Foreclosures on million-dollar homes surge

By Robert Frank

updated 12:44 p.m. ET Sept. 27, 2008

In 2003, Robert Provost snapped up a $2.5 million villa with its own boat dock in Sarasota, Fla. A finance chief for an auto-sales chain, Mr. Provost earned more than $250,000 a year and had an impeccable credit history.

Then he lost his job. Mr. Provost missed one $10,500 mortgage payment, then another. This month, the 53-year-old put his house, a five-bedroom with sweeping views of an intercoastal waterway, on the market for $3.4 million. But the listing has thus far attracted little interest. Mr. Provost says he expects to receive a notice of default from the bank — the first step to foreclosure — in the next month or two.

"A foreclosure would be devastating," he says. "My wife and I would have to start from scratch."

The housing crisis that swept through working-class and middle-class communities across the country is now creeping into the leafy driveways and the gated communities of the nation's most exclusive towns.

One symptom of these times: a surge in the number of million-dollar foreclosures. According to RealtyTrac, the number of homes valued at more than $1 million that are in some stage of foreclosure has swelled to 7,968 between January and August. That compares with 4,214 during the same period last year.

The number of $2 million-plus homes in the process of foreclosure has grown even faster, surging to 499 in the year-to-date compared with 201 for the same period last year. Home values are based on comparable, recent sales in the neighborhoods.

It wasn't long ago that bidding wars over luxury properties were commonplace, as buyers emboldened by the booming housing market paid ever-dearer premiums for what seemed like a no-lose investment. More than 64,300 homes priced at $1 million or more sold in 2007, more than triple the number in 2002, according to DataQuick.

Jodi Kerby & Associates Purchased for $2.3 million in 2002, this 10,600-square-foot home in Flower Mound, Texas, has a private gym, media room and a resort-style cabana overlooking the pool and tennis court. Sale price is $1.75 million.

Now tighter credit, rising job losses in finance and management, wildly volatile financial markets and falling home prices have started squeezing the most affluent. Patricia Tan, a broker in Florida with several million-dollar distressed listings and foreclosures, says her clients usually fall into three categories: executives who lost their jobs, homeowners who traded up to a larger house but couldn't sell their first, and speculators and flippers.

What all these groups have in common is that they lacked sufficient financial wiggle room if the market went south. Experts say it's becoming apparent that the even the well-to-do weren't immune to the aggressive lending practices of the go-go years.

"If you've got a lender who pushed them to the limit and you have some change in supply or demand, you'll have foreclosures," says Karl Case, the Wellesley College economist associated with the widely followed S&P/Case-Shiller index of U.S. housing prices. "Loans were unbelievably risky in every category," adds Tom Lawler, a housing economist in Leesburg, Va. "We're seeing the results of that lending in the high end."

The problems at the high end are only expected to grow. While luxury properties still make up a tiny slice of the overall foreclosure market — the number of total filings surged to 303,879 in August of this year — brokers specializing in foreclosures say banks are increasingly calling them to appraise foreclosed homes worth $1 million or more. (Foreclosures, the process by which lenders assume ownership of a house, usually are initiated when a borrower is more than 90 days behind in payments, although many lenders are now waiting longer and cutting deals with homeowners to avoid foreclosure.)

And according to a new report from UBS, delinquencies are rising rapidly for "jumbo prime" mortgages — large loans made to high-quality borrowers. About 4 percent of adjustable rate mortgages for prime borrowers who took out mortgages in 2007 have missed more than two monthly payments, up from just 0.52 percent for loans issued in 2005. Total jumbo mortgages outstanding could total about $1.34 trillion, according to UBS.

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