Sense on Cents

In the midst of speaking with a wide array of people over the course of the last 6 months, I continue to hear of more and more individuals who fall into the category of “house rich but cash poor.” This phenomena clearly developed over the last 8-10 years given the skyrocketing of home values. As people continued to take equity out of their homes, the home itself was viewed as a provider of wealth rather than a store of wealth. Well, now that the piggy bank that was the home has plummeted in value, many supposed well-to-do Americans are facing bankruptcy.

This unwind has happened so quickly as to leave these ’successful’ and ’savvy’ people bewildered. The fact is, a bear market in any segment of the market takes no prisoners.

Bloomberg highlights the explosion in bankruptcies that many high income but overleveraged individuals are facing in writing, Wealthy Families Face Bankruptcy on Real Estate Crash:

Wealthy individuals’ Chapter 11 bankruptcy filings jumped 73 percent in the second quarter from a year earlier, according to the National Bankruptcy Research Center, a research firm in Burlingame, California.

More individuals or families with at least $1,010,650 in secured debt and $336,900 unsecured are using Chapter 11 of the U.S. bankruptcy code typically associated with business reorganizations. Falling U.S. home prices leave them unable to refinance or sell properties when they drop below the value of the mortgage, said Joseph Baldi, a Chicago bankruptcy attorney.

How is this playing out for banks and other credit providers? An ongoing increase in delinquencies, defaults, and foreclosures. Moreover, this segment of the population consumed more high priced items and took more extravagant vacations. The pullback and impact on companies servicing this clientele will continue to be deep and meaningful. (more…)