Hopelessly Over-Leveraged Pretenders Quit Paying Because Lenders Allow Them to Squat

Lenders worry about accelerated or strategic default because their behavior encourages it. As lenders allow more borrowers to live for free, more borrowers will opt to do so.

Irvine Home Address … 24 PISMO Bch Irvine, CA 92602

Resale Home Price …… $1,499,000

Think what that money could bring

I'd buy everything

Clean out Vivienne Westwood

In my Galliano gown

No, wouldn't just have one hood

A Hollywood mansion if I could

Please book me first-class to my fancy house in London town

Gwen Stefani — Rich Girl

The rich posers can't be content with just one home. A Hollywood mansion and a flat in London would be great, particularly if they were going up in value and you could get a HELOC to spend the appreciation. It works great until lenders take away the punch bowl.

Biggest Defaulters on Mortgages Are the Rich


Published: July 8, 2010

LOS ALTOS, Calif. — No need for tears, but the well-off are losing their master suites and saying goodbye to their wine cellars.

The housing bust that began among the working class in remote subdivisions and quickly progressed to the suburban middle class is striking the upper class in privileged enclaves like this one in Silicon Valley.

Whether it is their residence, a second home or a house bought as an investment, the rich have stopped paying the mortgage at a rate that greatly exceeds the rest of the population.

More than one in seven homeowners with loans in excess of a million dollars are seriously delinquent, according to data compiled for The New York Times by the real estate analytics firm CoreLogic.

By contrast, homeowners with less lavish housing are much more likely to keep writing checks to their lender. About one in 12 mortgages below the million-dollar mark is delinquent.

This article has a seriously flawed assumption: debt is wealth.

Rich people are not defaulting on their loans. Most truly rich people don't have home loans. It is the over-leveraged posers who have loans over $1,000,000. In fact, since the home mortgage interest deduction is capped at $1,000,000 the only reason someone would borrow that much is because they aren't rich. Also, contrary to popular belief, it isn't sophisticated financial management to carry leverage on a personal residence. Smart rich people don't do that. Dumbass posers do.

The owners of today's featured property undoubtedly felt rich when they borrowed $1,460,000. Now that they are living in a rental, they probably don't feel quite so wealthy and sophisticated.

Though it is hard to prove, the CoreLogic data suggest that many of the well-to-do are purposely dumping their financially draining properties, just as they would any sour investment.

“The rich are different: they are more ruthless,” said Sam Khater, CoreLogic’s senior economist.

The delinquency among large loan owners is not a sign of the rich being ruthless, it is a sign of the pretenders getting wiped out by a weak economy and the huge debt-service payments on their borrowed lives.

Five properties here in Los Altos were scheduled for foreclosure auctions in a recent issue of The Los Altos Town Crier, the weekly newspaper where local legal notices are posted. Four have unpaid mortgage debt of more than $1 million, with the highest amount $2.8 million.

Not so long ago, said Chris Redden, the paper’s advertising services director, “it was a surprise if we had one foreclosure a month.”

If you look at the chart provided to the New York Times by CoreLogic, the rich posers have been defaulting just like their subprime brethren, but lenders have opted not to foreclose on this group because they know what it will do to prices — and the associated bank losses.

The sheriff in Cook County, Ill., is increasingly in demand to evict foreclosed owners in the upscale suburbs to the north and west of Chicago — like Wilmette, La Grange and Glencoe. The occupants are always gone by the time a deputy gets there, a spokesman said, but just barely.

In Las Vegas, Ken Lowman, a longtime agent for luxury properties, said four of the 11 sales he brokered in June were distressed properties.

“I’ve never seen the wealthy hit like this before,” Mr. Lowman said. “They made their plans based on the best of all possible scenarios — that their incomes would continue to grow, that real estate would never drop. Not many had a plan B.”

Speculative bubbles are a form of mass insanity where everyone ignores the obvious risks, and nobody makes a plan B. Paradoxical as it may sound, that is one of the reasons these things blow up. Whichever way the herd moves, the market is sure to move counter to it.

The defaulting owners, he said, often remain as long as they can. “They’re in denial,” he said.

Some are in denial, but many have accepted their fate and gaming the system.

… Lenders are fearful that many of the 11 million or so homeowners who owe more than their house is worth will walk away from them, especially if the real estate market begins to weaken again. The so-called strategic defaults have become a matter of intense debate in recent months.

Fannie Mae and Freddie Mac, the two quasi-governmental mortgage finance companies that own most of the mortgages in America with a value of less than $500,000, are alternately pleading with distressed homeowners not to be bad citizens and brandishing a stick at them.

Yep: Fannie Mae Encourages Strategic Default by Reducing Punishment Time for New Loan and Fannie Mae Bluffs Strategic Defaulters with Empty Threats. There appears to be no coherent policy at the GSEs, nor is there likely to be as long as politicians control them.

In a recent column on Freddie Mac’s Web site, the company’s executive vice president, Don Bisenius, acknowledged that walking away “might well be a good decision for certain borrowers” but argues that those who do it are trashing their communities.

The "trashing their communities" argument is silly. Houses change occupancy all the time without disruption to the community. Accelerated default may harm property values, but other than remaining owner's fantasies, and lenders' balance sheets, nothing changes. It angers me when lenders resort to childish peer pressure to keep people paying onerous mortgages.

The CoreLogic data suggest that the rich do not seem to have concerns about the civic good uppermost in their mind, especially when it comes to investment and second homes. Nor do they appear to be particularly worried about being sued by their lender or frozen out of future loans by Fannie Mae, possible consequences of default.

The delinquency rate on investment homes where the original mortgage was more than $1 million is now 23 percent. For cheaper investment homes, it is about 10 percent.

OMG! Those numbers are a catastrophe.

With second homes, the delinquency rate for both types of owners was rising in concert until the stock market crashed in September 2008. That sent the percentage of troubled million-dollar loans spiraling up much faster than the smaller loans.

“Those with high net worth have other resources to lean on if they get in trouble,” said Mr. Khater, the analyst. “If they’re going delinquent faster than anyone else, that tells me they are doing so willingly.”

This guy simply doesn't get it. THESE PEOPLE ARE NOT RICH: THEY ARE POSERS!

There are some truly wealthy people defaulting on mortgages because it is a wise business decision for them, but the vast majority are simply pretenders who couldn't make the payments if they wanted to.

Willingly, but not necessarily publicly. The rapper Chamillionaire is a plain-talking exception. He recently walked away from a $2 million house he bought in Houston in 2006.

“I just decided to let it go, give it back to the bank,” he told the celebrity gossip TV show “TMZ.” “I just didn’t feel like it was a good investment.”

The rich and successful often come naturally to this sort of attitude, said Brent T. White, a law professor at the University of Arizona who has studied strategic defaults.

“They may be less susceptible to the shame and fear-mongering used by the government and the mortgage banking industry to keep underwater homeowners from acting in their financial best interest,” Mr. White said.

Dr. White gets it.

… In the middle of a workday, one troubled homeowner here leaned over his laptop at the kitchen table, trying to maneuver his way out from under his debt and figure out the next big thing.

His five-bedroom house, drained of hundreds of thousands of dollars of equity over the last 13 years, is scheduled for auction July 20. Nine months ago, after his latest business (he has had several) failed in what he called “the global meltdown,” the man, a technology entrepreneur, said he quit making his $9,000 monthly payments.

“I’m going to be downsizing,” he said.

The man spoke on the condition of anonymity because, he said, he did not want his current problems to interfere with his coming reinvention. “I’m a businessman,” he explained. “I have to be upbeat.”

Ahhh the schadenfreude….

Lenders cause defaults by allowing borrowers to squat

The uproar over what lenders call strategic default (and I call Accelerated Default: What Strategic Default Really Is) centers around one key idea: borrowers won't repay loans if they don't fear foreclosure. Lenders created their own moral hazard when they chose not to foreclose on delinquent borrowers. Did they really think the word wouldn't get out?

Once people see their neighbors stop paying their mortgages and stay in their houses, they get angry. If those who are paying are struggling themselves, they start to feel foolish for being a chump. People won't endure much hardship when they believe they don't have to. Put yourself in their shoes: if you knew you could quit making your housing payment (rent or mortgage) and you wouldn't have to move, would you keep paying?

Squatting causes strategic default. That moral hazard cannot be avoided. Lenders cannot simply wait out the bad times and let people squat without having millions of other borrowers quit paying. I am amazed lenders thought they could allow squatting without consequence. They were tragically mistaken.

Option ARM Implosion

  • This property was purchased on 11/17/2005 for $1,825,000. The owners used a $1,460,000 Option ARM from WAMU and a $365,000 down payment.
  • On 10/10/2006 they opened a HELOC for $240,000. For their sake, I hope they maxed it out and got some of their down payment back.
  • They got to squat for about 18 months.

Foreclosure Record

Recording Date: 07/14/2009

Document Type: Notice of Sale

Foreclosure Record

Recording Date: 04/07/2009

Document Type: Notice of Default

Irvine Home Address … 24 PISMO Bch Irvine, CA 92602

Resale Home Price … $1,499,000

Home Purchase Price … $1,147,500

Home Purchase Date …. 6/10/2010

Net Gain (Loss) ………. $261,560

Percent Change ………. 22.8%

Annual Appreciation … 367.6%

Cost of Ownership


$1,499,000 ………. Asking Price

$299,800 ………. 20% Down Conventional

4.61% …………… Mortgage Interest Rate

$1,199,200 ………. 30-Year Mortgage

$296,749 ………. Income Requirement

$6,155 ………. Monthly Mortgage Payment

$1299 ………. Property Tax

$100 ………. Special Taxes and Levies (Mello Roos)

$125 ………. Homeowners Insurance

$142 ………. Homeowners Association Fees


$7,821 ………. Monthly Cash Outlays

-$1439 ………. Tax Savings (% of Interest and Property Tax)

-$1548 ………. Equity Hidden in Payment

$518 ………. Lost Income to Down Payment (net of taxes)

$187 ………. Maintenance and Replacement Reserves


$5,539 ………. Monthly Cost of Ownership

Cash Acquisition Demands


$14,990 ………. Furnishing and Move In @1%

$14,990 ………. Closing Costs @1%

$11,992 ………… Interest Points @1% of Loan

$299,800 ………. Down Payment


$341,772 ………. Total Cash Costs

$84,900 ………… Emergency Cash Reserves


$426,672 ………. Total Savings Needed

Property Details for 24 PISMO Bch Irvine, CA 92602


Beds: 4

Baths: 3 full 2 part baths

Home size: 3,900 sq ft

($384 / sq ft)

Lot Size: 9,391 sq ft

Year Built: 2000

Days on Market: 15

Listing Updated: 40358

MLS Number: P741000

Property Type: Single Family, Residential

Community: Northpark

Tract: Cmbr


Model perfect home in the guard gated community of Northpark. This Spanish Colonial style home is highly upgraded and features 4 spacious bedrooms, 4.5 baths, and an executive office off of the luscious landscaped courtyard. Fabulous chef's kitchen with s/s appliances,Sub-Zero built-in refrigerator ,elegant granite,breakfast bar and butlers pantry. Gorgeous master suite and bath with large walk-in closet. Entertainer's dream backyard with pool and waterfalls, spa,and built-in BBQ center. This home sits on one of the largest lots in the community and resides right across from the large common area.

The flipper will make a fortune

I was at the auction on June 10 when this property was purchased. It was the first property that will require financing over the conforming limit that has gone to auction in Irvine in quite some time. I expected it to be postponed at the last minute. When the bidding started, the young man who bought the place bid $1 over the opening bid of $1,147,500. It must have been hard for him to contain his excitement when nobody bid him up.

This property sold for $1,825,000 back in 2005, and he bought it for $1,147,501 at auction. Assuming it has dropped 20% from the peak, it is still worth $1,460,000. Any way you look at it, this will be a home run.

It is risky. It may be difficult to sell because jumbo financing is still very hard to come by, and there is much competition at the higher price points, but still… he has plenty of room to lower his price and get out with a hefty profit.

I can see why people are forming funds to buy trustee sales and flip them. It is a lucrative business, and there is no shortage of properties in the foreclosure pipeline.

As many of you know, we launched a trustee sale business earlier this year helping individuals buy and sell trustee sale properties. If you would like to learn how you can get involved with trustee sales, please contact me at sales@idealhomebrokers.com.

47 thoughts on “Hopelessly Over-Leveraged Pretenders Quit Paying Because Lenders Allow Them to Squat

  1. winstongator

    I’ve seen where people lament not being able to ‘time the market’, but this seems to be a great example. When markets move down, people get squeezed, and cash (liquidity) is king. The problem is when to pull-out and when to get back in. I think when you see everyone else getting in, it’s time to get out, and when there is a huge liquidity premium, put your cash back to work.

    Even with a 6% commission, this is a 20% ROI – for possibly a very short term, 3-6 months. 40%-80% annualized returns! How long before the hot money gets in there?

    1. IrvineRenter

      The higher the price of the property, the greater the liquidity premium is. I was shocked when there where no competing bids at this auction. The biggest player in Orange County trustee sales was present at the auction site, and he did not bid on it. I thought this would have been bid up to $1,225,000 to $1,275,000. The property is in pristine condition, so I doubt the flipper needed much renovation money.

      The foreclosures markets have not been attractive enough money to clear the markets. That is why banks are trying to approve more short sales. There is still significant need for liquidity at the auction sites, but people are so afraid of real estate right now that money hasn’t been going there. It should. The opportunities are tremendous.

      1. winstongator

        I don’t buy that the people that would bid for these are that afraid. I would imagine that there are plenty of money managers in LA who have enough savvy and see enough of these deals that would be able to bring cash to make those kinds of returns.

        I am wondering if the returns will really be that good. Definitely one to follow up on.

        1. IrvineRenter

          There are many funds buying these properties, but the dollar volume required is very, very large. Think about the cash value of all these properties that must go through foreclosure. It is in the billions.

          1. lowrydr310

            Our government debt increased by $1.9 trillion last year. What’s the big deal if another hundred billion is tacked on and we help these banks wash the junk through the system?

            I’m being sarcastic, but a few billion just doesn’t seem like a big deal compared to TWO TRILLION.

      2. Anonymous

        Re: lack of flipper interest
        Why tie up money in a luxury property for a potential 20% with more risk (ie. High end still falling maybe, plus takes longer to find a jumbo loan buyer) when you can buy several entry level properties that need a little work, and fix them up and flip them in less time for a greater percentage profit with less risk ( low end rising many buyers can get cheap financing)? Less risk, more reward that way I would guess.

        1. Planet Reality

          This is true.

          The real theft is in the low end conforming trustee sale market as featured here.

          First the tax payer subsidized banks are selling them to 100% cash buyers for 20-40% what they could fetch on the open market.

          Then the 100% cash buyers are flipping them to purchasers with Fannie and Freddie debt that will ultimately have high default rates and losses will be paid for again by the tax payer.

          1. AZDavidPhx

            And you believe that interest rates are just going to stay at a permanently low plateau to continue enabling all of this Tom Foolery? They cannot continue to pump these GSE’s for long. How is the tax payer going to step up again when interest payments on the national debt equal GDP?

  2. winstongator

    However, if the price is back at 2003 – $1.275M, profit net 6% commission is 4.4%. Is there any new construction going on? How would a property like this get priced for custom building? Replacement cost should have some impact on where this ends up.

    1. IrvineRenter

      Prices in Orange County aren’t impacted much by replacement costs. Once prices exceed replacement costs, the excess adds to land value. The reason the Irvine Ranch land is worth so much is because prices greatly exceed replacement costs and the Irvine Company does not provide sufficient product to drive prices down to replacement cost levels.

      1. winstongator

        So to get a 0.22 acre lot with five neighboring properties, I would need to shell out $800k-900k? Are there people buying lots or contracting for new homes at those levels?

        1. IrvineRenter

          There are no lots available in Irvine as the The Irvine Company completely controls land sales, and they are currently the only builder as well. The price of the land is rolled into the price of the house. The sticks and bricks can be put up for anywhere from $50/SF to $90/SF depending on finish quality. Of the remainder, some goes to development costs for roads and streets, but much of that is rolled up into the Mello Roos bonds. The vast majority of home price in Irvine goes to land value which in reality is Irvine Company profit.

  3. Planet Reality

    This is yet another example of the banks helping to transfer money from the tax payers to the truly wealthy. This 100% cash buyer will make a huge profit special thanks to the tax payer subsidies. The bank could sell this for $1.4M but they don’t need to since the tax payer already picked up the tab through higher taxes and eventually inflation.

    1. AZDavidPhx

      I find it very hard to believe that the banks would let an easy profit go. How do we know that the previous owner did not strip the joint or pour concrete into every toilet / sink in the whole place? Maybe just needed some TLC

      1. Planet Reality

        David, believe it… This is happening in spades. Banks are selling houses at auction to 100% cash buyers at 20-40% off market prices. Cash is king and the truly wealthy are benefiting at the tax payers expense. The banks are allowed to operate with mark to fantasy and 0% interest rate investment in treasury bills.

        1. Eat that!

          Where are the pitch forks and torches?

          Wait, sorry Dancing with the Stars is on, don’t have time to be outraged.

        2. no worries

          This I totally believe.

          Once they finally decide to be rid of the asset, the banks really don’t seem to care what they get for it as long as its cold, hard cash.

          1. tenmagnet

            Yeah, I agree
            The fact that WaMu took over a $500K hit on this one doesn’t seem to matter.

      2. AZDavidPhx

        So it sounds like nobody can answer as to the condition of the house when the flipper snapped it up at the auction block. The bank just handed over a perfectly fine house for 20% under FMV just because it was cheaper than paying 6% to a realtor?

  4. Enm

    I’m surprised that the second home serious delinquency rate over $1M is significantly lower than that for owner occupied homes. I would assume very much the opposite. Why are second homes holding up so well?

    1. AZDavidPhx

      Because most of the “second homes” were probably registered by the liar buyers as primary residences. I have no doubt that many of these “primary” residences in foreclosure are actually spec houses / vacation houses. I don’t pay a lot of attention to those statistics as the pool has been pissed in so much at this point, it’s impossible to know what all is actually in it.

      1. IrvineRenter

        The only explanation I can offer is what you said: many second homes were classified as primary residences. It is very surprising that the default rates on these don’t greatly exceed that for primary residences. Wouldn’t a distressed debtor quit paying on the second home before they went delinquent on the first? Perhaps those who are wealthy enough to truly afford second homes are not in as bad a financial condition as the large number of posers who are delinquent on the only home they own?

        1. Anonymous

          Maybe it’s because second homes had higher financing bars than primaries. So the seconds are regular people really buying a second home. Whereas some of the “primaries” are specuvestors looking for easier financing (ie. If someone is willing to play fast and loose to try and flip – what’s to stop them from lying to also say it is their primary residence?

          1. AZDavidPhx

            How hard is it to lie about whether a house is going to be primary or secondary? Seriously – oh I get a higher rate if it’s not my primary residence? Ok, it will be my primary residence – I promise. Pinky swear!

    2. freedomCM

      maybe it is because a BK judge can cram down second houses, but not primaries?

      debtors may be letting their first house to to FC, file BK, then move into the reduced mortgage second house to live in?

  5. AZDavidPhx

    Love the quote by the anonymous baby boomer Pollyanna:

    I’m a business man I’ve got to be upbeat

    It sums up the poser mentality perfectly. He really is not upbeat but he has to con himself into believing that he is because during the bubble economy – magical thinking actually worked from time to time. Now he is trying to replay those old tapes but it’s not working out.

  6. Sue in Irvine

    Interesting street name…Pismo Beach.
    I love Pismo Beach, such a classic beach town.

  7. Anonymous

    Another possible reason the over a million delinquency rate may be higher is that the high income earners may have bee hit harder in the recession. For instance, imagine a high income individual in boom times making fantastic bonus money or profits from a small business. They might have assumed the gravy train would last forever and expanded their lifestyle (including their house and mortgage payment) to match. Now the recession hits, the bonus disappears and the small business large profits evaporate. Suddenly they can no longer make their mortgage payment.

  8. Laura Louzader

    Another reason that the default rate on upper bracket houses is greater is that many of the buyers of these houses were nowhere near being “high income”.

    I have met two couples here in Chicago with incomes well below the $100K level who were able to “buy” houses priced at over $600K during the Great Rampage, thanks to “liar loans” and NINJA loans. One young couple had a combined 2-earner income of $65K and purchased a house priced at $900K in Park Ridge, next door to an elderly friend of mine. They were out of that house when the mortgage adjusted.

    There were far more high-end ($1M- $5M)condos and SF houses constructed here in Chicago than there ever could have been a real market for. By market I mean people financially qualified to by them even by loose modern standards. I

    So there is probably a bigger superfluity of expensive houses, beyond what the market could ever absorb with honest loans, in coastal CA.

  9. Home Searcher

    Irvine Renter,

    Over the weekend I checked out an open house on 40 Meadowgrass, Irvine, 92604. The property was listed at $350K. All bids had to provided between 1-4 on Saturday. It was a circus. Lot’s of peaople and lot’s of bids were placed. Can you dig up some more information on that property and the outcome?

    1. nefron

      Oh, I totally forgot about that place! I was going to go, just to see how many people showed up and what happened. Yes, more, more!

    1. AZDavidPhx

      Says they polled 1000 people at random. This seems like a pretty small sample considering we have 50 states among which only a handful got caught up in the bubble. I suspect that if the same survey were restricted to CA,AZ,FL the statistic would drop significantly. Notice how realtors and market pumpers are quick to point out how each and every market is different and one cannot be compared to the other. They will then take statistics such as the one above that are based upon the aggregate of all markets and use it to spin the other way.

    2. mike23w

      “In this year’s survey, only 8 percent of homeowners with mortgages didn’t know whether they have a fixed-rate or adjustable-rate loan, or something more exotic.

      Compare that to two years ago, when a Bankrate-commissioned poll found 26 percent of borrowers couldn’t identify their mortgage type.”

      holy crap; people are stupid.

  10. Marc

    I don’t see how this will be a home run at $384 / sq ft. And only 4 BRs for $1.5m? I doubt that the flipper gets much more than what he paid for it…

    1. AZDavidPhx

      You would think that if it were such an easy homerun, a second bid might have been placed by SOMEBODY. I can’t imagine all the people at these auctions go for the people watching entertainment value.

  11. George Williams

    This one is easy money: recent comps. are in the $1.5mm – $1.6mm range, and this particular home has a bigger lot than most recent Cambria model sales in Northpark.

  12. Richard

    Unbelievable. NY Times blames the problem on the wealthy. You assert that it’s not the wealthy but posers. Then the statment “THESE PEOPLE ARE NOT RICH: THEY ARE POSERS!” followed by a picture of the Beverly Hillbillies with the caption “We’re not as rich and sophisticated as you California folk. We heard about you city people who borrowed against your homes and lost them. Why don’t you take the tax money from us rubes who don’t know much about your fancy ways. We live to work and pay the bills of losers like you.”

    And then you show a picture of some black guy with the caption “Shove that mortgage up your a$$”.

    You’re an obvious racist.

    1. lowrydr310

      Hey ignorant dumba$$, that “some black guy” is Chamillionaire, the person mentioned in the article quoted just to the left of the picture. If you haven’t been following mainstream news, he’s one of the more prominent people who openly admitted to strategically defaulting on his mortgage, essentially (though not directly) saying “shove that mortgage up your a$$” (which I can’t blame him for – more prominent people should do this). I don’t see what race has to do with any of this.

  13. 3rd worlder

    America was finished by 2000 when NAFTA completed offshoring what was left of our industrial base to China. The housing boom from 2000-2007 based on creative credit was just a stop gap before the reality of having nothing of substance finally set in.
    Gee, does anyone have any good ideas for the next scam?

  14. Mike

    Home run? Closer to gambling.
    The high end in OC is plunging hard. Places in Laguna where I’m looking have had bigger drops than this over the last year and are unsold.
    Why is Irvine different? Without finance available who is this guy going to sell to? How is ANYTHING in Irvine worth north of a million?

Comments are closed.