The poor wealthy trying short sales on McMansions

The Sunday Detroit Free Press had an article by Kathleen Howley and Dan Levy of Bloomberg News about the alarming increase in defaults and short sales involving $1 Million-plus homes. These mansions in distress are mainly located in the areas that we might expect – California, Arizona and Florida – and many are second or third homes for the wealthy. A good number are also located in Michigan, however.

According to the article, about 12% of homes worth $1 Million or more are now 90 days past due on mortgage payments, as opposed to about 6.3% for mortgages on homes worth $200,000 or less. That is a big increase from last year, when only 4.7% of luxury homes were in default. A good number of these distressed luxury homes belong to luxury home builders who have gone belly-up in this recession. Read the whole article by clicking here - http://tiny.cc/O0fD9.

As the article points out this trend has the attention of the banks because they take a much bigger hit on a short sale or foreclosure on a $2-3 Million mansion than they do on the typical $200,000 house. According to the article, there are 114,000 home mortgages in the U.S. of more than $1 million. About a quarter of all mortgaged homes in the United States have loan balances bigger than their current value, known as being upside-down or underwater. That would mean 28,500 Million dollar-plus mortgages on these mansions are underwater and 13,680 are now more than 90 days overdue. When you apply the general real estate statistics of value declines of 20-30% over the last couple of years (at least in Michigan) you get huge losses in this category – losses big enough to cover the entire house value of normal people’s homes.

The various Federal programs to help homeowners hasn’t had any impact on these poor homeowners because there is a limit on so-called jumbo loans of $729,750 and most of these houses have loans that greatly exceed that limit. I suspect that there is little sympathy in the halls of Congress for the struggling Million Dollar homeowner; however, many in California might point out that this would be a typical middle class home out there. I have trouble getting my head around that.

Just like the rest of the market, this is a great time to buy a Million Dollar mansion. You could probably pick one up in foreclosure for 50-60 cents on the dollar, maybe less. That’s just what some people who have money are doing right now. I’ll have to pass on that right now, but it’s a thought. Of course, you’d still have to pay the taxes on the thing and that can amount to more per year than most people pay for their mortgages and taxes combined. I guess that old saying applies that if you have to ask about the taxes you probably can’t afford it.

I somehow have a hard time being too empathetic with these beleaguered Million Dollar home owners. I don’t think it is an envy thing so much as being fairly sure that they’ll find some way to game the system and land on their feet. You won’t see their possessions sitting out by the curb or see them showing up for a night at the local shelter. And I imagine that making the “hardship” claim to get the bank’s agreement for a short sale must be a challenge for many would be sellers – “well, you see, my client’s year-end bonus was only $20 Million this year, instead of the $100 Million that he expected and his alimony and child support payments eat that up, so he is severely short of cash and needs to downsize his lifestyle.” Oh, the hardship of it all. Where ever will we park the Bentley?