The Rich Are Different, Still

The NYT follows the Journal to the wealthy default story

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?”

While we might not know what it takes to be a strategic defaulter, we do know what it takes to be a celebrity defaulter. And, truth be told, that’s why I remembered the earlier Journal story:

Just this week, a Tudor mansion in Bel-Air belonging to film star Nicolas Cage was in foreclosure auction and reverted to the lender. On Wednesday, Richard Fuscone, a former top Wall Street executive, declared personal bankruptcy, forestalling a foreclosure auction that had been scheduled this week on his 14-acre Westchester mansion. Last month a Manhattan condominium owned by Italian film producer Vittorio Cecchi Gori was sold in a foreclosure auction for $33.2 million.

To be fair, the Times also included a celebrity in its story—the rapper Chamillionaire, who recently walked away from a $2 million house in Houston.

“I just decided to let it go, give it back to the bank,” he told the celebrity gossip TV show “TMZ.” “I just didn’t feel like it was a good investment.”

I’m not going to argue with his investment smarts. He’s Chamillionaire, after all.

But when it comes to strategic defaults, the Times (and everybody else) should do some more reporting, or at least stop guessing.

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Holly Yeager is CJR's Peterson Fellow, covering fiscal and economic policy. She is based in Washington and reachable at