How luxury homeowners dodge foreclosure (© Robert Daly/Getty Images)

© Robert Daly/Getty Images

When the owners of high-end homes fall way behind on their mortgage payments, foreclosure is not a foregone conclusion.

Lenders can be more willing to craft a new payment plan to make high-dollar homes more affordable. Paperwork and procedures are also often delayed, keeping homeowners in some states in their homes for two or more years after they've stopped making mortgage payments. In some cases, lenders are offering homeowners tens of thousands of dollars in cash in exchange for their agreeing to a short sale, in which a home is sold for less than the borrower owes on the mortgage.

Repossession rates show the difference. In 2012, roughly 85% of homes worth as much as $1 million that received default notices were eventually repossessed, according to RealtyTrac, which tracks real-estate data. About 28% of homes worth more than $1 million were repossessed. (Bing: Learn more about repossession rates)

Why bother?
For lenders, it's worth the extra effort to avert foreclosure on luxury properties. They incur substantial expenses when they hold these homes, including paying property taxes, maintenance costs and, often, homeowners'-association fees. The homes are also more difficult to sell because fewer buyers can afford them. When lenders eventually unload them, it's often at a loss.

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"Lenders have more of an incentive to work out payment plans for these borrowers than with the ones [whose homes] may move quickly," says Jon Maddux, co-founder of YouWalkAway.com, which helps borrowers, including luxury homeowners, in default or foreclosure.

Alternative payment options will vary by lender but can include getting a lower interest rate or extending the mortgage-repayment period to lower the monthly payments.

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Luxury homeowners often have more tools to delay foreclosure, says Daren Blomquist, a vice president at RealtyTrac. These borrowers are more likely to hire lawyers who will find problems with how the loan was structured, such as an inflated appraisal that resulted in a larger mortgage, and other technicalities.

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"It's all about buying time," says Richard Vetstein, a real-estate attorney in Framingham, Mass.

Separately, some lenders will encourage owners to consider a short sale. Armando Tiongson Jr. of Rockaway, N.J., says Bank of America recently offered him and his wife up to $30,000 in cash to short sell their 4,100-square-foot home, which they purchased for roughly $1 million in 2006.

Tiongson, a program manager, says that he and his wife haven't paid their mortgage in 18 months after spikes in their monthly loan-payment amounts, which initially required just interest payments. By offering this cash in exchange for a short sale, Bank of America says that it can reduce the losses that would kick in if the loan goes to foreclosure. The bank adds that it has been making such cash offers to homeowners of all loan levels since 2012.

What's your home worth?

The Tiongsons are going to take the bank up on its offer and sell.

"We are going in for the short sale mainly to avoid foreclosure," Tiongson says. "The cash option is really just a benefit."

For their part, lenders say they try to offer repayment plans and modifications to all borrowers, regardless of the size of their loan. Some say the repayment options offered will depend on what the investors holding that loan will permit.

Numbers don't always click
More options don't always work in borrowers' favor. Connie Der Torossian, program manager with the Orange County Housing Opportunities Collaborative, a nonprofit housing counseling organization in California, says that she has seen cases where loan modifications don't help luxury homeowners who purchased their homes at high prices and now have a reduced income that's too small to cover the modified monthly payment.

"Sometimes, the numbers just don't work when you have a $6,000-plus [monthly] mortgage to carry," she says.

Here are some other issues surrounding foreclosures:

  • Temporary savings: Many lenders will offer forbearance agreements, which can include temporarily lower monthly loan payments. But borrowers typically must repay that difference at the end of their loan term or when they sell their home.
  • Documentation required: To rework the terms of their loan, borrowers must provide tax returns and other financial paperwork proving that their income has changed since they got the mortgage. The paperwork also must prove that they can afford the mortgage at the new terms.
  • Credit hit: Borrowers who default on their mortgage could see their credit scores drop by at least 100 points, says John Ulzheimer, president of consumer education at SmartCredit.com, a credit-monitoring site. Separately, they'll have to wait seven years for a foreclosure to be removed from their credit report, during which time they could find it harder to get approved for loans.