BANKRUPTCY UPDATES

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• Book Publisher Houghton Mifflin Harcourt Files for Bankruptcy (May 17, 2012)
• Las Vegas Tycoon Lists $500 Million in Debts in Bankruptcy Filing (May 15, 2012)
• Nassau Broadcasting Sells its Assets in Bankruptcy Court (May 22, 2012)

Foreclosures Strike the Rich

While the foreclosure crisis first struck working class families in the far suburbs, wealthy homeowners now account for a disproportionate share of the country’s abandoned mortgages.

According to the New York Times, the rate at which the rich default on their mortgages has surpassed the national average. In fact, the wealthy have leapt far past the country’s delinquency rate. The Times article offered some telling statistics:

• According to the real estate analytics firm CoreLogic, more than one in seven mortgagors with loans worth more than $1 million dollars are seriously delinquent.
• In contrast, only about one out of twelve homeowners with mortgages worth less than a million dollars are delinquent.
• Nationwide, across all income levels, roughly 11 million homeowners owe more money on their mortgage than their house is worth.

Often, the homes that wealthy families can no longer afford are second homes, vacation cottages, or houses bought as investments. Since these homeowners typically have other residences, some experts claim that many rich homeowners simply abandon these homes, considering them lost investments.

In fact, the relatively high rate of delinquency among wealthy homeowners suggests that these people are leaving their homes willingly as a strategic decision.

In the words of Sam Khater, CoreLogic’s senior economist, “The rich are different: they are more ruthless.”

The ethics of the so-called ruthless homeowners who abandon their valueless homes is hotly debated.

Strategic defaults occur when families whose homes are worth less than the amount of their mortgage loan simply walk away from their residences.

The negative consequences of abandoning homes can range from aesthetic concerns, like overgrown yards or dirty pools, to more serious issues, like the use of unoccupied homes for illegal or dangerous purposes.

Moreover, individuals who abandon their homes can be sued by their lenders or lose the ability to secure future loans from cautious lenders.

However, while strategic faults may be bad for communities, some experts admit that they might make sense for wealthy people who have other homes, or who can afford the potential threat of lawsuit or lost loan opportunities.

Even Don Bisenius, the executive vice president of mortgage finance company Freddie Mac, recently said that walking away from a house “might well be a good decision for certain borrowers.”

Most people use traditional tools like bankruptcy to save a home from foreclosure when they are struggling to keep up with the payments. And while it may seem like the wealthy write their own rules, when it comes to dealing with mortgage problems they may indeed have options outside bankruptcy.

As Mr. Khater admitted, “those with high net worth have other resources to lean on if they’re in trouble.”