From bloomberg.com, hat tip PH!
Homeowners with mortgages of more than $1 million are defaulting at almost twice the U.S. rate and some are turning to so-called short sales to unload properties as stock-market losses and pay cuts squeeze wealthy borrowers.
“The rich aren’t as rich as they used to be,” said Alex Rodriguez, a Miami real estate agent with JM Group USA Inc., whose listings include a $2.9 million property marketed as a short sale because the price is less than the mortgage, leaving the bank with a loss. “People have reached the point where they can’t afford the carrying expenses of a $2 million home.”
Payments on about 12% of mortgages exceeding $1 million were 90 days or more overdue in September, compared with 6.3% on loans less than $250,000 and 7.4% on all U.S. mortgages, according to data from First American CoreLogic Inc., a Santa Ana, California-based research firm. The rate for mortgages above $1 million was 4.7% a year earlier.
As defaults on the biggest mortgages rise, borrowers such as Steve Holzknecht, 53, are turning to short sales to exit loans that now are larger than the market value of the house. Last month he cut the asking price for his 7,280-square-foot home in Kirkland, Washington, by $550,000 to $1.25 million, lower than the balances of his two mortgages. Holzknecht, the former owner of Four Suns Inc., a Seattle luxury homebuilder that went out of business two months ago, constructed the Craftsman-style home in 2000. He declined to identify his lenders or the amount he owes.
“It’s not uncommon to see this situation on the high end of the market — homes selling for less than it would cost to build them,” said Holzknecht’s agent, Joe Flick of Roanoke Group in Seattle. The property came on the market eight months ago priced at $1.85 million, he said.
Porter Michael Peterson, a 33-year-old linebacker for the National Football League’s Atlanta Falcons, bought a mansion near Tampa, Florida, four months ago for $1.1 million — almost half the amount of the mortgage taken out by the sellers three years earlier, according to real estate records.
Short sales almost tripled to 40,000 in the first six months of 2009 from the same period a year earlier, according to data from the Office of Thrift Supervision. The bank regulator doesn’t break out short sales by size of mortgage.
“You are just starting to see the tip of the iceberg with luxury short sales,” said Adrian Heyman, owner of Property Advisors, a real estate broker in Scottsdale, Arizona. “A lot of wealthy people are upside down in their mortgages and they just can’t afford the second or third vacation home anymore.”
There are 114,000 home loans of more than $1 million, according to First American. About a quarter of all mortgaged homes in the U.S. have loan balances bigger than their current value, known as being upside down or underwater, the data company said.
Masoud Bokaie, co-founder of engineering firm BORM Associates Inc. in Irvine, California, owes $2.6 million on a 3,664-square-foot house with marble floors and granite counters about 10 miles (16 kilometers) away in Newport Beach. He’s waiting to hear whether lenders Luther Burbank Savings and Wells Fargo & Co. will approve a short sale.
He received an offer last month “close to” the loan balances, said Shirley Cameron, his agent at Coldwell Banker Platinum Properties in Irvine, who declined to specify how much.
Bokaie said he doesn’t want to pay $7,000 a month in net costs including the property’s mortgages and taxes when real estate values in the area continue to tumble.
“What’s the point when the market is going in the other direction?” Bokaie said in an interview.
The U.S. median home price was $173,100 in October, 25 percent lower than its July 2006 peak, according to the National Association of Realtors. Prices fell 7.1 percent from a year earlier, the slowest pace of the year.
“The reason the low end stopped falling is because the government stepped in with affordable loans,” said Scott Simon, managing director at Pacific Investment Management Co., a Newport Beach-based investment firm that runs the world’s largest bond fund. “There is no political will to bail out a million-dollar house.”
Luxury home prices probably will drop another 5 percent before reaching a bottom in September 2010, according to Sam Khater, senior economist at First American.
Those declines may lead to losses on jumbo mortgages that dwarf the “haircut,” or discount to full value, that banks take on short sales or foreclosures of moderately priced homes, said Rodriguez, the agent with JM Group in Miami.
“When the bank takes a loss on a $3 million property it’s a lot bigger than the loss on a home with a $150,000 mortgage,” Rodriquez said.
I agree with this article 100%. But, one thing it doesn’t talk about is how many banks are postponing foreclosures. This is the real problem. Banks are sweeping their mortgage losses under the rug and using TARP/Accounting tricks to keep up appearances.
If people stop paying their mortgages but banks aren’t foreclosing. Nothing changes and the “rich” get to continue playing out their fantasy lifestyles.
BTW I know a guy living in a condo downtown for almost 4 years now without paying his mortgage OR hoa. Last time I asked him about it (about 1 year ago) he was over 30k in debt to the hoa alone.
Meanwhile I continue to pay my rent on time doing the right thing like a schmuck.
Seriously in the current RE market if you cheat you win. Nobodies calling in the bad bets. (At least not yet)
Why the hell would the CEO of an Engineering company admit to a short sale! What kind of message are you sending to clients and potential clients!
http://www.borm.com/ourstory/leadership/
(PS: Does BORM need to be licensed in the State of California to advertise Professional Engineering Consulting Services?)
Morgan Stanley, the securities firm that spent more than $8 billion on commercial property in 2007,plans to relinquish five San Francisco office buildings to its lender two years after purchasing them from Blackstone Group LP near the top of the market.
The bank has been negotiating an “orderly transfer” of the towers since earlier this year, Alyson Barnes, a Morgan Stanley spokeswoman, said yesterday in a telephone interview. AREA Property Partners will take over the buildings. Barnes declined to say when the transfer will occur.
“This isn’t a default or foreclosure situation,” Barnes said. “We are going to give them the properties to get out of the loan obligation.”
The San Francisco transfer would mark the second real estate deal to unravel this year for Morgan Stanley, which bet big on the property markets as prices were rising. The firm last month agreed to surrender 17 million square feet of office buildings to Barclays Capital after acquiring them for $6.5 billion in 2007 from Crescent Real Estate Equities. U.S. commercial real estate prices have dropped 43 percent from October 2007’s peak, Moody’s Investors Service said last month.
“It’s not surprising this deal ran into trouble,” Michael Knott, senior analyst at Green Street Advisors in Newport Beach,CA, said in an interview.
“It was eye-opening among a group of eye-opening deals. There was almost no price too high in 2007 for office space in top gateway markets.”
Almost 4 years on the free rent program is hard to believe. 2 years I can see, but he really hasn’t made a payment since 2006 or so? Wow.
“Almost 4 years on the free rent program is hard to believe. 2 years I can see, but he really hasn’t made a payment since 2006 or so? Wow.”
The guys a Lawyer throwing up roadblocks at every turn and he “paid” 1.9m for a condo that’s currently worth around 800k. Which would be a huge loss for the bank.
Here’s something funny. And maybe something to consider if moving into a condo highrise. In my guys building all the fobs that turn on the elevator are the same and are not coded to a single person in any way. But, In some buildings the fob that operates the elevators are coded to a specific user. In those locations if you don’t pay your hoa fees they TURN OFF your access to the elevator. A week or two of climbing 8+ flights of stairs will convince anyone to make sure their dues are always paid. 😉
Are people with mortgages over a million really “rich”, or just bigger debtors? I have a 1M+ house, and a mortgage that’s much, much smaller. I am, of course, current. A “rich” person, in my mind, would have a large, expensive house and no mortgage or a mortgage that is purely for tax uses, while the cash to cover the house sits elsewhere.
Maybe if people hadn’t bought houses up to the very tip-top of their means, then the “Carrying costs” of the house wouldn’t be so bad when the stock market tanks or income falls, etc.
“Big hat, no cattle”
As referenced in the above article, how does someone have a $2.6mm mortgage and only $7k in carrying costs per month, including taxes? The property taxes alone would be at least $2k/month.
lol, where can i get that type of loan?
The rich and the banks thought this would be a typical recession. They thought they could hang on till it was over. 2010 will push both over the side. The fed said yesterday that they will stop buying long term debt in the first quarter. That means mortgage rate will go up .75 to one percent.
Also people held off in the early 90’s during CA bad times. Then about 1994 prices really started to fall at the beach.
90401 is right on. That’s a NegAm loan. So much for option arms being bled through, right?
shadash,
Which bldg is your friend in?
mikem488, is that the pattern San Diego recessions typically follow? I’ve heard that before and I sure hope it’s true.
I’m a move-up buyer hoping that Oceanside has leveled off and that lower end Encinitas (around 500k) has more room to fall. At the moment, everything around 500k (mostly crap) sells above list with multiple offers.
Following up on Chuck’s comment, and more to my original point: if you have a large house on a Neg Am loan, you ain’t rich, in fact, you’re in a large hole.
Guaranteed, get ready for the next leg down in San Diego.
@Jinx: Anything within the FHA limits is hot right now. (FHA limit = $729,950)
You can get around this by finding a house that won’t take FHA financing, by buying at the steps (yep, save your pennies), or by waiting for the frenzy to subside.
Or you can buy something over those limits…although I think the $1M+ market has a lot of room to fall.
-Erica
FYI.
Harvard Economist Feldstein:
House Prices to Fall Further
http://www.calculatedriskblog.com/2009/12/feldstein-house-prices-to-fall-further.html?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+CalculatedRisk+%28Calculated+Risk%29&utm_content=Google+Reader
anyone consider that the rich are more financially literate which could increase the rate of strategic defaults.
the morgan stanley story that Jim posted above is a perfect example.
“Those declines may lead to losses on jumbo mortgages that dwarf the “haircut,” or discount to full value, that banks take on short sales or foreclosures of moderately priced homes, said Rodriguez, the agent with JM Group in Miami.
“When the bank takes a loss on a $3 million property it’s a lot bigger than the loss on a home with a $150,000 mortgage,” Rodriquez said.”
Local example of a “crew-cut” in the making:
6998 Rancho La Cima RSF 92067
Purchased 5/06 $2,775 ml
Foreclosed 9/09 Mortgage due $2,6 ml
Bank:Countrywide/B of A.
Four months later, still not listed.
@9
I think the fed will be under pressure to keep buying MBS so as to not conflict with the stimulus. Congress doesn’t want interest rates to rise and undo all of their marvelous achievments thus far. That said, Bernanke just refinanced and went fixed.
I find it hard to believe that the amount that guy in Seattle owes doesn’t also include some home ATM cash. If the value of your home really is less than the cost to build it than something is wrong. The cost of labor hasn’t decreased by that much up here (I live in the Seattle area) and the cost of supplies hasn’t decreased that much either. And since the guy built it with his own company, we know he got a good deal on both parts of it.
So I think I would like to call “shenanigans” on the story.
Come on. The whole premise of the article is ridiculous. There are volumes of information supporting the idea that wealth in this country continues to concentrate in a smaller and smaller group of people.
All of which is to say, these people aren’t rich, they’re just over-extended. Rich people, truly wealthy people may have taken some shots in the market but they’re still doing just fine. It’s the climbers, the almost rich who wanted a seven figure home but could only get one through creative financing that are foreclosing now.
Call it a case of personal definition if you wish but anyone defaulting on a seven figure mortgage right now either shouldn’t have been given the loan in the first place or they’re walking away from an underwater debt trap and living in another property they own.
Saying, “The rich aren’t as rich” is kind of dumb.
ice weasel,
too true, and strategically defaulting will in fact make them richer. So the title is quite off.