* Record number of defaults in Beverly Hills
* Many wealthy owners could still pay but walked away
* Only 12 of 180 distressed homes up for sale
By Tim Reid
BEVERLY HILLS, Feb 16 The careworn house
not far from Santa Monica Boulevard resembles millions of other
homes that have been foreclosed on since the calamitous U.S.
housing crash four years ago.
Garbage spews from trash bags behind the property. A smashed
television leans against broken furniture. A filthy toy dog lies
on its side, an ear draped across its face. The garden is
overgrown. The house needs a paint job.
Yet the property on North Rexford Drive, Beverly Hills,
California, is no ordinary foreclosure.
A sprawling, Spanish-style estate, fringed by majestic pine
trees and located near the boutiques of Santa Monica Boulevard,
its former owners were served with a default notice in 2010;
they were $205,000 behind in their payments on mortgages
totalling $6.9 million.
Welcome to foreclosure Beverly Hills-style.
Some 180 houses in Beverly Hills, the storied Los Angeles
enclave rich with Hollywood stars and music moguls, have been
foreclosed on by lenders, scheduled for auction, or served with
a default notice, the highest level since the 2008 financial
crash, according to a Reuters analysis of figures compiled by
RealtyTrac, which tracks foreclosures nationwide.
As in the default-ravaged suburban subdivisions of Phoenix,
Arizona, and Tampa, Florida, plunging real estate prices are the
root of the problem in Beverly Hills.
But the dynamics of the residential real estate collapse are
very different in elite neighborhoods such as this. The majority
of delinquent homeowners here owe more than $1 million. Many are
walking away not because they can't pay, but because they judge
it would be foolish to keep doing so.
"It's a business decision, not an emotional one which it is
for normal people," said Deborah Bremner, owner of the Bremner
Group at Coldwell Banker, which specializes in high-end
properties in the Los Angeles area. "I go to cocktail parties
and all people are talking about is whether it is time to walk
away, although they will never be quoted in the real world."
She said she had seen in Beverly Hills a big increase in
"strategic defaults," in which owners who can still afford to
make their monthly mortgage payment choose not to because the
property is now worth so much less than the giant loan used to
buy it during the housing bubble.
Strategic default is an especially appealing option in
California, one of only a handful of U.S. states where primary
mortgages made by banks are "non-recourse" loans. That means the
loan is secured solely by the property, and banks cannot go
after a delinquent owner's wages or other assets if they
Bremner said she helped a client buy a Beverly Hills mansion
last year that the prior owner had bought for over $4 million.
He decided to stop paying his $3 million mortgage - even though
he could easily afford it - when the value of the property had
dropped to $2.5 million.
"They were able to comfortably cover the loan," Bremner
said. "They were just no longer willing to see the value of the
A huge "shadow inventory" is building of elite homes that
are in default but have not been put on the market. Of the 180
distressed properties in Beverly Hills, only 12 are up for sale.
The backlog reflects the pent-up flood of foreclosed
properties of all price ranges that are expected to hit the U.S.
market this year, especially after five major banks reached a
$25 billion settlement last week with the U.S. over fraudulent
DEFAULTS ON "JUMBO' LOANS SOARING
Across the United States, the largest increase in
foreclosures and delinquencies, compared with 2008 levels, is
with "jumbo" mortgages - loans too large to be insured by Fannie
Mae and Freddie Mac, the government controlled mortgage finance
providers. 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.
Strategic defaults are now more likely among jumbo
loan-holders than any other type of borrower, according to a
report issued late last year by JPMorgan Chase & Co. Nearly 40
percent of delinquencies among non-governmental mortgages, which
are mostly jumbo loans, are strategic defaults, the report said.
"Now that these homeowners with jumbo loans are finding out
you can do this, more and more are doing strategic
foreclosures," said Jon Maddux the CEO of YouWalkAway.com, which
advises homeowners who are "underwater," the term for those
whose loans exceed the value of their home.
Nathaniel J. Friedman, a Beverly Hills lawyer, insists he is
not a strategic defaulter - that he never missed a mortgage
payment in his life. But he stopped making payments on his
five-bedroom, six-bathroom Beverly Hills house on Schuyler Road
three years ago.
Friedman, who had mortgages totalling $3 million with the
now-defunct Countrywide Home Loans, returned home one evening in
January 2009 to find a letter from Countrywide freezing his
$150,000 line of credit, which was linked to his second $900,000
loan. His primary loan was $2.1 million. The property is worth
about $2 million today.
Friedman says he decided to stop paying out of a sense of
vengeance from the moment he received that letter. He has been
in negotiations for months with Bank of America, which took over
Countrywide after its collapse, to modify the loan.
"I thought to hell with it," he told Reuters. "Why should I
keep feeding a dead horse if the bank has no confidence in me?"
"I was able to maneuver things my way because of the inertia
of the banking sector," Friedman said. He believes the bank will
blink first, and eventually modify his loan.