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Foreclosure rate on luxury homes explodes

Del Ray foreclosure-RealtyTrac.jpg
This six bedroom, ten bathroom home in Delray Beach, Fla. is up on the market for $13.5 million after being foreclosed on in July. RealtyTrac

Foreclosures in the ultra-high-end housing market -- homes worth $5 million or more -- have skyrocketed 61 percent over last year.

That growth bucks the trend: Overall foreclosures are down 23 percent, according to a new report from Irvine, Calif.-based real estate information site RealtyTrac.

These luxury homes -- beachfront properties along the Pacific Coast Highway, estates in ritzy zip codes outside Los Angeles and mansions in the wealthiest suburbs across the country -- initially experienced foreclosure rates just like any other region during the flood that swamped the real estate market in 2008. 

But while most other markets were continuously producing foreclosures over the past five years, this markets has remained relatively quiet, said Daren Blomquist, vice president at RealtyTrac.

Until lately, that is. “Recently, we've been hearing from agents that they're starting to see the high-end properties go to foreclosure and there turned out to be some data to support this notion that high-end holdouts are finally moving through the foreclosure process,” he said.

Blomquist calls them holdouts for a reason. It’s not a new phenomenon of high-end homeowners suddenly falling into foreclosure. Many have been delinquent for at least a year. “It’s kind of the last domino to fall of the housing crisis,” Blomquist said.

It may be a sign that lenders are now financially stable enough to start moving on ultra-high-end delinquencies and take the substantial losses these multi-million dollar homes represent.

“Just generally speaking, if the banks are dealing with a $5 million loan as opposed to a $500,000 loan, they're going to be a lot more interested in working something out to avoid foreclosure,” Blomquist said. “The foreclosure for that really high-end home represents a much bigger loss to deal with and a much bigger hit to their book.”

Steady leaps in home prices may also play a role in the uptick. Emmett Laffey, CEO of New York-based Laffey Fine Home International, said that sales on the ultra-luxury end of the market are strong. His company alone has closed 34 this year.

“Any foreclosure properties in this type of ultra-luxury market usually get purchased very quickly since there is one thing all super rich buyers want -- an outstanding deal on a real estate transaction, and in most cases foreclosures of this magnitude come with several million more dollars of built-in value,” he said in a release.

That could convince lenders to put these homes on the market in hopes of getting the highest returns.

The delayed rise in foreclosures could also be due to the wealthy homeowners, who may have had the financial means to hold off the foreclosure process longer than most homeowners.

It’s also important to note, however, that while the increase in ultra-high-end foreclosures is substantial, it represents a fairly small chunk of the market. Fewer than 200 luxury homeowners received foreclosure notices in 2013, compared to 1.2 million total properties across all price points. So a few dozen foreclosures makes a bigger impact in this market.

Florida and California account for more than half the total number of multi-million dollar foreclosures . The Miami-Fort Lauderdale area had the largest number of foreclosures at 47, followed by the Los Angeles-Long Beach area with 35, but the trends are very different. Miami saw a 488 percent increase in foreclosures, while L.A. only saw a 3 percent increase.

Those two cities are followed by Atlanta, Orlando and the New York City and northern New Jersey area.

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