Moody's: Jumbos Are Now at Greatest Risk for Default

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MORAL DOUBLE STANDARD FOR RICH AND POOR

EDITOR’S COMMENT: It’s really simple. Most people with jumbo mortgages are people who are more savvy with money than those who have much smaller homes. They are used to having money, not losing it. To them it is a simple calculation: if they stay with the home and pay off the mortgage, they are going to lose a couple of hundred thousand dollars. If they don’t stay with the house and take the hit on their credit score, they don’t lose that money. They have already lost their down payment and whatever extra money they put into the house when they thought they own it forever. Why throw good money after bad?

The answer for those  who are called rich is that they are walking away like any businessman does when he realizes the deal has gone bad. And the great likelihood is that the number of defaults will surge substantially as this new wave of foreclosures based upon strategic defaults come to the fore. The curious thing is that there seems to be a moral double standard at play here — the more money you have, the less likely you are to be stigmatized for simply refusing to pay.

There are many who believe that mortgage delinquencies in their region are concentrated in the middle-to-lower income neighborhoods. Actually, the research shows the number of delinquencies in the higher priced sections are currently exceeding the percentages in less affluent areas.

The most recent Mortgage Monitor issued by LPS reports that the largest increase in both delinquencies and foreclosures, as compared to 2008 levels, are in ‘jumbo’ mortgages. A jumbo mortgage, according to Wikipedia, is:

“a mortgage loan in an amount above conventional conforming loan limits…the limit is $417,000 for most of the US.”

In some parts of the country, that limit can be over $625,000. This type of loan finances the higher priced properties in a marketplace.

According to LPS, the percentage increase in jumbo mortgages is as follows:

• Delinquencies: increased 281%
• Foreclosures: increased 589%

Again, these numbers are greater than any other type of loan including Option ARMs and Sub-prime loans.

Strategic Defaults

That doesn’t necessarily mean that the more affluent don’t have the money to meet their mortgage obligations. In some cases, they see their home as a depreciating asset and determine that continuing to put money into it makes little sense. The Washington Post recently reported on this. In the article, they explained:

“The ratings agency Moody’s said that based on its analysis of mortgage-backed bond portfolios, homeowners with jumbos now constitute “greater strategic default risk” than any other type of borrowers, including subprime. That’s because an exceptionally high number of jumbo owners — many in high-cost markets hit by real estate deflation over the past several years — are stuck with persistent negative equity.”

Bottom Line

We often explain that the number of distressed properties in a neighborhood adversely impacts values of other homes in that area. It now appears that even the most affluent areas will be dealing with a supply of discounted properties entering the market as foreclosures.

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Tags: bankruptcy, borrower, countrywide, disclosure, foreclosure, foreclosure defense, foreclosure offense, foreclosures, fraud, jumbo, LOAN MODIFICATION, modification, Moody, quiet title, rescission, RESPA, securitization, strategic default, TILA audit, trustee, WEISBAND
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