High-End Foreclosures Rising Among Top Tier Homes

High-End Foreclosures Rising Among Top Tier Homes
By Octavio Nuiry, RealtyTrac Staff Writer

Until now, the foreclosure crisis was confined to a narrow niche of middle-class urban communities and outer-rim new housing developments where first-time homeowners and real estate speculators benefited briefly from favorable financing.

But increasingly there are signs that the foreclosure problem is spilling over into wealthier areas, where prime borrowers — and even high-end real estate developers — are rapidly falling behind on their construction loans, mortgage payments, property taxes, auto loans and credit cards at an alarmingly fast pace, according to industry analysts, economists and real estate brokers.

Jack McCabe, a real estate consultant in Deerfield Beach, Fla., said there will be more troubles for upscale flippers, high-end prime borrowers, developers and lenders.
“Upscale foreclosures are a growing trend,” said McCabe, pointing to the overflow of some 30,000 unsold beachfront Miami condominiums. “The wealthy are not insulated from foreclosures. In a lot of the bubble markets — like Miami, Palm Beach, San Diego, Las Vegas, Orange County and the Inland Empire in California — we are going to see an increase in the number of high-end foreclosures in relatively wealthy communities. This is just the tip of the iceberg.”
McCabe believes that delinquencies and defaults will rise not only among subprime borrowers, but among prime mortgages, Alt-A loans, teaser rate loans and low money-down loans as well, forcing homes valued at more than $750,000 into foreclosure. The rising trend of prime delinquencies among the wealthy poses a new threat to a battered housing market, which McCabe and others specialists claim is in a recession or heading towards one.
“The next two years are going to be pretty ugly in South Florida,” predicted McCabe, saying that Florida real estate will drop by another 10 to 15 percent in 2009 and the market will flatten by 2010.

With so many foreclosures across the nation, the mortgage mess is finally hitting the rich and the ultra rich luxury real estate markets. Seven-figure foreclosures — once a rarity in 2007 — are starting to pop up with more frequency in some of the wealthiest communities nationwide. Already, there’s a glut of McMansions in the $500,000 to $1 million range that have been foreclosed by lenders — and many more are falling into foreclosure, according to an analysis of RealtyTrac foreclosure records in 2006 and 2007 (see graphic).

Even in the Hamptons?

In many popular coastal areas, the inventory of high-end foreclosures has swelled, putting additional pressure on home prices and inventories. Along the Long Island shore, John Brady, an agent in the East Hampton area of Long Island, N.Y., trolls the upper-end of the foreclosure train wreck, searching for million-dollar bank-owned listings.

“The high-end housing market is not immune to foreclosure,” said Brady, who handles bank-owned foreclosure listings. “Rich people lose their home to foreclosure too. But they prefer to lose their second home rather than their first home.”
Brady confirmed McCabe’s statements, claiming that a growing number of high-end Hampton homes are falling into foreclosure — although the analysis of foreclosure data from RealtyTrac shows New York foreclosure properties in the $500,000 to $1 million range increased just 7 percent in 2007, and New York foreclosure properties valued at more than $1 million actually decreased 24 percent.
Brady said the owners of high-end Hampton foreclosures tend to be “people who kept pulling money out of their houses for their business, using equity in their second homes to pay business debt, credit cards, buy cars, go on trips.” They used their homes, he said, to get cash and kept pulling equity out.

Beachfront Bubble Bursts

In Florida’s Treasure Coast, buyers for Palm Beach oceanfront properties are some of the wealthiest people in the world. Ever since the 1920s, when the Vanderbilts and Biltmores built palatial winter estates on the sunny beaches of South Florida, northern snowbirds have flocked southward to Florida.
“I’m working with several foreign buyers right now,” said Deborah Magraw, a Palm Beach, Fla. agent who is currently representing buyers from Germany, Canada and Spain. “One buyer is looking for Palm Beach foreclosures priced between a $1.5 million and $2.5 million.”

Magraw, who sells bank-owned properties in the upscale communities of Wellington and West Palm Beach, Fla., said the trend of expensive homes falling into foreclosure has accelerated the past year, and she estimates that their are 80 high-end Palm Beach properties that are in foreclosure.

Consider Veronica Hearst, the widow of Randolph Hearst and stepmother of 1970s kidnap victim Patty Hearst, whose 52-room oceanfront mansion in Palm Beach, Fla. just recently went up for auction and sold back to the foreclosing lender for $22 million.
The Hearst foreclosure is an extreme example showing that high-end foreclosures are a growing trend.

“It’s going to be nasty,” warned McCabe. “The subprime was only the tip of the iceberg.”