Distressed Luxury Real Estate News

The average property owner will turnover a property once every 8 years. This of course means that many people in the US property market wishing to sell are doing so in the ordinary course of their lives, for a variety of reasons, none of which have anything remotely to do with defaulting on their mortgage repayments.

This continual source of supply in the property market competes with those actually struggling with distressed property, and with buyers having been sorely missed from the market for the past few years; all sellers have had to reevaluate their sale price. In the case of distressed property, the short sale in these conditions is even faster in coming. When it is a luxury property in the balance the multiples are far too imposing to hesitate – a buyer must be found.

Short sales of luxury property made up almost 20% of the US property market in the first half of 2010. Compared to their frequency in 2009 of 9%, it’s reasonable to find that the top end of town is coming under slight pressure. With foreclosure rates on jumbo loans above $417k being twice that of their government sponsored conforming cousins; this contention can hardly go unnoticed.

Apart from the classic reasons for a short sale on a luxury property, the market for the luxury niche is all the more weakened by the self regulation that the banks have adopted in their lending practices and the vigilance that the FDIC and the market in general has with respect to mortgage lenders. With these tighter controls many borrowers are finding that lending criteria is far stricter and that they simply don’t qualify for the loan that they would have easily managed 3 years ago. An additional factor is that in the past, when mortgage commitments became terse, one could approach a competing lender to refinance the loan and relieve some strain. Of course this is a luxury not afforded most people as many are fortunate if they have indeed maintained a financial relationship with one lender to date, let alone two. Such has been the carnage wreaked upon the US property market in recent times.

This conundrum is clearly evident in the luxury property MSI metric (Months Supply of Inventory). The MSI measures how long the present volume of luxury properties will take to be absorbed by the market at the prevailing success rate. Homes with values over $750k had an MSI of 18 months in 2007 while suffering the full force of the sub-prime mortgage crisis. In 2009, the MSI for these luxury homes escalated to 40 months. Buyers of luxury homes are in their element.

While the pessimists may infer a worsening of the luxury home market, it can also be found to be more of a graceful return to the norm. Luxury properties typically rely on capital growth and so produce very little comparative rental return. Further they are often owned by individuals with complex wealth distribution, and so foreclosure was able to be avoided for a longer period than what the average American was able to deflect. While not exclusively, the sub-prime mortgage fiasco primarily affected the conforming loans market of property valued at less than $400k. It took some time indeed before the entire market was weighed down by the momentum of the lower end. Therefore, in 2009 we find an eventuality that ought to have been quite expected in that the luxury market came under considerable duress.

Category : Distressed Luxury Real Estate News &Luxury Short Sales

US banks have probably been the envy of their European competitors with the Federal Reserve stepping in with its bank bailout program. A point that is often overlooked in most financial systems however, is the presence of prudential controls upon the banking systems of most developed economies of the world.

In the US, the regulatory body monitoring banks is the Federal Deposit Insurance Corporation (FDIC).  The FDIC insists that banks have a 10% capital reserves ratio; a percentage of risk weighted assets. In the event of anything less than this ideal it is tolerant up to a level of 5-6% where it will then take swift action to warn the bank, enforce corrective action or even declare it insolvent and become its trustee in receivership.

Such is the threat of being undercapitalized.

In essence, the bank needs to provide capital in order to meets cover its liabilities and its operating expenses and the FDIC capital reserves ratio seek to protect those interests. When mortgage repayments are 90 days in arrears, they are then deemed to be non-performing assets (NPA’s) and as such will reduce capital reserves due to the increased risk weighting of the non performing loans. With the ratings agencies making an art form of downgrading securities after the subprime mortgage crisis, many banks will find their capital reserve demands escalating dramatically as the risk weighting of these toxic assets increases with respect to capital.

Most of the stalwart banks such as JP Morgan, Citigroup, and Wells Fargo have a capital reserves ratio of between 10-13%. The bottom line for a bank when capital reserve ratios fall is consequential in many areas. In order to maintain the capital reserve requirements of the FDIC in the face of non-performing assets the banks have to cease buyback programs for shares, reduce dividend payouts and in fact issue more stock in order to survive in the marketplace. As survival in the market is more important than short term profit, banks effectively cease to invest for profit and focus all their energies into preserving their operations and avoiding the control of the FDIC watchdog.

This sad turn of events doesn’t end there. It also results in less finance being available for business and investment, which in turn contracts production and eventually increases unemployment. Household and consumer spending then cease, and the economy contracts. In the event of two consecutive negative quarters of growth, a technical recession is achieved. At best, as unemployment is a delayed indicator, a dramatic increase in unemployment may also suggest a recession is in effect.

So it can now be seen why the banks have such a genuine motivation toward getting non-performing assets off their balance sheets. During the GFC, many financial institutions failed to list their NPA’s on their balance sheets in a bid to avoid FDIC requirements, to escape a admonishing of their share price by the market, and also to continue trading for profits.

Therefore, banks will certainly entertain a short sale investor who is prepared to make a firm offer. Without a formal offer however, banks are unable to entertain the prospect of discounting the value of the non performing asset, and even when one is presented, in pursuance of policy & procedure guidelines, the lender will invariably enter into a procedure that will take considerable time for approval. At this stage, the prospective buyer has often flown the coup.

Category : Distressed Luxury Real Estate News

While every economy needs the lubrication of consumer spending, the events of the last 3 years and the Global Financial Crisis have given homeowners and prospective buyers an opportunity to reflect.

Often it is the case that our modern financially based economy reveals an opportunity to be had in taking the largest mortgage possible. The benefits of this lie in being able to purchase a more valuable home, in a better location with more valuable land, and built of finer materials and design. In an economic boom the sense of this strategy becomes reality as capital values soar with remarkable speed. A certain degree of comfort is then enjoyed by the mortgagor who by now is still laboring under a huge mortgage repayment schedule, but now has a pleasing buffer of equity as their reward.

Of course, in anyone’s language this is a tenuous position that can only make sense if repayments are maintained. If not, some form of distress will visit the property as foreclosure and its alternatives are considered by the lender.

Unemployment has risen across the board in the US to almost 12% in 2009 and has only recently subsided to approximately 10%. With this in mind, it comes as no surprise that many Americans who had taken a large mortgage on a luxury home have also been driven to defaulting on their repayments; in fact mortgages over $1m are defaulting at twice the national rate.

Many of these individuals have not only lost their employment but also their investments. Retirement funds are under a statutory mandate to invest a certain portion of their assets in property and blue chip stocks. With the collapse of world stock markets in 2007 & 2008, many Americans lost much of their intended nest egg, with the collapse of the US property market, more so. For many, redundancy or a dramatic reduction in salary was simply the catalyst to inevitable default, and it wasn’t long before lenders were knocking at the door. The gravy train had halted abruptly.

For these million dollar properties, their future is uncertain as banks are desperate to get them off their books with a recoup of whatever value possible. With the FDIC watchdog panting down their necks, lenders are wary of carrying Non Performing Assets (NFP’s) on their books too long. Sometimes it’s simply better to take a loss all at once as it frees up capital to generate positive cash flows in the future.

Additionally the cost of maintaining a million dollar property is invariably far higher than that of an average property of say $300k. When household income has been restricted this too is a luxury that simply cannot be afforded and mortgagors are often keen to extricate themselves of their debt obligations, even if it means that they are saddles with an outstanding amount after the execution of short sale.

For them, the discounted value of a static debt to be satisfied in the future is far more attractive than a current repayment schedule of outrageous proportions, no income, and equity that has turned from positive to deeply negative with the momentum of the property market collapse. Lenders on the other hand, find that short sales on luxury properties that have defaulted reduce FDIC capital requirements, and remove bad debts from their books.

Category : Distressed Luxury Real Estate News

When an economic downturn hits a modern economy the first sector to be affected is business and investment. Successful businesses have executive personnel that monitor the entire environment that the business is operating within. In order to maintain prosperity and value to shareholders, this individual will make alterations and amendments to the practices adopted by the enterprise on an ad hoc basis.

Almost immediately, business will reduce its capital investments and borrowings. This will reduce production and variable costs will also decline. Labor is one of the main variable costs that will be reduced, and while it will be a somewhat delayed consequence in order to comply with employment law, unemployment will eventually be felt throughout the economy. As more and more people lose their means to a livelihood, consumer spending and sentiment drop markedly.

The above scenario depicts precisely what the United States has endured for some 3 years now. Since the sub-prime mortgage crisis of 2007, a subsequent credit crisis evolved into a Global Financial Crisis which saw the US economy in steep recession.

That homeowners were unable to meet repayments was clear, for many had been lured into financial agreements that due to a huge interest component relied purely on a short term capital appreciation for its sustenance.

When this type of speculation is present in any market, irrational spirals downward in price is a matter of course.

So it was with the US property market. It was soon generously aided in its drop by a global economic recession that saw unemployment skyrocket from the conventional nonchalance of 5% in 2006 to a little under 12% in 2009.

As people lost their jobs, even what was considered to be a prime mortgage became fair game to a steep reduction in household incomes. Now, it was not only the foolhardy that never had the ability to maintain a sub-prime mortgage entered into at astronomical rates of interest, but also those that quite reasonably, relied on continuous employment in order to maintain their mortgage repayments.

The extent of these mortgage repayments however differ from case to case, but by and large, such was the sheer panic of the US property market that reason had nothing to do with it. As in most things economic, matters were compounded in a domino effect throughout the economy. Banks have certain prudential controls imposed upon them by the Federal Deposit Insurance Corporation. Banks must have enough capital to cover bad loans and operating expenses and the FDIC demands that this capital represent 10% of the bank’s total asset base. If this level drops to 5%, the FDIC will take action to protect the banks shareholder and other stakeholders.

Due to the fact that a loan is considered a non performing asset when a mortgagor is 90 days in default of a financial agreement, the rapid rate of defaults quickly eroded the capital ratio of many banks with 140 banks falling into insolvency by the end of 2009.

The cyclical nature of economics continued from here to raise the cost of capital borrowings, and so business investment reduced considerably. Unemployment continued to rise, and it was not until major stimulus packages were injected into the major developed economies of the world that jobs were created, consumer spending increased and business models reverted to a more positive outlook in increasing their employment.

With a job to provide income, US households were once again able to spend. Critically, more households were able to meet the demands of a mortgage, and considering the lowered interest rates to stimulate economic activity, the housing market in the US has shown signs of recovery.

Category : Distressed Luxury Real Estate News

Contrary to common belief that only lower and middle-class homes, hit by foreclosure select Short Sale as alternative option, it has gone upscale now, if the statistics are any indication.
Low-end home sellers in the housing markets have very widely been using Short Sale option already. News is even those multi-million dollar residences are being sold through Short Sale, as revealed by Valley real estate agents, who have witnessed such a clear trend.
A Short Sale is one where the distressed property sellers come to an understanding with their lenders, on a sale price which is less than what they owe as mortgage balance, to sell of the property. The difference between the consented sale price and the mortgage balance is mostly forgiven, although there are cases, where some lenders reserve the right for pursuing the mortgagee for that portion also.
One of the agents in Scottsdale, Joyce Tawes of Arizona Realty ONE Group is engaged in these types of listings – about 100 Short-Sales where homes of values from $700,000 to over $3 million are involved. He says that Short Sales and foreclosure homes are a reality in today’s real-estate market and therefore you can find many luxury homes in Scottsdale, Carefree, Paradise Valley and Phoenix, which fall either into Short Sale or foreclosure categories.
Another Short Sale specialist – a Valley Realtor and licensed in California too – Rosalie Soward says that nearly 80 percent of her current business is composed of Short Sales; she is optimistic that in the next two years there will be increased volumes of Short Sale along with increased average prices; as of now in Orange County there are at least three loans in the $800,000 to $1 million category homes, going into Short Sale and this summer this trend will see increase with more high-value properties.
Arizona Regional Multiple Listing Service’s data shows that in April, the residential Short Sales reached an all-time high figure of nearly 2,025, representing 22 percent of the total sales in the month, numbering 9,200 homes. Compared to last year, the overall Short Sale activity has gone up by more than 150 percent.
In February and March, the share of Short Sales was more than 20 percent of total homes sold – as per Michelle Lind, general counsel and assistant CEO for the Arizona Association of Realtors. That is the trend we are seeing and the federal government implemented a new incentive program, which may increase the numbers as well, Lind said.
With a view to expedite Short Sales potential to avoid foreclosure, the Home Affordable Foreclosures Alternatives program, which took effect on April 5, offers financial incentives. Lind said the above program provides incentives to lenders for completing a Short Sale; the incentives are not huge – sometimes may be $1,000 to the second-lien holder; but that may be the catalyst to increase the number of Short Sales.
Many lenders have streamlined the Short Sale process, which has helped make the Short Sale a dominant force in the housing market – according to Soward. She added that the banks have gotten smarter; it is going to cost them may be $40,000 for each property, which goes to foreclosure by the time they have to pay attorneys’ fees; get the property listed; get repairs on the property and so forth; some of the banks are easier to work with, and some of the banks may change their criteria of what qualifies as a Short Sale on a weekly basis; but in general it is easier to get results.
This year has seen even some commercial properties selling through Short Sale. The property of Jerry’s Audio/Video, located at 8680 E, Frank Lloyd Wright Boulevard in Scottsdale, owned by Jerry and Claudia Kowitz, was sold to Realty Unlimited for a price of $1.01 million through Short Sale in January.
The 11,464 square-foot property’s $1 million sale price was about half of the construction cost in 2000, according to seller’s representative Natan Jacobs of Vestis Group in Tempe and buyer’s representative Bill Bisniewski of Realty Unlimited.

Category : Distressed Luxury Real Estate News

The San Diego based research firm, MDA DataQuick in its compiled review of Chronicle records the following data – about 1,000 homes each worth over $730,000 went into repossession by the lending banks in the nine-county SF Bay Area, during each of the last two years. In the same value bracket, about 223 homes have been reported to be repossessed by lending banks from January so far.

In contrast such high value foreclosures were few in numbers – in 2005 when real estate boom was in full swing, only 42 such Bay Area properties in value over $730,000 fell into foreclosure trap and in 2006 only 80 properties met this fate.

Andrew LePage, an analyst with DataQuick said that the numbers are certainly high by historical standards. What is even more striking is the upward trend of behind-mortgage payments – the very first step in the foreclosure process – in affluent neighborhoods.

The mortgage tidal wave is sweeping across the high-end properties, although not on the massive scales yet, and inescapably the underlying causes and the shift in foreclosure activity is reflected by the growth. The reasons for the mortgage distress in these areas are – economic conditions of unemployment, stock losses etc; and ARM – adjustable rate mortgage loans also have their part in it.

LePage remarked that in high-end areas, the default notices which started first at super low levels have grown 50 to 100 percent higher.

A real estate agent with Empire Realty Associates in Walnut Creek, John Sefton says that it definitely seems like the focus is shifting; we are seeing more defaults, foreclosures and short sales in the more-affluent communities; and the activity in outlying lower-cost areas has dropped off.

Another significant share of high-end foreclosures – valued over $1 million – has come to light. In the Bay Area, lending banks repossessed total properties worth $289 million in 2008; 305 such properties were taken back in 2009; and in the first three months of this year, Bay Area homes worth $86 million fell into foreclosure repossession.

The foreclosure numbers, experts say, do not fully reflect how far the high-end properties are put into short sales, as banks are more likely to allow short sale option for these expensive homes, where the home owner stays put but the home is marketed for less than the mortgage loan balance.

Pat Lashinsky, CEO of Emeryville’s ZipRealty, a nationwide brokerage, said that on high-end properties, banks take the time to short-sale, because they get a higher return and better valuation. He added that when high-end homes are sold, their condition is significantly more important, since the buyers expect them to be well-maintained. But homes tend to get thrashed in the case of foreclosure.

An agent with Vanguard Properties in San Francisco, Kendra Wall, did sell nearly 30 foreclosures during last year, which included quite a few properties worth over $700, 000. Her experience is different, as she says with any of the high-end foreclosed properties she finds them vacant while takeover, they are always stripped bare and cited one instance, where the home owners had sold everything on eBay, including the kitchen cabinets, granite countertops and the appliances.

Late last year, Kendra Wall had sold a foreclosure property in San Francisco’s Eureka Valley for $1.37 million; the same was sold for $1.725 million in 2005. This property was stripped clean as this was a high-end re-model and perhaps the contractor took out the appliances, all the fixtures, and all the hardware off the doors for not being paid for his services.

There is another view that the banks are planning repossessions and sales strategically and so buyers looking at high-end foreclosure properties should not expect fabulous deals.

Diane DeFaria, a broker with D&F Properties in San Jose commented that these high-end properties sell fast when hitting the market, since the banks are doing a very good job on this; with a view not to flood the market, banks are withholding lots of these properties and plan the repossession, after foreclosure sale public auction, and their sales to prospective buyers.

She listed another property in January, a four-bedroom foreclosed home in Meadowlands Ranch area of San Jose, for $849,000 on the low-end scale; she got about 20 offers; and sold it for $950,000. The home had sold for $1.235 million in 2006.

Lashinsky says Realtors do not always list homes as short sale, as they believe it puts them at a disadvantage while negotiating. This makes the data on the number of Short Sales unavailable, but according to ZipReality data, there is a definite upswing in the number of short sales of higher-end homes, especially in Contra Costa, Alameda, San Mateo and Santa Clara counties.

Real estate experts agreed on the point that high-end properties take longer time to become foreclosures, as affluent people are savvier and have multiple resources, so that they can extend the time, whenever they are struggling for repayments.

Adjustable Rate Mortgages would reset more in the near future, because during the real estate boom years, buyers of high-end properties often relied upon ARMs, which allowed them initially just pay the interest alone or less than that. This added to the mortgage balance eventually and most ARMs will recast loans, after the initial period of 5 years and this will cause repayment installments to soar.

Already some ARMs have recast, but as these flourished only from 2005 to 2008, the recasts are expected to swell during this year end and continue over the few years next.

The analyses made by Chronicle previously found that in the Bay Area, option ARMs were used heavily, accounting for 20 percent of all homes which were either bought or refinanced during the period from 2004 to 2008. These ARMs were used for properties averaging in value of about $823,000.

Lashinksy summarized the picture thus “I think the combination of option ARMs and the unemployment picture is taking a heavy toll on the upper end; it tends to be a little more resilient to the economy, but when you combine those option ARM resets with portfolios that have taken a dramatic drop, people start thinking this asset is a noose around their neck and they have to get out from it or it will strangle them.”

Category : Distressed Luxury Real Estate News

The collapse of the housing market has shown its result among the celebrities too. As any average american citizen, celebrities or high positioned officials can face foreclosure. The most recent example is Chamillionaire, the millionaire rapper, who’s Houston mansion has been foreclosed by the bank. The mansion is a 7,583 square foot home, which Chamillionaire picked up four years ago for $2 million. The real estate has entered in the bank’s possession.

However, the rapper says, this was a business decision, because he ‘"decided to let that house go". The reason behind is the real estate market, which went down so the house had become a bad investment. Chamillionaire says it was his most expensive mortgage, he owns other homes as well, and he could easy afford the monthly tab for the $2 million Houston property, and there wasn’t any "financial negligence or anything like that". He just let it go.

Chamillionaire also added, that he never was in that house, simply because he was always on the touring. "I just didn’t feel like it was a good business investment to pay that much mortgage for a house I was never at."

Chamillionaire claims he is very far from being broke. "I still got all the cars," he said.

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Category : Celebrities &Distressed Luxury Real Estate News