The careworn house not far from Santa Monica Boulevard resembles millions of other homes that have been foreclosed on since the calamitous US 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 in 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 US$205,000 behind in their payments on mortgages totaling US$6.9 million.
Welcome to foreclosure Beverly Hills-style.
About 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.
However, the dynamics of the residential real-estate collapse are very different in elite neighborhoods such as this. The majority of delinquent homeowners in Beverly Hills owe more than US$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.
A strategic default is an especially appealing option in California, one of only a handful of US 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 default.
Bremner said she helped a client buy a Beverly Hills mansion last year that the prior owner had bought for more than US$4 million. He decided to stop paying his US$3 million mortgage — even though he could easily afford it — when the value of the property had dropped to US$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 property drop.”
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 US market this year, especially after five major banks reached a US$25 billion settlement last week with the US over fraudulent foreclosure practices.