More Luxury Homes Headed For Default

Bloomberg Article Summarized by Troy Corman, todayshomedeals.com

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Stock market losses, pay cuts, a sluggish economy and tighter credit have put the squeeze on an increasing number of wealthy homeowners. As a result, homeowners with $1 million mortgages are defaulting at almost double the U.S. rate.

About 12% of mortgages at $1 million and up were 90 days or more past due in September, compared with 6.3% on mortgage loans less than $250,000, according to data compiled by First American Core Logic.

The result has been a 3-fold increase in short sales. A short sale is when a lender agrees to let the borrower sell his or her home for less than the amount owed on the mortgage. Although it's not good for the borrowers' credit score, it's much better than a foreclosure.

Porter Michael Peterson was the lucky recipient of a short sale in Tampa, Florida. The Atlanta Falcon and NFL veteran recently purchased a mansion there for $1.1 million, almost half the amount of the original mortgage on the home that was previously bought in 2006.

The upper-end market has also been hampered by tighter lending standards. Mortgages outside the fannie mae and freddie mac framework are few and far between. Banks would rather borrow at close to 0% and buy 10-year treasury bonds at 3.5%, and make the spread, than make riskier home or business loans. While interest rates are at historically low levels, many can't take advantage, as banks continue to reduce credit lines and credit cards each month.

Hopefully, the home buyer tax credit can help some upper-income home buyers. It was extended to April 30, and was expanded to cover more upper-income buyers. Singles with modified adjusted gross incomes of up to $145,000 can qualify although phase-outs begin at $125,000. For couples filing jointly, the credit begins phasing out at $225,000 and modified adjusted gross incomes above $245,000 do not qualify.

Also, homeowners who have lived in their current principal residence for 5 years can qualify for up to a $6,500 credit. Homes priced up to $800,000 are eligible for the credit.