Growing Number of Affluent Homeowners Can No Longer Afford Their Mortgages

Growing Number of Affluent Homeowners Can No Longer Afford Their Mortgages
By Kendra Marr
Washington Post Staff Writer
Thursday, May 15, 2008; Page D01

For sale: Spacious home outfitted with six bedrooms, 5 1/2 baths, granite countertops, stainless-steel kitchen appliances, a three-car garage, exercise room and wet bar -- all for $875,000 in the Red Cedar West subdivision of Leesburg where houses once sold for $1-million-plus.

"I thought I'd try to take advantage of the low prices in the foreclosure market," said Ryan Magazine, who owns a Leesburg carwash and signed a contract on the foreclosed property as an upgrade to his previous home. "Right now is a great opportunity to get a house."

The foreclosure signs that have been sprouting up in less-affluent communities since 2006 are beginning to appear in the well-off suburbs, attached to houses that once cost $1 million or more. Although those kinds of homes are in the minority now, real estate agents predict the numbers will swell.

In Loudoun County, 60 houses priced over $750,000 are among the 932 foreclosures and short sales -- an exit strategy of selling the house at a loss with the bank's blessing to avoid foreclosure.

Affluent neighborhoods have been able to stave off foreclosure longer, but the effects of once-popular loans, such as adjustable-rate and interest-only mortgages, are beginning to take their toll, economists and real estate agents said. The consequences are being seen in places such as Loudoun County, where the rapidly expanding population and income levels meant razing dairy farms for new subdivisions over the past two decades, as well as Fairfax and Montgomery counties, where new subdivisions proliferated and demand drove up prices.

"We're seeing the first group of people who got in way too high and bought at the top of the marketplace in the middle of 2005 and end of 2006," said Tony Arko, an agent with Market Advantage Real Estate who co-writes the blog Loudoun Foreclosures.

While the expanding subprime market enabled lower-income borrowers with uncertain credit histories to buy and refinance property, interest-only mortgages allowed middle- and upper-income home buyers -- and investors -- to buy beyond their purchasing power, said Robert E. Lang, director of the Metropolitan Institute at Virginia Tech in Alexandria.

"Who would have imagined that people would use this as an excuse to heavily leverage themselves?" said Lang, noting that higher-income people found ways to buy bigger, more expensive houses, endangering themselves just as lower-income, first-time buyers did. "And now they're caught in the same way."

One in every 519 U.S. households received a foreclosure filing in April, according to RealtyTrac, an online directory of foreclosed properties.

Homeowners can have trouble paying their mortgages for a variety of reasons, which can be set off by illness, divorce, unemployment within dual-income families or business losses, for example. Investors, who bought up properties gambling that they could quickly resell them for a higher price, became another source of foreclosures when housing prices fell.

In the $750,000-and-higher foreclosure price range, there are 76 homes on the market in Fairfax County and 66 in Montgomery County out of the thousands of foreclosures and short sales in both jurisdictions, Arko said.

"It's small," he said, "but it wasn't even on the radar, it was so insignificant last year."


Nationwide, from 2006 to 2007, the number of foreclosed properties listed at $1 million or more rose 50 percent, to 7,642, up from 5,091, according to RealtyTrac. And the number of foreclosed homes priced from $500,000 to $999,999 jumped 88 percent, from 52,836 to 99,457.

"In the old days, you thought when someone was buying a $1 million house, they would stay in it," said Beth Doman, a Chantilly real estate agent.

Last month, Doman toured an empty six-bedroom mansion in the Villages at Waxpool, an upscale development in Ashburn, looking crestfallen as she pointed out the movie room, wet bar and library. Her client, local real estate investor Keith Thai, was struggling to close a short sale on this house he had bought for $1.2 million. It was in near-perfect condition with unscuffed white walls and shiny granite countertops. The tub in the downstairs bathroom had never been used -- and still had the original stickers -- even after renters had been living there for more than a year.

Doman ran her hands along the wrought-iron banisters and sighed. "This is nice," she said.

But the bank didn't approve the short sale, and Thai's house fell into foreclosure. So did Thai's 10 other high-end properties, including his own Ashburn home.

"I feel like a loser," Thai said, putting his head in his hands.

After WorldCom's downfall in 2001, Thai quit the company and systems engineering altogether to start a second career in real estate. He took classes and attended seminars. He was enthralled by Donald Trump's tale of building a real estate empire and vowed to make his own real estate fortune. And, on paper, he did.

"In two years," he said, "I made tenfold what I made in the last 15 years."

Thai flipped houses. He gathered investors to buy a high-end home from a builder before ground was even broken. When the house was completed, he sold it for a hefty profit.

Thai deferred the taxes on the sale of the investment property by channeling that profit into three new homes with adjustable-rate mortgages. He rented those homes to families for about $3,000 to $3,500 a month, while the interest was at 1 percent. The rent on each house was about $200 a month less than the mortgage, but at the time, Thai said, he could afford it.

After about a year, he would sell a house and repeat the process.

At the height of his investing, as home prices continued to skyrocket, Thai owned 15 homes in Northern Virginia. He later sold four, and of the remainder, nine were valued at about $1 million.


But in 2006, homes values stopped rising. The housing bubble was deflating. When interest on Thai's adjustable-rate mortgages jumped as much as 11 percent, he took the equity out of the homes to pay the deficit and keep his investments alive.

"I hang on and I say, 'Okay, bad time. When it's over I can sell it back,' " he said.

The market never improved. Builders lowered the prices on new homes, making it impossible to sell back his investments to break even. In just six months, Thai spent his entire savings. The bank barred all his short sale attempts.

As the mortgage crisis unraveled, so did his marriage. Today, Thai is homeless and nearly bankrupt. For the past three months, he's been staying with friends and applying for engineering jobs. So far, no luck.

"This time last year," Thai said, "I was happy."

But not all troubled investors and homeowners are as candid about foreclosures as Thai is. They're embarrassed. They've fled town. They especially don't want their former neighbors and business clients to know they've fallen on hard times.

After six years of record-shattering growth and building boom, Loudoun County faced one of the region's steepest declines in home prices last year. The median price of single-family houses and townhouses sold last year was $492,000, down 8 percent from $535,000 in 2006, according to a Washington Post analysis.

"A lot of people on the market with McMansions for sale ended up foreclosing them," said Danilo Bogdanovic, an agent with Market Advantage Real Estate and Arko's co-blogger. "They found it easier to walk away."

Real estate agents said this was only the beginning for luxury home foreclosures.

"We're going to be back to the prices we were at 15 years ago," said Bill Milletary, an agent with Century 21 Redwood Realty.

As for Magazine, after he signed the contract on the foreclosed Leesburg house, he realized there were several problems with the property, such as irrigation leaks and its noisy location.

"I acted quickly because I was so excited about the price," he said.

He reconsidered and backed out.

But he found other good prices. Now he has closed on a house in the Raspberry Falls development in Leesburg. This one was not a foreclosure.