Mansion Mortgages: Foreclosure Salvo Hits Ultra-Rich

Mortgages held by the rich and famous are coming up short. Admittedly this isn't a problem which impacts a lot of us, but if you have a $5 million home you ought to know that foreclosures among the upper-crust are soaring.

While U.S. foreclosure activity is down, RealtyTrac says estates, mansions and chateaus worth $5 million or more have seen foreclosure levels have risen 61 percent in recent months.

It's hard to understand why the rich are facing such hardship; you wonder if shelters and food banks will now have to stock lobster, beef Wellington and fois gras to accommodate the huddled masses from the ultra-rich.

Why should there be such a surge in high-value foreclosures? After all, the Dow Jones Industrial Average just topped 16,500, a world record. Francis Bacon's Three Studies of Lucian Freud recently went for $142.4 million, the most expensive painting ever sold at auction. Indeed, the Mei Moses Family Of Art Indexes hit a two-year high in November.

So if times are so good for the one percent, why are so many mansions getting foreclosure notices?

"This trend may indicate lenders are now financially stable enough to more comfortably survive the big-ticket losses that these properties potentially represent," said RealtyTrac. "In addition, an improving housing market means more prospective buyers, even for these ultra high-end homes. A bigger buyer pool translates into higher sales prices on these properties, allowing lenders to recoup more of their losses on these jumbo loans gone bad."

And yet higher home prices should lead to fewer foreclosures. If it is true that more buyers have an interest in super-expensive homes then the problem of foreclosure is easy to avoid -- just sell the home in the open market and pay off the loan. Given that the gross domestic product rose 3.6 percent in the third quarter there are surely a few more people searching for homes with wine cellars, pools and ponies.

Mortgages and Foreclosures

If you want to buy or refinance an estate now may be an ideal time to get such financing. According to the Mortgage Bankers Association, jumbo mortgages at the start of 2014 had lower interest rates than their smaller conventional cousins. This is a huge change from past pricing levels when jumbo interest rates were routinely a half percent or more higher than conventional financing.

If it's not pricing or financing, then why are so many mansions being lost to foreclosure? It's just a guess, but the betting here is that some mansions are being let go because ownership is just so unattractive.

Yes, I know, huge homes are an index of success, a public recognition of power and authority, properties which are good for the ego and assure one's status. But really, would you want a mansion?

Think about Versailles. Arguably the largest mansion in the world, it housed lots of French kings to say nothing of the assorted nobility, the familial and financial 1 percent of the time -- at least until the French revolution.

here was no privacy, the place was flooded with people. In the winter the royal rooms were freezing. The king's bedroom was vast but it wasn't warm. He probably spent a lot of time contemplating the joys of a small shack with a big fireplace.

Yachts and Mortgages

Big homes are like yachts. It isn't the cost of acquisition that's a problem for the well-healed, it's the ongoing need for staffing and maintenance. In effect, as I tell people, buy an estate and you're in the "home administration" business.

I suspect the real reason for the surge in mansion foreclosures are not worries about mortgage rates or property taxes, but rather the inability to market such spacious residences. Among the seriously rich, no doubt some have an estate here and there but many seem to want the latest in wealth chic, to live as modestly, quietly and invisibly as they can. They want simplicity and privacy -- and they want heat.

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