Over three million live in California and Arizona, where a borrower can hand over the keys to the lender and walk away. These are two antideficiency states, where the lender has no recourse beyond the collateral property.  So of course it makes sense that wealthy homeowners would default on their mortgage loans. They live where in places home prices were the highest and the fell the steepest, and where the consequences of default are the least onerous. The New York Times overlooked the “where” and “why” of the story.

The wealthy are also less dependent on consumer credit. They can buy cars for cash; and charge expenses on their debit cards. So for them, it’s easy to make a fresh start. But the mortgage debt doesn’t go away. It’s simply pushed off to the banks insured by the Federal government. The rest of us pick up the pieces.

In Phoenix, total home mortgage debt exceeds the market value of all homes with mortgages. The 58% of homeowners with negative equity are seriously under water, while the remaining 42% with positive equity worry about continued deterioration of their home values. (CoreLogic’s disclosures do not include homes with no mortgage.)

"Even if the economy is the, quote, No.1 issue,” said John McCain when he was running for President in January 2008, “the real issue will remain America's security.  And if they choose to say, ‘Look, I do not need this guy, because he's not as good on home loan mortgages,’ or whatever it is, I understand about that, I will accept that verdict,” he told Florida voters. “I am running because of the transcendental challenge of the 21st century, which is radical Islamic extremism." Since then, Phoenix home prices have fallen by 38 percent. No wonder he wants to talk about immigration.