The trend of increasing defaults in higher-priced communities continues. No doubt the rough economy, temptations to strategically default, and rising unemployment are part to blame.
Another culprit may be the recasting (not resetting) of option-arm loans that were very popular on the $1M+ loans.
Caroyln Said at The San Francisco Chronicle reports Default notices rising in upper echelon ZIPs
In upscale communities such as Los Altos, Greenbrae and Alamo, where median prices top $1 million, about twice as many households received default notices from January to September as in the same period in 2008, according to recorders' office data compiled by MDA DataQuick, a San Diego real estate research firm. The same is true for mid-scale areas with median prices around $500,000, such as Walnut Creek, Los Gatos and Campbell. "The question is, could this be the beginning of something that gets a whole lot worse?" said Andrew LePage, an analyst with DataQuick. "The distress in the high end right now is important to watch; it helps explain why we have more sales (of high-end homes). More distress means more-motivated and more-realistic sellers. We're just starting to find out whether the riskier loans that were not subprime will come back to haunt us."
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Overall, 17 percent of Bay Area default notices this year were in communities where the median price topped half a million dollars, up from 12.2 percent last year.
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"A lot of people in California who own $1 million to $3 million homes bought larger and more expensive homes than they really needed," said Peter Schiff, president of Euro Pacific Capital in Darien, Conn. "Part of their purchase was for investment purposes, because they assumed values would go up. Now that people have a more realistic outlook on real estate prices, it changes the dynamic. There is very little reason for someone with a million-dollar mortgage on a $700,000 house to struggle to make that payment. More and more people are going to walk away from these homes."
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...struggling mortgage holders at the high end have fewer remedies. Big-ticket jumbo mortgages are shunned by lenders, which closes off refinancing. Most of the government-backed loan modification efforts are focused on the lower end. Option ARMs, or adjustable-rate mortgages, which were used heavily in California and the Bay Area for expensive homes, will be recalculated in large numbers next year through 2012. Such loans allowed borrowers to make minimum payments that didn't even cover interest, with shortages added on to the outstanding principal. At recast, the loans can undergo dramatic payment jumps, as payments have to include both principal and interest spread over a shorter period of time.
Here is the original mortgage reset/recast chart from Credit Suisse in 2007. The Option-Arm recasts are in teal green. As of November 2009, we are in month 34 of this chart.
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