Wednesday, December 23, 2009

Jumbo Default Rate: 2x Conforming Loan Levels

Homeowners with jumbo mortgages of more than $1 million are defaulting at almost twice the U.S. rate and some are turning to so-called short sales to unload properties as stock-market losses and pay cuts squeeze wealthy borrowers.

“The rich aren’t as rich as they used to be,” said Alex Rodriguez, a Miami real estate agent with JM Group USA Inc., whose listings include a $2.9 million property marketed as a short sale because the price is less than the mortgage, leaving the bank with a loss. “People have reached the point where they can’t afford the carrying expenses of a $2 million home.”

Payments on about 12% of mortgages exceeding $1 million were 90 days or more overdue in September, compared with 6.3% on loans less than $250,000 and 7.4% on all U.S. mortgages, according to data from First American CoreLogic Inc., a Santa Ana, California-based research firm. The rate for mortgages above $1 million was 4.7% a year earlier. This continues to pressure luxury home prices throughout the country but especially so within the 1-2 million dollar segment of the market of the "working rich".

As defaults on the biggest jumbo loans rise, borrowers such as Steve Holzknecht, 53, are turning to short sales to exit loans that now are larger than the market value of the house. Last month he cut the asking price for his 7,280-square-foot home in Washington, by $550,000 to $1.25 million, lower than the balances of his two mortgages.  Holzknecht, the former owner of Four Suns Inc., a Seattle luxury homebuilder that went out of business two months ago, constructed the Craftsman-style home in 2000. He declined to identify his lenders or the amount he owes.

With the fire sale of assets causing luxury real estate markets to implode and very probable future increases in the rates of LIBOR based ARM loans; doing nothing and going about your life is not an option. Get your financial house in order as this ride will last many more years.

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