Million-Dollar Homeowners Defaulting At Double The Rate Of Others

The mortgage crisis isn’t just about homeowners with underwater subprime mortgages on unsellable houses. Folks with million-dollar homes are also finding it difficult to get out from under their hefty mortgages, and are defaulting at rates that are double those for homeowners with mortgages under $250,000. The difference? They’re often willing to sell at a loss, and their lenders are willing to let them do so, instead of foreclosing and destroying their credit ratings.

According to Bloomberg:

Payments on about 12 percent of mortgages exceeding $1 million were 90 days or more overdue in September, compared with 6.3 percent on loans less than $250,000 and 7.4 percent on all U.S. mortgages, according to data from First American CoreLogic Inc., a Santa Ana, California-based research firm. The rate for mortgages above $1 million was 4.7 percent a year earlier.

As defaults on the biggest mortgages rise, borrowers such as Steve Holzknecht are turning to short sales to exit loans that now are larger than the market value of the house. In such a transaction, the lender agrees to accept less than a 100 percent payoff on a mortgage to expedite the property’s sale.

Holzknecht, 53, last month cut the asking price for his 7,280-square-foot home in Kirkland, Washington, by $550,000 to $1.25 million, lower than the balances of his two mortgages. Holzknecht, the former owner of Four Suns Inc., a Seattle luxury homebuilder that went out of business two months ago, constructed the Craftsman-style home in 2000. He declined to identify his lenders or the amount he owe

One reason rich howeowners may be willing to take a haircut (other than, you know, being rich), is that they’re not about to get any help from the government “The reason the low end stopped falling is because the government stepped in with affordable loans,” Scott Simon, managing director at Pacific Investment Management, told Bloomberg. “There is no political will to bail out a million-dollar house.”

Luxury-Home Owners in U.S. Use ‘Short Sales’ as Defaults Rise [ Bloomberg.com]

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  1. tbax929 says:

    Can you imagine the outrage if the government started bailing out the folks with million dollar homes?

    • ihatephonecompanies says:

      I imagine it would be similar to bailing out million dollar corporate bonuses….

    • Flourless Algernon says:

      You mean like my friends with normal 9-5 jobs who have $700,000 to a $1,000,000 mortgages on two bedroom 1500 square foot houses in Southern California?

      • tbax929 says:

        Yes, I mean them. If you stupidly spent that much on a house and are living check to check, you don’t deserve a bailout.

        • Flourless Algernon says:

          I just meant that there’s a real difference between the “luxury” homes of the original article and a “million dollar home”. It’s all about the view from your window.

          • admiral_stabbin says:

            $1,000,000 in So.Cal. isn’t a different $1,000,000 then it is here in Iowa.

            If one chooses to live and work in one of the most expensive areas of our fine United States, then I would hope they are also compensated relatively to the cost of living for their area. In other words, I don’t distinguish between a luxury home that costs a million dollars, or a double-wide trailer that costs a million dollars. They both still cost a million dollars, and should only be bought by people that make enough money to afford living in something that costs a million dollars.

            • producerist says:

              “If one chooses to live and work in one of the most expensive areas of our fine United States, then I would hope they are also compensated relatively to the cost of living for their area.”

              Sorry, they are not. With house prices in California increasing 25% per year during the dotcom and post dotcom era, I never received a 25% yearly salary increase. In fact, it was often zero or one percent. I partially blame this for the recession. Inflating house prices with no equal inflation in paychecks. It’s a doomed model.

          • Awesome McAwesomeness says:

            Those people chose to live in an expensive housing market too. They are not victims. They made a choice.

            • Verdant Pine Trees says:

              Agree completely with you. I lived in southern California for years. They absolutely made a choice. My old neighborhood in the Valley was very desirable, especially for families, close to downtown, close to Hollywood proper, and the bona fide Hollywood studios, close to most of the places you needed to get … and the houses ran about $350,000 – not a million dollars. For a million dollars, you’re talking a place in Santa Monica or some similarly “hot” locale, and absolutely you make a choice for that. Yes, maybe getting a house you can afford means a longer commute, or carpooling or even taking Metrorail — but that’s what you do. I worked with a woman who commuted from San Bernadino to Pasadena five days a week. However, she was working her dream creative job and it was what she could afford.

              Some people talk themselves into believing that you have to be in a specific city to get anywhere jobwise; one woman told me she couldn’t understand why any writers would live outside New York City. If you want to be a big fish in a big town, it’s still a choice.

              I rented throughout California. After I married, I *chose* to move to Texas, where I could buy a house in a conveniently located suburb with mature development, in many ways similar to where I once lived in SoCal. It cost me under $115,000. Sure, I miss California, but I like having a mortgage that we can pay on one salary if one of us loses our job, wants to stay home with kids, or gets sick. That was a choice.

              Two types of new license plates predominate here: those from Michigan and Ohio, and those from California, where some people got the memo about home values and income. And yet even here some people I know, who are not at all wealthy, choose to live in overpriced areas, whine about the lousy choices for non-millionaires but also about needing to be “where the action is” – i.e. in a hip address. It’s still a choice.

        • HIcycles says:

          I’m sorry, what? What about those who live pay check to pay check and stupidly purchased a home, albeit modest, that they couldn’t afford. How is that any different?

          • tbax929 says:

            It’s not. I don’t want anyone to get bailed out for making a purchase they can no longer afford. Sorry.

  2. pecan 3.14159265 says:

    If you have a $250,000 home, and your mortgage is $2,000 and you need to make ends meet, you could feasibly pick up a second job and make that payment. I think that’s what a lot of people are doing. I think the percentage for wealthy homeowners is higher because the amount they owe is such a massive amount that you can’t just pick up a second job (in an already terrible job market) to make ends meet. There’s nothing you can do about it. And the lower fixed mortgage rates don’t help these wealthier homeowners because it excluded them.

    • tbax929 says:

      Absolutely. I pay about $750 a month, which isn’t a lot of money. When I lost my job, I was fine because I could make that payment just using my unemployment checks. If I had to pay a lot more each month, I’d have been in a bigger bind.

      • FatLynn says:

        The article doesn’t mention the fact that these people probably have more resources at their disposal in working with the bank, like lawyers and other accounts that may be important to the bank.

        Nobody wants to ruin their credit score, but the bank isn’t willing to let just ANYONE do a short sale.

      • ChuckECheese says:

        In Arizona, the maximum unemployment check is less than $250/week. So it took you three weeks’ pay each month to pay your mortgage.

        • tbax929 says:

          It doesn’t matter because I had enough money saved up to cover my other expenses. The only thing I use my unemployment for is my house. By the way, it’s not true that you only get $250.
          If you qualify for a subsidy, you get more than that.

    • Awesome McAwesomeness says:

      Well since people don’t “need” million dollar houses, they need to suck it up. Some of these people probably could have paid cash for a smaller house and done without that house payment, but opted for more to impress people or whatever.

      Seriously, someone has to pay for all of these defaults and short sales. The banks certainly won’t be the ones footing the bill, we already found that out long ago.

      • daddy_froglegs says:

        That’s pretty damn judgmental.

        Who the hell are you to say what people need and don’t need?
        Did you NEED your iPhone? Did you NEED to buy Xmas gifts?

        Or were you just trying to impress someone?

        I can stand a lot of things in this world, but self-righteous whiners is not one of them.

      • morlo says:

        Most of these million dollar houses cost 1/2 as much 8 years ago.

    • mac-phisto says:

      i think this also points to a statistic that’s rarely tracked anymore – “underemployment”. how many of these homes are owned by professionals that lost their job & have a new one, but their income level is drastically different? i would imagine a good number of them.

      we’re supposed to be excited b/c we only lost 11,000 jobs last month compared to 720,000 in the same month last year. but when you look at the real stats, everything’s not as cheery as it seems – “In November, employment fell in construction, manufacturing, and information, while temporary help services and health care added jobs.” http://www.bls.gov/news.release/empsit.nr0.htm

  3. shoelace414 says:

    If you owe $100,000 the bank owns you, if you owe $100,000,000 you own the bank.

  4. daddy_froglegs says:

    I’m gonna go ahead and divulge something I probably shouldn’t, only because it’s a topic that directly involves me.

    I am one of these people. I defaulted on my $2 million dollar home and walked away from it.

    I can tell you first hand that the biggest difference I’ve noticed so far is that, when you jump ship on a multi-million dollar home, it sits in limbo for a long, long, long time. The bank doesn’t want it.

    They still don’t want it 2 years later. And it sits. The problem is, I can no longer afford it and the bank can’t really do any kind of “modification” on a home that expensive that makes any sense to either side. So it sits.

    And yeah…. no one is bailing me out. Eventually at some point I will be taking a half million dollar bath, at least.

    Now, for those of you about to jump all over my shit, you don’t know my circumstances before, during, or after my time with this home, and if it helps you swallow this a little better, in the last 2 years I have paid back 1/4 million in other debts, and still going.

    Yeah….. not all rich people are on “easy street”. We just have bigger bills.

    • tbax929 says:

      I wouldn’t jump all over you since you don’t seem to indicate that you’re entitled to a bailout.

    • henrygates3 says:

      There was an article here a while ago on why bailing out might be the most financially sound decision. Businesses do it all the time – why not people?

      • daddy_froglegs says:

        Well, walking away is one thing, but it’s not the end. People with moderately priced homes, let’s just say a house at $250k, can walk away and that’s the end of it. The bank will foreclose and they are done with it.

        In my case, the bank will be coming after me for a fair chunk of change. They know I can’t file bankruptcy, and what am I gonna do…. run? I’m not in my 20′s any more. (or even my… never mind). I’m too old to run and change addresses & phone numbers all the time, so they’ve got me. They’re not going to just whitewash a .5 mil or more loss on it, which means I get to eat it.

        The smart thing to do in a modest home is stay there during the process, payment free, and pay off debts or build up some reserves. Again, it doesn’t work in my case. I ditched the house the month after I couldn’t make the payment any more because the normal monthly bills are so insane that it makes no sense to stay. I’m living now every month, all expenses, on less than what my monthly electric bill was at the big house, and I’m not exactly living in a cardboard box right now.

        So, there are differences, and those strategies don’t work for every situation. The more the dollar amount goes up, the less they work.

        • FDCPAGuy says:

          Some states allow for a deficiency judgment to be awarded to the bank for the difference between the outstanding loan and FC sales price and some states do not. I will assume that you’ve done your research when you’re talking about them coming after you for the remaining balance. I wish you the best though it’s not an easy thing no matter what your income level.

          • daddy_froglegs says:

            Yes. I’ve done my diligence and spoken with teams of lawyers. The property is in a judgment state, and they most definitely went after it, and got it. That’s as far as the process has gone in 2 years though. It’s back in limbo. They’ll never be able to auction it, so eventually it will go back on the market and sit for many more years.

            If and when it finally sells, then they will come knocking for the balance.

            All of my actions are prepared in advance though. I have 3 sets of lawyers in 2 states which have covered every conceivable angle of what’s to come and when, and have been working on solutions every step of the way for the last 2 years. There will be no surprises. I know what’s coming so I won’t be blindsided. Doesn’t make parts of it any easier for me to swallow, but this is another difference between high dollar homes gone bad and normal homes gone bad. You won’t read stories about million dollar home owners suddenly shocked to find out they’re losing everything. They all have lawyers and they all know the score.

            • H3ion says:

              It used to be the case (I don’t know if the law has changed) that in Florida, the house was sacrosanct and could be preserved even in a bankrutpcy proceeding. If you don’t object to moving to Florida, buying a house and then filing for personal bankruptcy, keeping the house, that might work. My recollection is that there was no cap on the house value. I also recall that Bowie Kuhn or someone associated with him pulled this off in the 80′s. If there’s any interest, I would run it by a Florida attorney before doing anything.

              • daddy_froglegs says:

                I have a few things in mind, somewhat on that path, but not gonna discuss on a public forum. ;-)

              • varro says:

                They changed the eligibility standards for unlimited homestead exemptions in states like Florida in the 2005 overhaul of the bankruptcy code.

                The poster has a team of lawyers on it, so he should be getting advice on the advisability and timing of possible bankruptcy filings.

          • Luckier says:

            All states allow for a deficiency judgment against the foreclosed homeowner where the bank chooses to seek judicial foreclosure. Usually a deficiency judgment is not allowed where the bank chooses to seek non-judicial foreclosure. Since non-judicial foreclosure is quick and less costly, banks normally choose that for the “regular” homeowner. For a high-value home with a large deficiency, the bank is not going to let go of the deficiency, so they will choose the longer judicial foreclosure process.

    • Eyebrows McGee (now with double the baby!) says:

      I can’t help but be curious how, when you seem to be all over the various angles with the house foreclosure, you ended up with such a large house (with such very large utility bills, as you mention) in the first place. Perhaps it’s just a cultural thing, but you seem good with money, and where I am, wealthy folks who are good with money tend to underbuy their houses; it’s the nouveau riche and/or people with “more money than sense” who buy the very large or very expensive houses. (I do know that in other parts of the country there’s more visible house competition; or few houses in good school districts, say, that aren’t terribly expensive. So I do know there are reasons.)

      You don’t have to answer, and I truly don’t mean this to sound judgmental because you sound very savvy and obviously didn’t dumbass your way into the situation; I just can’t help being curious. :) It’s my curse!

      • daddy_froglegs says:

        Well, there was a lot more involved than just the basics I’ve let out. I had three properties at the time with which I needed to make decisions on, all at verying degrees of cost as well as risk. I admit, I made a few bad decisions along the way. I made a few good ones that netted me some completely INSANE profits that I won’t even begin to discuss, but it’s the bad ones that come back to bite you.

        My downfall was injecting “passion” into a property, when I should have been thinking with my head. I bought my last place (the one in default) because a girl really liked it. I threw all business sense out the window and went for it. At the time, it was the height of the boom, and based on past deals, I could do no wrong. I was literally growing money trees.

        We all make mistakes. Mine is just on a much bigger scale.

        Don’t get me wrong…. I’m feeling immense pain from this. I still make a ton of money, but I am perpetually broke now because of that deal. I’m counting pennies in my little black “debt book” here as we speak, wondering how I’m going to pay for my dog’s vet visit. It’s that bad. I’ve forked out $250k in a year & a half towards my debts and lived on spaghetti. It won’t get better for me (by my projections) until July of 2012. And that’s when the house deal will come calling and I’ll be sunk again for another 5 years.

        Yes, I had lesser houses. They were great. I bought more, and bigger as my income grew. Isn;t that what everyone does? even if you make minimum wage and then suddenly get a raise, don’t you buy better stuff? We all do.

        But I’m paying my debts and paying for my mistakes, which is a lot more than most of the news stories I’ve read can offer.

        • UncleAl says:

          “Yes, I had lesser houses. They were great. I bought more, and bigger as my income grew. Isn;t that what everyone does? even if you make minimum wage and then suddenly get a raise, don’t you buy better stuff? We all do.”

          I don’t think you’re going to find many sympathetic ears here… because, frankly, that’s *not* what we all do. Those of us who have practiced fiscal responsibility and lived well *below* our means instead of above them are pretty *correctly* outraged by both the bailouts going on right now and folks like you who are feel justified in buying whatever you wanted as long as someone would loan you the money. The piper has asked to be paid, and I, for one, think it’s about time.

          • daddy_froglegs says:

            Well, we all live different lives don’t we. And how I spend my money is my business. Yo may not agree with it, but it’s my money to spend, borrow, and ultimately pay back. Wise or not, that’s the beauty of being an individual. We don’t all have to listen to you andlive under your way of thinking.

            I’m not looking for sympathetic ears….. I’m not looking for anything. You do what you need to do, and I’ll do what I need to do. I’m 99% sure I wouldn’t agree with the way you’ve spent your money either.

        • Eyebrows McGee (now with double the baby!) says:

          I appreciate the answer. Like I said, I’m not being judgmental, I’m just curious about what the process was to get there because:

          “I bought more, and bigger as my income grew. Isn;t that what everyone does?”

          The cultural background I’m from, no. Mostly we buy bigger as our families grow, then downsize again when the kids move out. I drive a 10-year-old compact economy sedan. I can afford newer and “better” and bigger, but my car still works, so why?

          And I know plenty of people have an answer to that “why?” — or else there’d be no luxury car market! — which is why I asked you, since you seemed to have your head on straight and I appreciate the chance to try to understand a different mindset.

          • MrEvil says:

            That’s a good deduction, I know lots of people that do the same thing. Heck, my dad knows a local farmer with several million dollars in the bank and he doesn’t have electricity in his house, pays cash for everything. He always makes sure to have a brand new pickup every couple years.

        • thisistobehelpful says:

          Also dude you can get pet insurance. If your dog’s under 5 or 7 or something you may be able to get a yearly policy for a bit and it will pay for the basic check up, the shots and sometimes a bit more. Ask his vet if they take any pet insurance and if so which ones. Also, sign up for alerts from the ASPCA, Human Society, any other local shelters, animal control and petsmart/co. There are A LOT of free or supremely cheap vaccination programs. We used to take my cats for their rabies for $5 at animal control. My dog got his rabies/distemper at petsmart for $20.

          Also if you have a long term relationship with your vet they may just flat out take installments. At the end of my cat’s life the vets did a lot to help me pay for his final care and even his euthanasia.

      • daddy_froglegs says:

        Sorry for the spelling…. it’s the brandy.

      • thisistobehelpful says:

        Where I am they tend to overbuy because it’s status not necessity. A lot of the homes around me are mil+ homes and it’s just the standard fit-in thing. The $2m mcmansion is like a set of plans bought from the city. The guys that are buying their third home with cash tend to have a much more custom build. There’s some guy on a road I take that basically built a house from ground up out of stone like a mini-palace.

        I have a friend down on the shore part and there are these FANTASTIC, gorgeous “starter” homes that go for $2mil on the low end. Her parents know a couple building a house in that area that spent $6mil on just pouring the foundation because it basically got poured straight into Long Island Sound. She lives in an original house from like 1830 blah blah whatever so she’s in this lovely, old, almost Victorian and then you go down two streets there are houses with built in lighthouse towers basically.

        In some towns around here it is (or was) nearly impossible to buy a house for under a million dollars unless it was in the poor part. And by poor I mean it was still like $400k because you paid for location. There’s ONE street in Darien that’s considered poor and the “low income” stuff in New Canaan is this set of brick condos off on the edge of town.

        Also the rate of childbirth wasn’t any higher so people would have 6 bedrooms and 1-2 kids. If they started out with a 3 bedroom when they have their first kid they would upgrade to a 4+ bedroom. I’m in the land of the broker meltdowns but men (the usual single earner) still buy their wives a new car every year and the kids get a BMW and spend summers in France or whatever. There’s just a lot more for sale signs out there now.

        Sometimes I wonder if the wives/kids even know how close to bankruptcy they might be since despite a hefty income it’s still mostly based on credit. It’s a very weird place here. If you like lessons in insanity I recommend a visit.

    • Awesome McAwesomeness says:

      It seems like you could have bought or paid cash for a much lesser house though and you would not be in this situation. People make choices in life and I don’t feel any sympathy that you or anyone in your situation has repercussions. You should have to pay the bank back b/c you made the choice to spend so much on a house.

      I’m not jumping your shit, I’m just telling you spending so much was completely your choice. It was obviously a bad one.

      • daddy_froglegs says:

        I am no different from anyone else. I bought what I could afford at the time.
        If all you can afford is a $50k home in South Dakota, then that’s what you buy. I was able to buy a $2 mil home on an island with plenty of money to spare. What’s the difference? Why should I settle for a $50k house in South Dakota when I don’t have to? Would you?

        The only thing that’s different is the size of the bill.

        Don’t judge me. I don’t judge you. It has nothing to do with the cost.

        • producerist says:

          Please correct your statement. Instead of saying “I bought what I could afford”, make sure you say, “I took out a loan on what I could afford”. Because you really didn’t buy the house or else you wouldn’t be losing it now, would you?

        • Verdant Pine Trees says:

          The book “Millionaire Next Door” argues very expressively why someone might decide on a smaller house payment even if they have more money.

          I don’t think the comparison is fair between someone in one of the Dakotas and someone in LA (to me that sounds like a value judgment right there – there are people in LA who choose lower-cost communities), but between someone choosing to live in Upland, rather than Pasadena. Or someone choosing to live in Milwaukee rather than Chicago, Philadelphia rather than Boston, or Spokane rather than Portland.

          You make a choice to live/stay where the cost of living is very high, or where the home prices are inflated; and I do think that just as some people judge me for not buying a McMansion because I could afford it, or trying to turn my modest house into a palace overnight, I can judge other people’s choices.

          We made the choice to move and then buy way under what we could, because we assumed things would not always be good. I have family that has held onto land in Southern California for more than 30 years. The time to invest in that real estate was back in the ’70s and ’80s.

  5. FDCPAGuy says:

    Part of the reason why it’s difficult to re-work a jumbo loan is these loans were not sponsored by GSEs (FNMA, FHLMC) and thus are having a harder time being sold and packaged on the secondary market. Jumbo qualifications are nuts right now compared to conventional GSE loans (and rightfully so). One of the only buyers of Jumbo loans that I know of right now is GMAC. A conventional loan is easier to rework because of the GSE backing it and there is also a secondary market for them still; meaning that if you get sick of owning the loan you can ditch it and re-capatilize a bit.

    • daddy_froglegs says:

      That’s definitely part of the problem. No one wants to buy that stuff.

      The other end of it is, once you slip into missing a payment or two on these, there’s no catching up. It’s not like getting a part-time extra job delivering pizza is going to help you make your $18k monthly 1st mortgage, or your $7k monthly 2nd mortgage. Especially once you miss one or two payments.

      If you miss a payment like that, you’re likely never to make it up in this economy. The investors know this. Nobody wants to buy this stuff. And you sure can’t refinance your way out of it when you’ve lost $400k more than it’s worth.

  6. Cant_stop_the_rock says:

    “The difference? They’re often willing to sell at a loss, and their lenders are willing to let them do so, instead of foreclosing and destroying their credit ratings.”

    Is this implying that less wealthy people are unable to do the same thing? Because plenty of middle class and poor people are doing short sales… Did I miss the part of the article that said lenders are unwilling to accept a short sale from poor people?

  7. madanthony says:

    I wonder how much of this is because the state that probably has the most over $1 million houses -California – is also a non-recourse state, meaning that banks can’t go after people who default on their mortgages for the difference between the amount owed and what the bank gets for the foreclosure.

    • DWMILLER says:

      I am under water in two houses. I was told because I re-financed both homes,one through a mod and the other by taking $ out, that if I let them go back to the bank I will get sued for the difference or a fat 1099 from the bank. I live in California.

      • daddy_froglegs says:

        A 1099 is MUCH better than being sued for the difference. If I was ever given the option I’d take the 1099 faster than light moves.

    • Syrenia says:

      California is non-recourse for the purchase only. The devil is in the details, as DWMILLER discovered.

  8. AuntieMaim says:

    I wonder if two things are contributing to this issue:

    1. Because of the real estate market fallout, people are less willing to pay a lot for a home (or less able to get a large mortgage), and thus the market has affected the high-end homes more than the lower-end ones;

    2. If someone does have a million or so dollars to spend on a home, they may tend to shop new-built or look for what is known in the Boulder CO area as a “scraper”, a desirable plot where they will just demolish the house and build to suit (and thus be looking to spend less than a million dollars buying and the rest of their budget building).

    In northern CO, there was talk for years before the real estate meltdown that the resale market for “McMansions”, for example, was sluggish, maybe because people with a million dollars to spend and not looking for an older home tended to choose a new-built or in-progress build they could customize rather than taking over a “used” house. I don’t understand that part of it myself, as I grew up in a historical home and prefer older homes (and I think older, established homes tend to retain value better than the slap-em-up sprawl developments) (one of which we live in now, much to my dismay, as my husband bought there before we dated and we don’t want to shop for something else yet, as we’re not sure if we’ll be living in the same city once I finish my degree). I also don’t know how much of the multi-million foreclosure problem is “McMansions” as opposed to other types of expensive homes.

  9. Garbanzo says:

    “even if you make minimum wage and then suddenly get a raise, don’t you buy better stuff? We all do.”
    Only to a point. My family’s income and consumption have both increased substantially over the years but, critically, we’ve grown our consumption much more slowly than our income. Our starting point was when I literally went for months with holes in my shoes because I could not afford new ones. The year my income hit $16,000 (a $3000 raise) I bought new shoes–and then put $2000 into an IRA. I think increasing your consumption by $30-$50 for every $100 your after-tax income goes up (assuming you’re above poverty level to start) is a reasonable long-term strategy.

    “I was literally growing money trees.”

    If you were literally growing money trees, what happened? Was there a money tree blight? Gypsy moths? Did they die in a freeze? Choked by kudzu?

  10. _hi_ says:

    Did you cut off Beckys last name on purpose… Becky Con? On the sign. The image… up top.