Luxury Foreclosures: True Homeowner Hardship or Savvy Business Decision?

As the 2012 calendar year gets underway, the nationwide housing market woes are well-known and continue to be well-documented.  The combination of financial instability, political misdirection, and lender hesitancy [to take losses] have cultivated a lethal cocktail of foreclosures and borrower defaults.  What is less familiar, however, is the newly realized default and foreclosure trends in high-end neighborhoods.  Yes, even the star-studded territory of Beverly Hills, although still the home to lustrous faces of stage and screen, big-time doctors and lawyers, is not immune to the housing crisis.

Was it just a matter of time before the tidal wave of default spilled over the Hills like a domino effect from the neighboring areas? Or could something else be at play here that spawned the arrival of increased luxury foreclosures? Analyzing political innovations, specifically the introduction of SB 931 and Civil Code 580E, we'll find that homeowners are no longer inclined to hitting the snooze button to stave off foreclosure proceedings, but instead are jumping out of bed to the foreclosure alarm because of new political incentives.

What is SB 931? SB [Senate Bill] 931 requires the holder of a first mortgage or deed of trust that is secured by residential real property to accept the sale proceeds as paid in full, and requires that note holder to fully dismiss the remaining amount of the borrower's indebtedness on the deed of trust or mortgage following the sale. Translated simply... following the completion of either a foreclosure or short sale, the lender will no longer be permitted to seek deficiency judgments from the homeowner for the forgiven amount. 

What is Civil Code 580E? This law is very similar to SB 931, but extends the non-recourse requirement in the event of a sale to all junior lien holders as well. 

Is it a coincidence that the default rates in luxury RE markets increased following the introduction of political innovations such as SB 931 and Civil Code 580E?  Or are the default trends arising from the increased understanding of Realtors and homeowners of these political enactments?  I would argue the latter, given that more and more cases of "strategic" default have been interjected into these luxury RE markets. 

Strategic default refers to a situation in which the homeowner intentionally CHOOSES not to pay his / her debt obligation because the property is now worth much less than the loan used to buy it at the artificially high price during the housing bubble. This is contrary to actual default cases in which homeowners were unwillingly forced into missing payments due to income loss, employment changes, or mortgage payment adjustments.  Local statistics show an increased number of houses in Beverly Hills have been foreclosed on by lenders, scheduled for auction, or served with a default notice [ForeclosureRadar.com], yet very few were actually listed for sale by the owners.  Additionally, 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.[lpsvcs.com] In light of the facts:

·         Foreclosure and default rates have risen in luxury areas, like Beverly Hills

·         Of these homes in foreclosure, very few were actually listed

·         Foreclosure rates on Jumbo loans have increased greater than any other form of loan

We are taking the stance that homeowners are becoming more aware of the political reforms which are for their benefit, and are reacting accordingly by intentionally defaulting on their upside-down loans.  Knowing that their lenders can no longer pursue deficiency judgments after the sale of their home, residents of Beverly Hills are thus choosing to jump out of bed and wake up from their underwater slumbers.

Banks, in reaction to the adjusting behaviors of their borrowers, are introducing new incentive packages to homeowners attempting a short sale, as a way to combat homeowner’s new found indifference to walking away.  We’ll dive into this topic of bank behavior changes in a future article….