Wealthy Home Owners Next In Line
In a normal housing market they’d be able to sell, but now they are stuck.
Far from the housing crisis’ epicenter, high earners with good credit may be heading for trouble as their adjustable rate mortgages (ARMs) adjust beyond their means, local real estate agents and others say. In a normal housing market they’d be able to sell, but now they are stuck. The next wave of problems will come from prime borrowers who bought too much house or borrowed too much against it. A “prime” borrower is one with good credit.
Real estate agents warn that some high-income borrowers have already been forced to sell or leave their homes and more will follow. Especially those who used their homes as ATMs, withdrawing cash via home equity loans. There are also signs some lenders are warily eyeing “prime” borrowers. JPMorgan Chase & Co. raised its reserves for possible home equity loan loss for subprime and prime borrowers by $635 million in the second and third quarters last year.
Getting into property during the boom was easy, with mortgages freely available for no money down. Then came the subprime crisis and the credit crunch, slowing the market, pushing prices down and home inventories up. Home owners who bought recently with no money down are the ones most likely to abandon a property when they fall behind on the mortgage.Real estate agents say speculative investors who bought to make a profit are also walking away as the rents they charge fall behind the mortgage payments as their adjustable-rate mortgages readjust. The home owners who find it harder to walk away are those who took out large home equity loans before prices started falling and now owe far more than their home is worth. Unlike subprime borrowers, however, wealthy home owners are more likely to try to cut a deal with their lender, rather than end up in foreclosure.The alternative solution available to them is to opt for a short sale. Under a short sale agreement, the borrower sells below the mortgage value and the lender writes off the difference. The lender gets less than originally anticipated, but is not stuck with a foreclosed property. The borrower’s credit rating is damaged, but not as badly as if they had lost the home.
