The New York Times caught my eye with a front-page story on how the housing crisis is hitting the upper class. You know, bye-bye to wine cellars and $9,000 mortgage payments.
But there are a couple of problems with this attention-grabbing piece. It relies way too much on phrases like “data suggest” to make its big point, that “many of the well-to-do are purposely dumping their financially draining properties, just as they would any sour investment.”
And The Wall Street Journal ran a very similar piece, way back in April. Actually, it’s a better piece, if you factor in the celebrity-defaulters the Journal tracked down.
Here’s the Times headline:
Biggest Defaulters on Mortgages Are the Rich
And what follows is interesting enough. Here’s the crux of it:
More than one in seven homeowners with loans in excess of a million dollars are seriously delinquent, according to data compiled for The New York Times by the real estate analytics firm CoreLogic.
By contrast, homeowners with less lavish housing are much more likely to keep writing checks to their lender. About one in 12 mortgages below the million-dollar mark is delinquent.
The Times looks at investment homes and second homes, too, and found that delinquency rates for million-dollar-plus properties are higher than those for less expensive places.
What’s frustrating for readers is the way the Times tries to explain this discrepancy.
The story notes a recent comment from a Freddie Mac official, who said that some people who walk away might have good reason to do so, but, in the process, they’re trashing their communities. Then it goes on to suggest some theories it can’t really support:
The CoreLogic data suggest that the rich do not seem to have concerns about the civic good uppermost in their mind, especially when it comes to investment and second homes. Nor do they appear to be particularly worried about being sued by their lender or frozen out of future loans by Fannie Mae, possible consequences of default.
It makes sense that investment and second homes don’t engender the same feelings of civic good and community that one finds in the place where someone actually lives. But does anything else help us get from the data to the deeper sociological meaning of it all?
One academic speculates that the rich “may be less susceptible to the shame and fear-mongering used by the government and the mortgage banking industry to keep underwater homeowners from acting in their financial best interest.”
Then there’s this, from CoreLogic’s senior economist:
“Those with high net worth have other resources to lean on if they get in trouble,” said Mr. Khater, the analyst. “If they’re going delinquent faster than anyone else, that tells me they are doing so willingly.”
That’s certainly possible. And Khater told the Journal basically the same thing when it looked at all this a few months ago.
But the Journal also offered this:
Another possibility is that many of those borrowers were high rollers on Wall Street who have lost much or all of their incomes and no longer can keep up their Gatsby-esque lifestyles.
Many of them, of course, were able to stave off foreclosure for a long spell. “If you take your average subprime borrower who loses his job, he has almost no savings to fall back on,” says Joe Garrett, a bank consultant at Garrett, Watts & Co. in Berkeley, Calif. So foreclosure may occur within months. “A wealthy borrower can last much longer,” Mr. Garrett notes. “He’s got a variety of investments that can be liquidated over time.”
Seems there are lots of theories to explain this data.
As Annie Lowrey pointed out recently at The Washington Independent (where I used to work), despite all the attention it gets, we really don’t know that much about strategic default. “There is not even a commonly accepted definition of strategic default — what line separates “strategic defaulters,” who can still afford to pay the bank, from plain old defaulters, who cannot?”
Here here, CJR. More reporting=good. Then too, I noticed that a few of the Time's commenters also asked the key question: How does the newspaper define "rich guy?"
The definition certainly cannot be "owes at least a million bucks on his house." Can it?
#1 Posted by edward ericson, CJR on Fri 9 Jul 2010 at 09:03 PM
It seems both this critique and the Times article are making an implicit assumption that "strategic default" is something unsavory. A mortgage is a loan a secured by a piece of real property. It's a fairly straightforward business arrangement. Companies default on loans from time to time; they fail to make payments and return the collateral to the note holder(s). It's not considered anything more than a good or bad business decision, certainly not some kind of "moral failure." There are consequences to defaulting (loss of the actual house, substantial damage to one's credit rating, etc). Those are significant penalties. There's no need to moralize about people's "obligation" to pay banks when it's clearly not in their own best interest. After all, the vast majority of the damage to the housing market was made by reckless lending that drove housing prices up far beyond their long term value.
#2 Posted by jph, CJR on Sun 11 Jul 2010 at 01:04 AM
I think the senior management of the banks would (and do) strenuously disagree with JPH's post above.
Their worst nightmare is every borrower looking at their transaction with a purely rational eye.
#3 Posted by garhighway, CJR on Mon 12 Jul 2010 at 12:22 PM