Donny Piwowarski's Blog

Foreclosure, Beverly Hills style: Wealthy people 'walking away' from mansions as number of repossessions surges to 180

Fri, 17 Feb 2012 07:32:00 -0800

Majority of delinquent homeowners in Beverly Hills owe over $1million
'Strategic default' popular as in California mortgages can be secured just by the home and banks cannot go after other assets

Last updated at 9:42 PM on 16th February 2012

The careworn house not far from Santa Monica Boulevard resembles millions of other homes that have been foreclosed on since the calamitous U.S. housing crash four years ago.

Garbage spews from trash bags behind the property. A smashed television leans against broken furniture. A filthy toy dog lies on its side, an ear draped across its face.

The garden is overgrown. The house needs a paint job.

Yet the property on North Rexford Drive, Beverly Hills, California, is no ordinary foreclosure.

FORECLOSED: This sprawling, Spanish-style estate is one of many foreclosures in Beverly Hills. Its former owners were $205,000 behind in their payments on mortgages totaling $6.9 million

A sprawling, Spanish-style estate, fringed by majestic pine trees and located near the boutiques of Santa Monica Boulevard, its former owners were served with a default notice in 2010; they were $205,000 behind in their payments on mortgages totaling $6.9 million.

Welcome to foreclosure Beverly Hills-style.

Some 180 houses in Beverly Hills, the storied Los Angeles enclave rich with Hollywood stars and music moguls, have been foreclosed on by lenders, scheduled for auction, or served with a default notice, the highest level since the 2008 financial crash, according to a Reuters analysis of figures compiled by RealtyTrac, which tracks foreclosures nationwide.

As in the default-ravaged suburban subdivisions of Phoenix, Arizona, and Tampa, Florida, plunging real estate prices are the root of the problem in Beverly Hills.

But the dynamics of the residential real estate collapse are very different in elite neighborhoods such as this.

The majority of delinquent homeowners here owe more than $1 million. Many are walking away not because they can't pay, but because they judge it would be foolish to keep doing so.

'It's a business decision, not an emotional one which it is for normal people,' said Deborah Bremner, owner of the Bremner Group at Coldwell Banker, which specializes in high-end properties in the Los Angeles area. 'I go to cocktail parties and all people are talking about is whether it is time to walk away, although they will never be quoted in the real world.'

The mansion, overgrown, abandoned and badly in need of a paint job, is one of 180 foreclosures in the wealthy Los Angeles enclave

She said she had seen in Beverly Hills a big increase in 'strategic defaults,' in which owners who can still afford to make their monthly mortgage payment choose not to because the property is now worth so much less than the giant loan used to buy it during the housing bubble.

Strategic default is an especially appealing option in California, one of only a handful of U.S. states where primary mortgages made by banks are 'non-recourse' loans. That means the loan is secured solely by the property, and banks cannot go after a delinquent owner's wages or other assets if they default.

Bremner said she helped a client buy a Beverly Hills mansion last year that the prior owner had bought for over $4 million. He decided to stop paying his $3 million mortgage - even though he could easily afford it - when the value of the property had dropped to $2.5 million.

'They were able to comfortably cover the loan,' Bremner said. 'They were just no longer willing to see the value of the property drop.'

A huge 'shadow inventory' is building of elite homes that are in default but have not been put on the market. Of the 180 distressed properties in Beverly Hills, only 12 are up for sale.

The backlog reflects the pent-up flood of foreclosed properties of all price ranges that are expected to hit the U.S. market this year, especially after five major banks reached a $25 billion settlement last week with the U.S. over fraudulent foreclosure practices.

Default is a popular option in California as banks cannot go after other assets, only the property used to secure the loan. That is not the case in most states, including foreclosure ridden Florida, where the pictured home is located

Across the United States, the largest increase in foreclosures and delinquencies, compared with 2008 levels, is with 'jumbo' mortgages - loans too large to be insured by Fannie Mae and Freddie Mac, the government controlled mortgage finance providers. Foreclosures on jumbo loans are up 579 percent since 2008, greater than any other form of loan, according to a report last month by Lender Processing Services, Inc.

Strategic defaults are now more likely among jumbo loan-holders than any other type of borrower, according to a report issued late last year by JPMorgan Chase & Co. Nearly 40 percent of delinquencies among non-governmental mortgages, which are mostly jumbo loans, are strategic defaults, the report said.

'Now that these homeowners with jumbo loans are finding out you can do this, more and more are doing strategic foreclosures,' said Jon Maddux the CEO of YouWalkAway.com, which advises homeowners who are 'underwater,' the term for those whose loans exceed the value of their home.

Nathaniel J. Friedman, a Beverly Hills lawyer, insists he is not a strategic defaulter - that he never missed a mortgage payment in his life. But he stopped making payments on his five-bedroom, six-bathroom Beverly Hills house on Schuyler Road three years ago.

Friedman, who had mortgages totaling $3 million with the now-defunct Countrywide Home Loans, returned home one evening in January 2009 to find a letter from Countrywide freezing his $150,000 line of credit, which was linked to his second $900,000 loan. His primary loan was $2.1 million. The property is worth about $2 million today.

Friedman says he decided to stop paying out of a sense of vengeance from the moment he received that letter. He has been in negotiations for months with Bank of America, which took over Countrywide after its collapse, to modify the loan.

'I thought to hell with it,' he told Reuters. 'Why should I keep feeding a dead horse if the bank has no confidence in me?'

'I was able to maneuver things my way because of the inertia of the banking sector,' Friedman said. He believes the bank will blink first, and eventually modify his loan.

Comments (7)

The fault is of the people as well as the banks. People should know how to live within their means and stop trying to look flashy. Banks were giving people loans they knew they weren't qualified for and now look.

- derp, USA, 17/2/2012 15:18

Click to rate Rating (0)

Funny when uneducated people use words like Marxist to describe Obama. Go read a book and discover who Marx was and what he stood for. Also learn what are the tenets of democracy, socialism, communism, and a theocracy. That way, you know what system of government you are promoting when you try to have your religious beliefs codified. Can't be doing that on one hand and waving a democratic flag in another. Stop the insanity.

- Barbara, Somewhere in the Lone Star, 17/2/2012 12:31

Click to rate Rating 3

It appears the one percenters arnt doing as well as the Obama Marxist would like us all to believe.

- JAKE, texas, 17/2/2012 05:24

Click to rate Rating 17

Oh come on they just announced it's getting better, we should pay more attention and not look at the numbers, forget the numbers, don't look at the man behind the numbers.

- Thames, London, 16/2/2012 23:20

Click to rate Rating 50

It must be a nice feeling for the banks and real estate now. It gives the customer so much power and real estate keeps coming down. Serves them right for putting up ridiculous prices and cashing on it for decades.

- concerned citizen, the 3rd planet., 16/2/2012 23:11

Click to rate Rating 62

Bums are bums, no matter how much money they have.

- Mike S., DisUnited Kingdom, 16/2/2012 22:20

Click to rate Rating 79

"Strategic default" LOL So the wealthy aren't "deadbeats"they are just being "strategic".

- Budd, CayceUsa, 16/2/2012 22:13

Donny Piwowarski's Blog

Foreclosure, Beverly Hills style: Wealthy people 'walking away' from mansions as number of repossessions surges to 180

Comments (7)

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