Wealthy people are turning to auctions to sell off McMansions as their finances begin to collapse.
“We are seeing more people with homes that were on the market for $4 million to $7 million that are not selling, and they are calling us,” Jim Gall, president of Auction Company of America, tells The New York Times.
The paper reports about Jack Warner, 61, who had a successful construction business in Elkhart, Ind., that allowed him to purchase a home on Little Torch Key, Fla. 16 years ago.
In 2007, the home was appraised at almost $14 million. But when the real estate market collapsed, he closed the construction company.
Last year, another of his corporations, Lucky’s Landing, which owned the Florida property, filed for bankruptcy, the Times reported.
Warner couldn’t find a buyer for his home at the listed price of $5.9 million, so he asked he decided to auction off the home instead.
To avoid personal bankruptcy he needed to bring in at least $3 million from the sale to pay down his mortgages.
The winning bid was $2.5 million. “O.K., I’m broke,” he whispered to the Times afterward.
Following the subprime meltdown, coming due soon is another $230 billion of option adjustable-rate mortgages.
These were typically written for jumbo loans for larger houses for people with decent credit trying to buy much more house than they might otherwise be able to afford — McMansions.
Under a so-called “option” ARM, borrowers can pay less each month and the difference is added to the balance of the loan. Basically, it’s a form of leverage that presumes house values will always rise.
Lower interest rates have delayed the effect of the effected explosion of option loans, but it hasn’t made them disappear. And the slowing economy is squeezing even rich borrowers out of properties they can no longer afford.
"They're probably going to default at a rate that makes subprime look like a walk in the park," warns Rick Sharga, senior vice president for RealtyTrac, a foreclosure research firm in Irvine, Calif.
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