Published On: September 3rd, 2013 / Categories: underwater mortgages /

underwater mortgagesFaced with hundreds of homes that have been abandoned by “underwater” owners, the City of Richmond, California, has proposed to purchase 624 loans secured by those properties, and has threatened note holders who resist selling with seizure of their loans.

The City argues that these loans are only worth the current value of the underlying real estate. The City proposes to acquire these loans for, in some cases, as much as a 50% discount on their face amount. The plan is to offer owners who stay in their homes a chance to get a City-financed mortgage loan for just less than the home’s fair market value (e.g., $240,000 for a house worth $250,000). In this example, the city would offer to buy the loan for $200,000 and would compel the sale at a reduced rate, at the expense of the current mortgage holder. The additional sum realized from the refinance ($40,000 in this example) would fund the program, and provide profits to those providing seed capital.

The action has already prompted a lawsuit (Wells Fargo Bank, N.A., et al. v. City of Richmond, California, et al. [need case number and court if you have it, otherwise, drop the parenthetical identifying the case name]), which is not surprising considering the potential losses to the current mortgage holders. Opponents also argue that this practice, if it becomes more popular, could reduce access to mortgage capital in areas with volatile real estate markets. Further, the Federal Housing Finance Agency has weighed in (August 6, 2013) with a statement that such use of eminent domain, “…presents a clear threat to the safe and sound operations of the entities under its purview.”

It will be a closely-watched case.

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