Million-Dollar Mortgages Performing in Line with Smaller Loans: Moody’s

Tue, Aug 3, 2010


By: Carrie Bay

Mortgage borrowers with balances over $1 million are faring just as poorly, but not worse, than borrowers with lower balances, according to Moody’s Investors Service.

According to the New York-based credit rating agency’s data of securitized private-label mortgages, as of June 2010, mortgages originated from 2005 to 2008 are 60 or more days delinquent at the same rate, 28 percent, for both the average borrower and borrowers with million-dollar-plus mortgages.

Over the past several years, borrowers with million-dollar-plus mortgages have fallen behind at only slightly lower-than-average rates, according to Moody’s. Since early 2008, serious delinquencies — 60 or more days past due — on the million-dollar-plus segment have risen nearly in tandem with the overall delinquency rate, typically separated by around two to four percentage points, the ratings agency said.

Moody’s conclusion: Although delinquency rates differ significantly among different loan products, million-dollar-plus mortgages still perform close to the average in each product type.

Peter McNally, a VP and senior analyst at Moody’s, says the lack of a difference in delinquency rates contradicts conventional wisdom by suggesting that strategic defaults on underwater mortgages are not more prevalent among rich borrowers than they are among other borrowers.

McNally explains that early on in the credit crisis, most delinquencies were a result of job loss, leading to borrowers’ sudden and unexpected inability to make their mortgage payments. He says as the crisis continued and home prices dropped, increasing numbers of borrowers fell behind not out of necessity, but out of an unwillingness to make payments on a mortgage with a balance that had become higher than the value of the home, a so-called “underwater” mortgage.

Assuming that job loss is as much of a driver of default for rich borrowers as for average borrowers, then the supposed higher propensity of large loans to strategically default should reveal itself in higher default rates for large loans, McNally says.

But because borrowers with loan balances of more than $1 million have been falling behind at rates similar to those of average borrowers, McNally contends that the size of the loan does not appear to indicate the likelihood of a borrower walking away from an underwater mortgage.


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