Rich are Defaulting on Loans at Higher Rate? Not So Fast...

Foreclosed California home
Foreclosed California home

Big surprise that the messages to my Blackberry came quick and early, as the bosses read today's New York Times piece on how, "Biggest Defaulters on Mortgages Are the Rich."

The article is based on data from CoreLogic, a real estate analytics firmthat can run all kinds of great numbers. The data show that while one in 12 mortgages under a million dollars are delinquent, "more than one in seven homeowners with loans in excess of a million dollars are seriously delinquent."

Shall I wax on about how the rich care less about their credit ratings than the not-so-rich, or how many of these luxury homes are second homes that the owners don't really need, or how rich folks don't give a hoot about their communities and see these homes purely for their investment value?

Nah, I'd rather do a little math.

Here's my problem with the thesis of this article: A little less than 14 percent of the loans outstanding in the U.S. are "jumbo," meaning over $417,000, according to government statistics (FHFA). The number of loans that are over $1m are even less than that.

The Housing Fix -- A CNBC Special Report >> See Complete Coverage
The Housing Fix -- A CNBC Special Report >> See Complete Coverage

So when we're talking about rates of default, you have to factor in the share of the market that you're looking at and the bottom line numbers.

Yes, the rate is higher, but it's a far smaller share of borrowers, and that makes the numbers far more volatile.

And we're not talking about the super rich here. We're likely talking about those in the one to two million dollar homes, because the super rich don't deign to deal with such banal items as mortgages.

Also, let's not forget that jumbo loans don't qualify for the government'sHome Affordable Modification Program, nor do the big banks rush to modify jumbos under their own programs.

And when we look at investment homes, of course the more expensive ones will default at a higher rate, because the equity lost will be far greater, with the original investor further underwater; that then makes the time horizon for recouping that investment too long for anyone, rich or otherwise, to stay in the game.

And take a look at the May Existing Home Sales report from that National Association of Realtors.

Just 1.7 percent of all home sales in May were of homes over one million dollars.

That just gives you an idea of how small that marketplace is.

Yes, we can always find the odd celebrity that squandered away all their millions and defaulted on the loan, but I would take a big step back before I come to the conclusion that the "rich: are more likely to default on a loan than the "unrich."

Questions? Comments?