Even the Rich are Defaulting on Their Mortgage Loans

You probably wouldn't think that people in million dollar homes would be in danger of foreclosure, but it's actually more common than the people in more modestly priced homes.

You wouldn’t expect people who make millions of dollars to default on their mortgage loans. After all, if they can’t make their payments, what chance does the average homeowner have of staying afloat in this market. But even the millionaires are going through foreclosure and losing their homes in some cases.

Many of these million dollar foreclosures are in prominent areas, such as the ones that overlook the oceans. La Jolla, California, a town near San Diego, is one of those places with nice homes with a breathtaking view. But home buyers pay a lot for that view. Darren Thomas is one of those homeowners that loved the view when he first moved in to his La Jolla home for which he paid more than $1.3 million. Today, that same home is worth less than $800,000 and Thomas is not enjoying the view as much as he once did. He has owned his home for less than five years and he has seen its value drop by more than a half million dollars.

As a result of its drop in value, Thomas simply stopped making payments about two years ago. “It was a business decision,” he said in an interview. His payments were $10,000 per month and his home was worth only a fraction of his overall mortgage. He decided to do what is called a “strategic default,” which is a conscious and willful refusal to pay a mortgage payment and put more money into a home that is worth a lot less than his mortgage.

Darren’s story is not a unique one these days. According to statistics, about 1 in 7 home mortgage loans over $1 million are “seriously delinquent.” One in 7 may not seem like a big deal but when you consider that only 1 in 12 of mortgages below $1 million are seriously delinquent, it makes you think a little. And the sad fact is that banks are less likely to foreclose on homes that have mortgages over $1 million as quickly as they would on homes less than $1 million. Darren is a great example. He has lived in his home for the last two years without making a payment. Banks don’t want these homes because they are harder to sell and they require more upkeep. The maintenance costs are higher than with the homes that cost less than $1 million. In addition, an empty million dollar home hurts the market immediately surrounding the home and brings down the value of neighboring homes.

As Darren says: “The loss is not mine. The loss is the banks.” He and thousands of other millionaires are being ruthless when it comes to their mortgage and just treating it as an investment that didn’t work out. Do you think this is fair?

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Comments

  • jimmy

    February 02, 2011

    It is absolutely not fair and it isn't happening all around the country. What I will never understand is why California has laws that prohibit a mortgage lender from pursuing a borrower's other assets in a foreclosure. I've had mortgages in New York State and in London and both have contained clauses allowing the bank to do precisely that.

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