Many of America’s wealthier homeowners are already feeling the pinch. According to research firm First American CoreLogic, in August 2008, 5 percent of U.S. jumbo prime mortgages — those over $417,000 — were behind payments 60 days or more.
That was higher than the 3 percent of normal prime mortgage loans 60 days or more behind, but well below the 29.5 percent delinquencies seen for subprime loans, or the 15.4 percent rate for Alt A mortgages, which are a step above subprime.
But that 5 percent rate for jumbo delinquencies was more than three times the 1.4 percent rate in August 2007.
“Jumbo prime mortgages have seen the biggest increase in delinquencies of any category over the past year,” said Sam Khater, chief economist of First American CoreLogic. “The worst affected areas are states like California that have seen sharp price declines. But few areas are unaffected,” he said.
The squeeze many wealthy Americans find themselves in is that they borrowed far too much against those homes.
“People bought the boom on the assumption property values would continue to rise and they leveraged their homes to increase their wealth,” said Dennis Hedlund, founder of iEmergent, a forecaster for mortgage and real estate companies.
“People have seen the value of their assets, including stocks, decline. But their debts haven’t,” he said.
That has left many affluent borrowers trying to offload homes via a bank-approved short sale — taking an offer for their home below what they paid to avoid foreclosure. But that process has been criticized in recent months as being too slow, or because banks insist on unrealistically high offers.
“Many banks still have no effective system in place to deal with short sales,” said Ron Rosen, a realtor in Lighthouse Point, Florida.
But Prudential Preferred CRE’s Hanna said he has seen an improvement in how Illinois banks handle short sales, as he feels the impact of the crisis has sunk in for more bankers.
“A few months ago, these bankers maybe saw the secretary down the hall lose her home, but they couldn’t relate to that,” he said. “Now, it’s maybe the guy in the office next door. It has just become a lot more personal.”