Early on after the real estate bubble burst the home loans that went bad were largely subprime and the general feeling then was that the defaults would pretty much stay in this particular segment. Lo and behold, slowly the Alt-A type of mortgage, once thought to be on really solid footing, started feeling the heat, too. The avalanche didn't stop there either. Defaults are now hitting the luxury homes that were supposed to somehow bypass the wrath of the mortgage gods, at least that's what many industry observers believed.
Mortgage payments on roughly 12% of loans over $1 million nationwide were 90 days or more past due in September, reports First American CoreLogic, Inc. a California research shop. Let's compare that to some other numbers. For home loans under $250,000 the corresponding figure was 6.3%, about half less. For every mortgage around it stood at 7.4%. One more. In September of 2008 it was 4.7% for mortgages north of $1 million. In short, in one year the figure has nearly tripled and that is mildly alarming.
Las Vegas valley - with communities like Summerlin, Anthem, Southern Highlands, Mountains Edge, Lake Las Vegas, Spanish Trail and Canyon Gate - luxury homes probably have even higher default rate due to the serious downturn of the once-booming housing market. Parts of Arizona, California and Florida, at least them, are other areas similarly affected. No market segment obviously is immune to the economic forces of the real estate collapse.
Many high-end homeowners have resorted to short sales to deal with the issue, so long as the mortgage lender goes along with the plan. It can be a tricky proposition, however. Let's say a nice mansion has a mortgage of $1.5 million on it and now the price is only $900,000, a 40% drop. The property is gloriously underwater. The bank would have to take a bath to the tune of $600,000, if sold like that. That's tough to swallow all in one shot. In comparison, a house with a $300,000 mortgage that is 40% underwater would be sold for $180,000, amounting "only" to a $120,000 write-off. Big, big difference for the mortgage lender.
When things fail to work out some homeowners decide to tiptoe away in the thick of night from the property, becoming a so-called strategic default, or a walkaway. These terms really have been absent from the everyday real estate vocabulary up until recently. Now they are being talked about from coast to coast over micro beers and at water coolers, and in high places, too, as it is becoming a growing pain for those dwelling in corner offices with a view.
Jumbo mortgage defaults will keep banks that have a bunch of them in their hack-proof electronic ledgers in a precarious position for a while. Some will never make it, some will do so over a long, painful stretch of time. Overall, it'll limit mortgage liquidity and prolong a true recovery. But, it also could be the end of the default cycle that kicked off with the subprime product. If so, then after this latest mess is sorted out the mortgage and housing markets can begin rising from the fog of misery to once again become power players in the national economy. Can't wait.