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Are Banks Afraid to Foreclose on the Rich?

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I got this report from an attorney who is doing work in one of the top five foreclosure states. I’m relying this account in a somewhat sanitized form; he provided far more in the way of specifics.

One of his colleagues has a monthly mortgage payment considerably above $20,000 a month. He has not made a single payment in over 18 months. He has also not received a foreclosure notice or even as much as a call from his servicer.

He knows of 20 people personally in his community who have mortgages of over $20,000 a month who have not made a payment in over a year. As with his case, there has not been a peep from the bank about the failure to pay. Some are nevertheless freaked out, concerned that the sheriff will show up any day, and have moved out.

The only theory my contact could come up with is that the high end appliances in these homes would make them particularly attractive targets for stripping, and the banks figure it’s cheaper to keep the nominal homeowner in place rather than pay for security. Another possibility is that the market for $5 million and over homes in this area is so thin (as in non-existant) that they are afraid to take over and put any homes on the market out of concern for revealing where prices are now.

Needless to say, this anecdote illustrates the two tier system we have in the US, of one set of practices for the very well off and another for the great unwashed.

Two questions for readers:

1. Do you see evidence of bank reluctance to foreclose in neighborhoods with very high end homes? Is this example isolated, or part of a broader phenomenon?

2. If so, what do you think is driving this behavior?

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87 comments

      1. david chess

        I’ve noticed that banks are slow to foreclose on people who have the resources to challenge them in court. The procedure the process requires is out of reach for the average person whose house is being forclosed.

        Yves, please wiki the FHFA, the Federal House Finance Agency. It is an agency, independent of the federal government, that controls fannie and freddy policy. Created in 2008, it smells like the FED. It seems that all houses being foreclosed on counterfiet chain of title are then assigned over to Fannie and Freddy. The taxpayer gets the loss, the properties are controlled by this independent agency. This is designed to hand title ownership to FED cronies. Check it out. The FHFA is the reason Fannie and Freddy can’t write down principal to make modifications work.

  1. fcc

    No it is not an aberration. As a contractor (in MA) I’ve done many jobs on “Mortgage Hill” where it’s not unusual to see two beemers in the driveway and rented furniture in the house; these people don’t get foreclosed. I know one guy who hasn’t made a payment in two years.

    5 miles away in Swamp Lane every third house is for sale.

    What do I think is driving it? The belief amongst bankers that people who were successful are intrinsically more moral than others, and that they offer the best future opportunity for profit.

  2. Matt SF

    It’s either they don’t want to foreclose on the holidays, or the banks can’t simply produce the note on the property. Higher income buyers are, by in large, more savvy about financial matters and generally have access to better legal advice, so it makes since that if the banks know they have a weak hand, it’s better to play “see no evil, speak no evil” for the time being.

    A second alternate theory could be a fear of mark to market accounting. Since a foreclosure is, in essence, a forced sale at current market conditions to expedite the sale, perhaps the banks simply don’t want to know (or don’t want the public to know) how deep their proverbial rabbit hole actually goes.

  3. Bob Beck

    I like Matt SF’s second alternate theory. In a non recourse jurisdiction the dollar loss on the forced sale is large and immediate. In FL if the bank is still short after the forced sale they can hound the former owner or at least pretend that debt is an asset.

    I find differences in bank behavior between recourse and non recourse jurisdictions informative.

  4. AR

    My relative who’s a RE agent in a ritzy FL gulf coast beach resort says there aren’t foreclosures there. Listings are very slow to move, often over a year. People are reluctant to lower their asking price. Maybe that’s because they’re not paying or desperate?

    Maybe the bankers don’t want to destroy their own neighborhoods?

    1. attempter

      “Don’t want to destroy their own neighborhood.”

      We need a tale of a bankster who stopped paying even as he continues to foreclose on others.

      I like this revelation of two-tier system. Regardless of the proximate reason, we must always represent it as the rich again getting away with what the non-rich can’t. The banks and government choose to allow them to stay without pay, to jubilate in place. So let’s claim and exercise the same right.

  5. chas

    Most likely don’t know where the notes are. These houses would have been good bait in CDO’s. They fear the rich are more likely to resist – lawyers, doctors. More likely to ask, “where’s the note”. Prefer to go under after the bonuses.

  6. Tom Hickey

    The short answer is that it is not in the bankers’ interest to foreclose. There might be quite a few reasons or only one, like it the bank CEO’s brother-in-law’s house. Whatever the reasons may be, it sure looks like a two-tier system of the privileged and the peeons. So what else is new?

  7. flash91

    Mark to market may be a large part, but more immediate would be the tax status.

    Once a bank forecloses, they start owing the property tax on the non performing asset. That’s an immediate drain, as opposed to a delayed problem.

    I could totaly be wrong though.

  8. Doug Terpstra

    In addition to obsolescence from dereliction, banks are likely procrastinating due to the rapid rack-up of liabilities in property taxes, HOA fees, mechanic’s liens, utility bills, and any number other assessments from the time of repossession to the time of (fire) sale in some distant future.

    Wow. $20K a month. Squatters never had it so good. Imagine the compounding snowball of losses in gated enclaves as just a few of these outmoded energy-sucking behemoths with their Jurassic solariums start sprouting weeds, plywood windows, and unhinged shutters. At some point the pretending must end, forcing another bigger imminent banking crisis.

    Bernanke can’t possibly buy all of these too and the commercial flops can he? Surely Ron Paul will catch on. I’m looking forward to the new Obama-Republican regime.

    1. psychohistorian

      Bernanke and crew have already bought all this stuff and it is sitting in Maiden Lane I, II and III.

      History will not be kind to the propaganda being spewed about how robust/vacuous the current economic recovery is. Since we now really have socialism for the ultra rich I guess it is just trickle down to extend the faux rule of law and welfare queen status to the semi-rich. Maybe the bottom will never fall out of this charade if they can keep the sheeple in line and ignorant.

      What is the time limit of extend and pretend? As long as the nukes last I guess. We have a ways to go then. Hang on!

      1. psychohistorian

        I had a further thought. What does this sort of conscious decision making say about the level of collusion that must be going on at all sorts of levels keeping this house of cards from falling??????????????????

        Someone should give someone a BLOWjob and knock this thing down. Its bad example for the children.

        1. Francois T

          What does this sort of conscious decision making say about the level of collusion that must be going on at all sorts of levels keeping this house of cards from falling?

          I think about it this way: Not one financial crisis since 1910 has occurred without some financiers trading the Armani suit for the orange jumpsuit. None…except now!

          So yes! The level of collusion is very high, fear is intense (How else can one explain the unconscionable Irish bailout, backed up by the people’s pensions for Pete’s sake??) and the situation is highly unstable in Europe and here to. Chris Whalen, as well as Yves BTW, have predicted the unraveling of some big banks for 2011. That is going to be quite the show.

  9. Dikaios Logos

    I’d think the fear of mark-to-market is the biggest driver. The post’s description of the neighborhood makes it clear if the weakness were ever known, it might kill almost all the value in that neighborhood.

    I know of one foreclosure on a house with a circa $10K mortgage on a street that has housed very wealthy and powerful people, including a few I am sure everyone posting here would know about. But while the prices might fall there because of the foreclosure, I am guessing it would be a fraction of that caused by a foreclosure in the neighborhood described in the post. And I believe the banks have a pretty good algo for seeing those differences.

  10. bill

    I know a man who hasn’t been paying for 18 months. His home is in a very nice neighborhood. He hasnt recieved anything from his servicer. He told me that he asked a friend at another bank if he would check out the status on his loan. Not even a notice of default yet.

    I like the mark to market explanation. In our area, the 500,000 plus market is dead (500,000 is a mansion here). The houses in that range have lost alot more equity than the smaller houses. So the negative equity is significantly more than all the crap fees the bank can collect foreclosing.
    Were jumbo loans securitized more or less often than conventional loans?
    I’m guessing that most jumbo loans arent owned by the GSEs and I wonder if that has any significance.
    Perhaps someone realizes that rehabilitating a trashed squatted in mansion is significantly more expensive than fixing a trashed modest home. Maybe they are hoping the once rich occupier wont trash the mansion. I wouldnt put it past alot of them if they thought they could make a few bucks selling copper or light fixtures.

  11. required

    Yves, extending and pretending, while clicking their heels three times and repeating, “There’s no place like home.”

    1. Ron Wilkinson

      The last big project I was on in Montecito. The client had sold his business in Santa Ynez to finance the extensive remodel, not sure if that went into the purchase. He kept his business in Santa Barbara.
      When we were getting towards the end of the project the client was less friendly and my boss said he was complaining about cost but I saw much more money going out after this bit of here-say hit my ears.
      I personally went and picked up a very expensive antique in a Montecito shop (no bargain hunting there) to deliver at that house. It was lavishly furnished as the remodel finished up.
      The house went on the market shortly after we finished the job.
      One funny part of this is at the entry gate on East Valley Road there’s a mature hedge inside the gate screening a view of the house, a new-old (mature) hedge, it was put in by the client before he marketed it. This was 06 early 07.
      I think this reveals a tone of spending and attitude in the moneyed residents of So Cal.

  12. EconE

    In the neighborhood in Los Angeles where I grew up (Hancock Park/Windsor Square) the banks have been selectively shortselling the properties on the arterials over the last couple years. In the neighborhood, there are two N/S arterials (Highland and Rossmore) and 2 E/W arterials (3rd and Beverly).

    I have seen many homes (12 or so) on Highland (the busiest of all the streets) sell short, and one on each of the other arterials both N/S and E/W but I have only seen one sold short in the “interior” streets although there are many homes on these streets that are owned by flippers.

    My guess is that the banks prefer to get rid of the less desirable high dollar homes (those with the biggest location flaws) before they start to foreclose on the more desireable ones.

    The homes in the neighborhood are all 7 figure homes with a number of them being upwards of $10,000,000 (bubble prices).

    I wouldn’t doubt that there was some serious HELOCing going on. IrvineRenter of the Irvine Housing Blog profiled the property on Rossmore.

    http://www.irvinehousingblog.com/blog/comments/heloc-abuse-hollywood-style/

  13. Andy

    Lake County, IL here. Many of multi-million dollar foreclosures, but many more “sleepers.”

    A local realtor told me she was SHOCKED to find out how many people are living in mansions without paying on them for over a year.

    There were too many McCastles built here on spec. I have believed for a while that the banks aren’t foreclosing because there are too many $1,000,000+ homes in trouble. It would definitely force the market to market, but if these things start hitting the market at the rate the loans are actually going bad, it would crash the market beyond the 30% it’s already dropped. I think they’re trying to control the supply flow to prevent a feedback loop on dropping mansion prices.

    And yeah, taxes, maintenance, liability, etc, etc, etc.

    Saks is doing well here. Think of all the goodies you can still afford when you’re not paying $20,000 a month on a mortgage. New Lexus SUV, honey?

    1. psychohistorian

      There were the Roaring Twenties and then there were the Naughties which we are still in to as overtime or is that extend and pretend.

    2. Doug Terpstra

      History rhymes. Recall the grandiose robber-baron mansions of the early 20th century. In the aftermath of the first Great Depression (hereafter to be renamed the mini-GD), many porticoed, colonnaded, over-fenestrated mammoths in leafy urbs like Grand Rapids, MI, were hacked into six or eight tenements. Soon, in the torrid, post peak-oil Sunbelt, many of today’s scorched, exurban McCastles are sure to be stripped and abandoned while others are hacked into McNuggets.

    3. traderjoe

      I agree with the extend and pretend explanation. The past couple of years has been one giant and multi-headed attempt at reflating old or new bubbles. This would allow the banksters and insiders to sell their newly re-inflated assets and continue to collect salaries and bonuses for as long as possible. There is no one in charge that has the incentive to prick the new bubble. That would leave them ‘out-of-charge’. Regulators, banksters, politicians, etc. all want to keep the top spinning. it’s going to be one helluva hangover.

  14. Elroy

    Interesting note up there about maybe the bankers don’t want to destroy their own neighborhoods. But I think it’s a combination of the banks’ inability to manage their loans and the notes thereunder, courts overwhelmed with cases and a savvier homeowner with more lawyers than ever.

    We live in one of the cheaper homes in a very wealthy neighborhood and we’re behind, ohhh, I guess it’s almost 3 years now. Our mortgage was/is about $4,500/month. We’ve fought tooth and nail every month and the tide is finally swinging in our favor. We knew the loan we signed was f’d up when we signed it; they added a point, they didn’t properly disburse funds after closing, the originator went out of business within months and the new note-holder GMAC railroaded us into a “loan modification” after we defaulted in 2007…that didn’t modify anything, but tacked on another $40,000 to our loan. (i’m skipping a lot of details of course.)

    With our 3rd (and recently adding a 4th lawyer of counsel), currently in Chapter 13, we’ve uncovered a panoply of fraud, malfeasance and mock documentation. It ain’t over yet and I don’t know if we’re going to be able to settle. But we’re going to push for everything we can b/c we have been through absolute hell. This is no picnic and not for the faint of heart. It might seem like we coasted, but it’s almost destroyed our marriage and our lives. Unfortunately, for the bank, we are stronger than ever.

    As for wealthier people being more savvy and hiring better lawyers, maybe. But there’s a woman down in FL who is 25 years behind on her mortgage and she represents herself (look it up in WSJ about 2 weeks ago). It has as much to do w/how much fight you have in you and doing what you believe is right, than the money. But if we win something, the money will be a bonus. As it stands, my son graduates high school in 2012 and we can drag this out until then and walk away from the house. Bye bye GMAC. Let the wealthy neighbors deal with it.

  15. chris

    If you owe the banks $2000 a month that’s your problem, if you owe the banks $20,000/month it’s the bank’s problem…

  16. mrfreeze

    This is simple: There are simply too many costs to the lender.

    1) Foreclosure costs
    2) Legal costs
    3) And the big cost: reselling the house.

    I live in the Seattle Area. If one looks at the absorption rate for homes over $1M for the last decade it’s running under 2% per month on average (this means that very few million dollar homes sell each month). There’s less cost in just leaving the borrower in the house.

    What’s so disturbing is that I know of “regular” folks who after missing just a few payments are flung into foreclosure and inevitably out of their homes rather quickly.

    It reminds me of the old saying, “If you’re rich, it’s free!”

  17. IF

    I think the rich just have more buffers, so the foreclosures take longer to show up. But even in high end areas (Atherton, Woodside) multi-million dollar foreclosures are slowly showing up on Google maps. No personal anecdotes of old money running out, but there is some new money with the recent recovery in tech.

    1. pvmuse

      I live in Portola Valley, Woodside area and personally know of several homes that have been quietly taken back by the banks, but almost a year later have not been put on the market. These homes are in the $3,000,000 to $5,000,000 dollar range. The reason must be the weak market, but how long do they plan to keep them? the market hasn’t improved in the last year. The majority of the large mortgages in this area remain portfolio loans, and were not resold. the banks are not being generous to large mortgage holders in delaying foreclosure, they are only looking out for themselves, and their own balance sheets.

      1. Fran

        I think that where the loan ended up is significant. Portfolio loans the banks don’t mind holding. The sub prime loans were sold (the banks knew a high percentage would go bad – it was a hot potato). The banks are scrambling to get back all those houses that they ‘sold’ but never transferred over.

  18. London Banker

    Under Basel Accord rules and US regulation, mortgages are given a preferential credit risk weighting of 50 percent. This means the bank reserves only half as much against a mortgage loan as a corporate loan or consumer loan. As a result, if the bank is forced to recognise that a mortgage is not performing, they take an immediate hit to capital and reserves for which it has not provisioned in advance.

    With banks already under-capitalised, marking to market on jumbo mortgage means a bit hit which dents the bank’s ability to do other business leveraging its capital. Add to that the cost of taxes, housing association fees, etc., and a foreclosure at the high end means committing a large chunk of cash while cutting into the bank’s future business scope.

    Extend and pretend is bad policy, but so too were the policies on capital (in)adequacy, disapplying accounting principles, etc.

  19. DownSouth

    Is this the first time this drama has played out? Maybe the banksters are letting some of the more prominent main streeters know who really is in control. The message seems to be: Play ball with us (politically) and forbearance shall be yours. Fuck with us (politically) and you will find yourself homeless on the street. We made you, and we can destroy you.

    Silver, silver certificates, and Treasury bonds (that is to say, all the Government’s money) must be retired, and National Bank notes made the only money.

    You will at once retire one-third of your circulation (your paper money) and call in one-half of your loans. Be careful to make a monetary [emergency] among your patrons, especially among influential businessmen.

    The future [of our debt-based system] depends upon immediate action, as there is an increasing sentiment in favor of Government legal-tender notes and silver coinage.

    –American Banker’s Association, “The Panic Circular of 1892,” from Charles A Lindberg’s Banking and Currency and the Money Trust

    1. Binky Bear

      I’d be a little leery of diving into a noted anti-semite and Nazi sympathizer’s oeuvre at this time. Okay, a lot leery, considering Lindbergh was associated with an American Fascist movement and got a medal from Hitler. Just saying, big grain of salt. Not saying banks are perfect or that capitalism hasn’t failed repeatedly because it is a self-corrupting system.

      1. Skippy

        What has the Third Reich got to do with it, oh now I remember, the Industrialists & Banksters were all behind them…Thanks!

      2. ginnie nyc

        Binky Bear: You are confusing Charles Lindbergh, father and son. The father was a trust-busting congressman in the first quarter of the 20th century, very anti-Fed.

  20. DownSouth

    Maybe the banksters are letting some of the more prominent main streeters know who really is in control. The message seems to be: Play ball with us (politically) and forbearance shall be yours. Screw with us (politically) and you will find yourself homeless on the street. We made you, and we can destroy you.

    Silver, silver certificates, and Treasury bonds (that is to say, all the Government’s money) must be retired, and [interest bearing] National Bank notes made the only money.

    You will at once retire one-third of your circulation (your paper money) and call in one-half of your loans. Be careful to make a monetary [emergency] among your patrons, especially among influential businessmen.

    The future [of our debt-based system] depends upon immediate action, as there is an increasing sentiment in favor of Government legal-tender notes and silver coinage.

    –American Banker’s Association, “The Panic Circular of 1892,” from Charles A Lindberg’s Banking and Currency and the Money Trust

  21. rc whalen

    Well of course banks are afraid to foreclose on rich people. Rich, crazy people litigate you and everyone you know into annihilation — and sometimes even win. But if the bona fide note holder does foreclose, being rich won’t help. Politics, however, is another matter, as illustrated in the FL item.

  22. DavosSherman

    I strongly disagree with the premise of this article.

    My father-in-law told me about distant relatives living in Florida, which last I checked was like 1 foreclosure for every 267 receiving a foreclosure notice.

    These relatives haven’t made a payment in 18 months.

    They got one NOD, called the bank and told them they’d pay when they could. That was the end of it.

    Should I write a piece: “Are Banks Afraid to Foreclose on the Middle Class”?

    No.

    1. Tim Goswell

      Thanks for standing up for the rich! It seems the only ones defending them nowadays are the government, the banksters, and the entire corporate media.

      But that isn’t enough. The rich are discriminated against and need for all of us: the homeless, the unemployed, as well as the poor, the working class and the middle classes to stand side by side with our brothers and sisters who are reduced to squatting in $20,000 a month McMansions, and having to cut back on their expense accounts at Coco Chanel and Louis Vuitton!

      1. DavosSherman

        Your confused. I’m NOT standing up for the rich. I stated, and maybe not clearly enough – so let me be blunt: This article is asinine. The rich and the middle class are squatting. Banksters aren’t afraid – they own Congress, the Senate and Moron Obama, look at the lobbyrat contributions.

  23. Greg

    I think its the “Borrow a little , the bank owns you. Borrow a lot, you own the bank”

    TBTF applies to individuals too.

  24. Pearl

    Great post and thread, Yves. I hope you and your readers are able to dig up more info on this subject–it has my head spinning!

    I have gone to great lengths to dig up this old Eddie Murphy clip. (Only clip I could find–sorry about the banners throughout.)

    But I think Eddie Murphy was on to something. Turns out, though, it wasn’t a black/white thing–it was a rich/poor thing. (Make sure you watch through to the “Equity National Bank” part! :-) )

    http://dumpalink.com/videos/Eddie-Murphy-As-A-White-Guy-49b5.html

  25. Let Them Eat Information

    This can’t be accurate in the gated community:

    “Some are nevertheless freaked out, concerned that the sheriff will show up any day, and have moved out. ”

    This must be what is happening in the working class ‘hoods, filled with blighted post war ramblers, levittowns, and capes.
    I can’t believe this fear or freak out is intense in a neighborhood with 20K mortgage payments, where access to informatiom, counsel, high quality food, fine motor cars, etc,, is less of a problem. The “wealthy” were the first to recognize value of a strategic default, there isn’t any “oh my gosh, where am I going to live” if you have the means, Besides. all levels of self-worth, poor, rich or in between are reading, or have read, scholarly articles that evaluate (Brent White) and consider, the move to stop paying. As another generalization, the poorer folks are probably much more “fear filled” about where they will be sleeping.

    1. Yves Smith Post author

      This guy has a 20 person sample. “Some” I take to be 2-5. That’s still a minority. And the sheriff showing up means your stuff gets dumped on the curbside. No one wants the embarrassment and the damage. If you have a lot of “stuff” as someone with a big house does, this isn’t a matter of getting a UHaul, it means getting a mover and a big truck. You can’t get that on a same day basis. Might take a day, two, maybe three. In the meantime your stuff in on the lawn, vulnerable to theft and weather damage.

      Anticipatory moving out looks pretty rational to me.

      1. Let Them Eat Information

        Agreed – however, the Sheriff doesn’t just evict one day out of the blue: folks will be papered to death, they hopefulle now how to read, and the baliffs don’t spontaneously bust the lock and toss the flat screen into the yard without substantial forewarning, in every state. It’s pretty clear when stuff should be abandoned or U-Hauled away, people still confuse foreclosure with eviction, I would encourage no one to freak out about any of this horseshit, but fight it if they want to stay.

  26. Art Eclectic

    It is really very simple – the market for homes in the high-end range is literally dead (unless the property is particularly spectacular and has a premium location.)

    A foreclosure sale would reveal true values and cause every comp in the neighborhood to drop. We all know that the more underwater the owner is, the more likely they are to walk away – this is even more true on high end properties.

    If it were to be revealed that values of formerly 5 million dollar homes was now more like 3.5 million, that would cause a stampede of owners walking away and stopping payments. This would destroy banks, servicers and everyone who had invested in those MBS products. One house with a 5 million dollar mortgage will do the same financial damage of 16 houses at 300k.

    You are also talking about owners in the same social class as executive bankers. They don’t want to see their own home values erode any more than joe six pack.

    Always follow the money, it tells the truth every time.

    1. Lyle

      To boot this sector is only able to get loans on the private market (being above the Fannie and Freddie limits). The private mortgage market is definitely on life support so that may be one of the reasons little turnover is seen in these properties, no one will lend on it. There are a few folks who can pay cash on the barrelhead, but they are mighty few.

    2. Dikaios Logos

      I like your post. You mentioned premium locations and very special properties. I think there are few locations that are solid and established enough that they will experience a milder downtown than others. I might mis-understand your idea of very special properties, but I do know the only house ever built by one of the most highly regarded architects in the world sold recently for about half of the original asking price. A large, late 18th century estate I know of has languished and probably won’t sell unless they really cut the price.

      I’d imagine that banks are most reluctant to foreclose on high-end homes in areas where majority of as the sales have been very recent. Not only would the home values fall fast (I’d imagine the formerly $5million places would fall to well below $3.5mil.), but the political dynamic would change very quickly.

    3. traderjoe

      I think that’s a good explanation.

      I also wonder if this is a conscious or sub-conscious attempt by the powers in charge (but not necessarily the PTB) to keep the consumer economy moving a little bit. Regulators allow extend and pretend, balance sheets aren’t hit, and the extra ‘savings’ of mortgage payments allow for some shopping at the mall to prop up the economy artificially.

  27. richard cameron

    It is interesting to see all of the comments about “rich” people getting the best deal in foreclosure. in my book, if you are truly “rich”, then you are not in foreclosure – you probably paid cash for the house, or took a very low rate, floating HELOC and played the spread with higher paying investments. If you did take a mortgage, you paid it because you can afford it, and you would NOT go through a strategic foreclosure because of the impact on the mutual trust necessary to do business in any community.

    Thus, i suggest that “rich” people in foreclosure are not “rich”, they are simply posers.

    1. Dikaios Logos

      I agree with what you say, but the next step is where things start getting really interesting. Politically, selling “free markets” was all about convincing the posers that most of what stood between them and riches was the evil ‘libruls’ and their ‘regulations’. To attack posers’ balance sheets or more importantly their self-image is to risk changing the political dynamic a lot. I wouldn’t be sure they’d become anti-bank (witness the Tea Party), but they would almost certainly become more volatile.

    2. Tim Goswell

      This reminds me of a conversation I had recently with a Swiss woman from Geneva. I made the mistake of referring to someone she knew with a $5 million dollar house near Lac Leman as being “rich”.

      The Genevoise turned up her nose at this idea, and suggested that he was nothing but “un petit riche” or “un poseur”. In order to be *vraiment riche* she assured me, you needed a minimum of *at least* $50 to $100 million.

      I started to object to this (where does that leave the homeless, the unemployed, should they even be allowed to exist?) but I decided there was no point in pursuing the conversation.

      1. Dikaios Logos

        I agree with both you and your Genevoise friend. While I think the people with $5 million homes on the Lake are rich, I think your friend shows meaningful familiarity with wealth when she draws a higher line for the truly rich than most people do. I’ve been amazed at how many people in the U.S., from those with tens of millions of dollars in assets down to much of the middle class, conflate their interests with those of the ultra rich. A more divided society is sometimes a good thing.

        1. Tim Goswell

          Hmmm, I’m afraid you misunderstood my post. I never said this Genevoise was a friend of mine, merely someone I happened to have a brief conversation with, although not nearly brief enough, as far as I’m concerned.

          And I was trying to convey her sense of snobbism, entitlement and superiority in referring to someone with a $5 million home as “un petit riche” (a little rich) and “un poseur” (a poser). As if only someone with $50 to $100 million was worthy of her respect.

          Personally I find the snobbism of this attitude to be appalling and reprehensible, but it seems to be quite common among those who are “truly rich”, as you put it, or merely aspiring to that category, the “posers”, as Richard Cameron refers to them.

          To quote George Orwell:

          “The mass of the rich and poor are differentiated by their incomes and nothing else, and the average millionaire (or billionaire, if you insist) is only the average dishwasher dressed in a new suit. Change places, and handy dandy, which is the justice, which is the thief? Everyone who has mixed on equal terms with the poor knows this quite well. But the trouble is that intelligent, cultivated people, the very people who might be expected to have liberal opinions, never do mix with the poor. For what do the majority of educated people know about poverty?”

          1. Dikaios Logos

            I think it is more likely I was sloppy in my post than I mis-understood yours. I got that she wasn’t truly your friend and I got that she was being obnoxious.

            But this woman’s remark highlights something that strikes me as very important: that many people, including much of the upper middle class in the U.S., make the mistake of seeing themselves as having common interests with the ultra rich. I think tension and snobbery, annoying as they are, counter-intuitively serve the purpose of keeping clear that there are greatly divergent interests between billionaires and people with say, $20 million dollars.

            In short, I’d take the snobbism and division, with all its problems, over a coarse grained view of wealth that implores large portions of the better educated and more comfortable to contribute to a very primitive political economy.

          2. richard cameron

            i think i was not clear in my post with respect to the “poser” issue. my point did not really have to do with the value of the house. If you buy a house (for $50k or $500K or $5M or $50M) and you have to worry about how you are going to make the mortgage payment, then you probably cannot afford it. to me, if you can afford a house, that means you can pay cash for it, and are simply using a mortgage as a financing tool. if you can do that, you are “rich”. typically, that is not the case until you get into the million dollar plus homes. that is where the problem arises – two people live next door to each other in $5M houses – both are considered “rich” by the public. One person has to manage his spending so as to be able to make his mortgage payment – he is not “rich”. His neighbor considered paying cash for his house, but was able to borrow $4 mill at 6%, and invest it in his business and get a 10% return. He is “rich”.

  28. El Snarko

    The operational purpose of institutional policy and administrative law is the protection of capital. It seems logical that the application follows a skewed distribution related to potential impact on the equity of the holders of the paper at issue. Evan handed application would injure the institutions themselves thus its absence.

    If foreclosures vs mortgage arrears (or possibly tax arrearages) by zip code could be plotted your answers would be forthcoming.

  29. Dan

    It would seem that there are more than a few factors – taxes, ability to sell at or above the loan value, occupancy vs. vagrancy. I also wonder in non-recourse states the ability to sue for past due payments is also not a factor.

    Either way, as Richard Cameron comments, ‘posers’ is the real label – hardly rich.

  30. financial matters

    Very true, again it is the highly leveraged who are in trouble and causing trouble for the banks. If you took out a loan you could marginally afford for an $800,000 home and saw it go to 2.5 million and then took out a 1.5 million dollar home equity loan the system is in trouble. If you put 1.5 million down to buy a 3 million home recently and missed out on the appreciation then you could feel like a chump by continuing to pay your mortgage but not as easy to walk away as you have skin in the game.

  31. c.

    When will it dawn on people that they can end-run the banks? If the banks are filing fraudulent paperwork to gain ownership why are people not going down to the county registrar’s and pulling a copy of a recent mortgage satisfaction and forging it to their home and mailing in the filing with a bit o’ cashier’s check? :D

  32. dcb

    to take over these properties refuts the mantra that the problem was sub prime and the governmeent, not bad banking.

  33. MBS Guy

    Banks and Investors have written down their subprime Alt A loans aggressively. They, and their regulators, argue that they now are adequately capitalized for these bad investments. Banks and investors have not written down jumbo loans underlying the related MBS nearly as aggressively. Jumbo MBS have retained more value and, in many cases have appreciated in value this year. Given the size of jumbo loans and the comparatively low levels of credit enhancement for these deals, only a few defaults and liquidations can blow through the credit enhancement quickly and cause losses for the senior classes. If servicers started liquidating these very delinquent loans, the losses would reveal that the senior bonds were overvalued and need to be written down more aggressively. This would kill this market and require significantly more capital to be held against the MBS.

    1. MichaelC

      Perhaps you can answer to a question that’s been irking me.

      Who’s funding the servicers for the paymentds to the senior tranches on all the delinquent mortgages in the pools?

      If the banks are extending credit to the servicers, it makes some sense in that they can fund the servicers to avoid, or at least delay taking hits on the senior pieces they still own , in other words robbing Peter (the bank, ultimately the govt) to pay Paul (the bondholders (themselves).

      Their growing exposure to the servicers will have to be reserved and written off eventually. Are they arbing the write down process by keeping the senior bondholders whole while ignoring the bad loan impacts from the servicers. If that’s the case then the banks will have set themselves up for a bailout when it comes time to writeoff the servicer loans, and the senior bondholders could keep the payments received from the servicers. It seems like a possible mechanism for another backdoor bailout for sr bondholders.

      I can’t see how the servicers are still afloat without a lot of help from the banks. Seems to me that help will only be available if it benefits the bankers, and the senior bondholders.

  34. Allen C

    I suspect that the combination of factors (reserve reqs, low/slow turnover, comp impact) leads this peculiar situation.

    Some have attempted to calculate the positive impact to consumer spending. $1B / month is 50,000 homes in the $20K / month mortgage range.

    Another part of the big scam is that we really have no idea how deep the hole is and even whether it is growing or shrinking. So much for SarbOx. Until convincingly revealed otherwise, I continue to presume man behind curtain, Wizard of Oz. Perhaps a team of BS artists behind the curtain feverishly pulling levers.

    Freddie and Fannie are well capitalized. We are not printing money! …

    This is no tale and when it all blows, the BS artists retreat into their well lined bunkers leaving the masses to suffer. They better have a good Republican Guard out front.

  35. frank

    Frank here. An easy way to cross check this would be to go to foreclosureradar.com and punch in the zipcode. You can see if there is an annomaly.

    About 15% of jumbo mortgages currently are 90 day late or greater.

    The biggest difference between a jumbo and subprime borrower is that a jumbo borrower has more access to lawyers, delaying the process, modification and multiple bankruptcies.

    The extend and pretend on the upper end will create larger losses for the bank on those properties in the future. However, given the large spreads banks are currently earning between deposits and loans they will be able to generate more earnings to offset these losses.

    The biggest uncertainty is that many of these jumbos were tied to libor and 1 year t-bills or other low cost of funds index. As rates move up the payments will force many who are current to not make payments.

    We are witnessing a deleveraging of debt throughout the world. The upper end is not immune.

    1. Frank

      Hmm, I thought I was the only Frank posting here, although I notice you’re calling yourself “frank” instead of “Frank” with a capital F.

      Still, it’s too close to avoid confusion. Maybe you were here before me, but it doesn’t matter.

      From now on (if I continue to post), I’ll go by Frank Lavarre, and you can have “frank”.

  36. just curious

    Perhaps those “strategically” not paying their $5K, 10k, 15K, whatever K mortgages will so STIMULATE the economy with their new found “wealth” and spending, the economy to recover. Is that the plan?

    If so, better hurry up with it. Most local governments are not exactly flush. Key, it seems to me, is whether, or not, the above described “strategiests” have continued to pay PROPERTY tax. When local governments move with their liens, the banks’ hands will be forced.

    So, with any significant numbers not paying for 18 months or longer, surely an inflection point for these types of properties is rapidly approaching.

  37. moslof

    It is simple “denial” caused by peak optimism at the top of a trend that is possibly three orders of magnitude larger than 1929 according to the Elliott Wave Principle.

  38. kravitz

    The poor feel powerless, and when pushed, walk away or cower. Some bankers are probably laughing at how easy a time they’ve had until recently, foreclosing like mad men.

    The rich know they can fight, and can call people who could make the banks’ lives miserable. Especially if embarrassing the wrong person in public.

    Simply a business jusgement.

  39. Dont Give Up

    It takes just one, two or more people in the same neighborhood to raise hell by standing up and fighting, and pointing out the evidence, doing the reporting the media “doesn’t have interest” in doing- it’s well worth the effort.

  40. jim

    Like you mentioned, at least part of the reason for avoiding forclosure is those higher priced homes are less likely to sell in this market. It is easier for the banks to keep somebody in them maintaining them rather than let them go vacant and having to mow the lawn.

  41. Ray Phenicie

    The mark to market phenomena offers a lot of insights:
    1. In the neighborhood I’m in, the home values vary as much as a low of $85,000(pre WW II vintage, less than 1200 sq ft.) topping out at around $325,000 (built less than 40 years ago and maxing out at around 2500 sq ft)-all on smallish lots that are anywhere from 1/5 of an acre to just over an acre of land. This is Michigan, Southfield is a suburb of Detroit, we are in the vortex of the economic melt down and have yet to recover from the depression of the so called ‘oil embargo’ of the 1970′s that sent our precious car companies into a permanent tizzy. The whole area is nothing more than a factory town. Around 1990, McMansions – 2-3000 sq ft, 2-4 acre lots and prices starting at around $400,000 going up to $600,000-were built on the periphery of the area, and a stranger sight you will never see than land that was once a farmer’s field to virtually sprout these ungainly mushrooms overnight. These are cities like Waterford and Milford and Brighton-third and fourth tier suburbs that orbit in the outer limits of the faux French Burgundian ticky tacky of the boorish hinterland. These same fakey homes house the elites (or trying to pretend elites) looking down their noses at the inner city.
    2. If a Realtor wants to keep their cozy commissions flowing, the real value of the upper end of this whole schmear must be hidden. Currently a home in the $200,000 range- near the bottom end of the top 1/4 value on the block, has been empty for 8 months; no doubt it will remain empty for another 8-10 months, a greater than 50/50 chance exists that it will remain empty for 4-6 years like other homes that are very close by. If a reality check were to be done, and the home were sold so it could attract a buyer, in my opinion, the value would of that solid $200,000 would have to be marked down to $125,000 ( or less ) taking the whole neighborhood with it. The Realtor is pipe dreaming- “Better to hold on to the hope (illusions) that a living can be made selling homes than to wake up to a cold coffee pot.
    3. If that oh so solid $200,000 home needs to be marked down %35 what about those fakey French Bordeaux Bouldvards?
    They will never budge at any price short of a give away. Why?
    Go ask the CEO of General Motors LLC while he’s surveying the parking lots, the Detroit River and the whole loverly Downtown Detroit scene from the 43 floor of the Renaissance Towers.

  42. Paul Tioxon

    I have personally witnessed delays of this nature in Philadelphia in the mid 90s when there was a mini boom then bust. The parallels are real estate values skyrocketing, refi for cash out then go underwater. Then papers were served by one of the top of the line politically connected law firms, but no one pulled the trigger til the market came back. They are waiting, they can can afford to, they get money from the Fed. Keeping the homeowners in place is a good idea, as was stated, to keep the building from being stripped. Bottom line, they have not forgotten about anything or anyone, especially the wealth management market segment, they just haven’t got to it yet and don’t need to til they can get something out of it. It sounds like triage strategy and remember, they hate to hire people and put them on the payroll to run things the right way, this REO business is the landlord business, and it is too labor intensive, compared to robo signing and website command and control models.

  43. Scott Hogan

    This may have been covered by someone else – I apologize for not having time to read all comments.

    But additionally to your post, if I were in a position to foreclose on properties with less than clear title due to lack of a fully indorsed promissory note, I would not pick on someone clearly in a position to sue me for lack of standing.

  44. goodrich4bk

    The answer is that few homes can be sold for more than the Fannie Freddie limit because there is really no financing for buyers of such homes. The alternative — sitting on the non-performing loan — is attractive because a non-performing loan over the Fannie/Freddie limit requires less capital reserved than the same loan after foreclosure when the asset becomes REO and sits there month after month.

    Although the mark-to-market rule applies equally to all loans, REO’s that will qualify for the Fannie Freddie loan limits are very quickly re-sold. With Fannie and Freddie now underwriting 98% of all loans in the U.S., what bank would want to own a home that is “worth” more than that?

    Think of it as an absorbtion rate issue. Which would the bank prefer: 10 homes worth $100k or one home worth $1 million? You would think there is no difference, but the difference is in liquidity and the time the capital is stuck. I can easily foreclose and turn the 10 homes within two years and, with good management, impair only $500k of capital by staging the foreclosures and REO re-sales. Can’t do it with the single home. I foreclose and am required to set aside $1 million of capital for two or more years. The reserve comes directly from earnings and, therefore, from my year end bonus.

    Normall the regulators would be all over this issue and force the banks to foreclose. But the regulators are all “extend and pretend” driven because of politics.

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