Mortgage Defaulters More Likely to Be Rich Than Poor

(July 9) -- Today's New York Times challenges the conventional wisdom with an article on the types of Americans who are walking away from their mortgages: It's mainly the rich, not the poor.

"Whether it is their residence, a second home or a house bought as an investment, the rich have stopped paying the mortgage at a rate that greatly exceeds the rest of the population," reports The Times. "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."

It appears that the rich are less likely to have moral qualms about walking away from homes, including those that are "underwater" in real estate parlance, meaning that the amount owed in mortgage payments is more than the worth of the house. Recently, Fannie Mae, the government-owned agency that backs loans from lenders, has taken steps to penalize walkaways, freezing them out of the mortgage pool for seven years.

But many believe that in this instance the rich shouldn't be pilloried but emulated. Recently, financial reporter Roger Lowenstein made the case for walking away from bad mortgages. Americans should act like businesses, Lowenstein writes:

Businesses -- in particular Wall Street banks -- make such calculations routinely. Morgan Stanley recently decided to stop making payments on five San Francisco office buildings. A Morgan Stanley fund purchased the buildings at the height of the boom, and their value has plunged. Nobody has said Morgan Stanley is immoral -- perhaps because no one assumed it was moral to begin with. But the average American, as if sprung from some Franklinesque mythology, is supposed to honor his debts, or so says the mortgage industry as well as government officials. Former Treasury Secretary Henry M. Paulson Jr. declared that "any homeowner who can afford his mortgage payment but chooses to walk away from an underwater property is simply a speculator -- and one who is not honoring his obligation." (Paulson presumably was not so censorious of speculation during his 32-year career at Goldman Sachs.)

It's just another instance of holding Main Street to loftier standards than Wall Street. And walking away from a mortgage isn't illegal. "Mortgage holders do sign a promissory note, which is a promise to pay," Lowenstein writes. "But the contract explicitly details the penalty for nonpayment -- surrender of the property. The borrower isn't escaping the consequences; he is suffering them."

Why should they be made to suffer more than they already have?

Read the full New York Times article here.