New public funding plan: Seize home mortgages

richmond, ca postcardJune 7, 2013

By Wayne Lusvardi

With pension costs sapping budgets, governments at all levels are coming up with novel funding methods. The latest comes from the city of Richmond, which must deal with a looming 50 percent increase in pension costs amounting to $7 million per year over the next five years.

The city’s idea: use eminent domain to seize over-mortgaged home loans from lenders and re-sell them for a $46 million profit. That would help the city of 105,000 plug a $1.75 million decline in sales tax revenues and $7.9 million in additional costs from the negative effects of foreclosed properties in 2012.  About 49 percent of all mortgages in Richmond are classified as “underwater” — meaning the amount of the mortgage on a home greatly exceeds its current market value.

Richmond is another troubled East Bay city, just 12 miles up the 580 freeway from Oakland. Except for a few cities, such as university-town Berkeley, most of these cities have missed the tech prosperity of San Francisco and Silicon Valley to the southwest.

As the San Jose Mercury News reported last month, Richmond has $712 million in negative equity in over-mortgaged homes. That equates to $153,151 on average for each of the 4,649 over-mortgaged homes in the city.

According to Zillow.com, the median home value in Richmond dropped from $311,000 in 2008 to $157,000 after the bursting of the Mortgage Bubble. That’s a $154,000 decline, or 50 percent. Home values have begun rising lately, in just the last by 24 percent to about $200,000. But that’s still way off the peak of 2008, and could be another housing “bubble” about to burst.

Richmond tried to plug its looming budget shortfalls by putting a $6 million local sales tax increase called Measure D on the ballot in 2011. It would have boosted the sales tax rate from 9.75 percent to 10.25 percent. Voters heartily shot it down, 57 percent to 43 percent.

But voters would have no say on the new idea of eminent domain seizures of mortgages. No voters would have to approve mortgage eminent domain.  No municipal bonds would have to be issued or paid back with interest. The city would not have to fight labor unions to unwind pension obligation contracts.  It would be a new way to raise taxes: condemn mortgages from banks and re-sell them back to the same homeowners to reduce their mortgage payments.

How does secondary mortgage market work?

Mortgages are typically not held by the banks that originated the loans, but by what is called a secondary mortgage market. (This is not the same as getting a second mortgage on your home.)

Instead, the investors in the secondary mortgage market are typically pension funds, insurance companies, hedge funds and governments.

The mortgage market buys and sells mortgages based on discounts according to their yield and risk.  The discount is lower for loans where the borrower is making payments and higher for those who have defaulted.  A typical discount for a defaulted loan is 20 percent or higher.

How would mortgage eminent domain work? 

Richmond’s mortgage re-seller, Mortgage Resolution Partners, proposes to “cherry pick” the best performing mortgages out of a secondary mortgage market lender’s portfolio.  But it would buy these high-grade mortgages based on the 20 percent discount for low-grade “bad” mortgages.  It’s sort of like going to an auto dealer and picking only the new cars, but paying for them based on the discounted price as if they were used cars.  This is why the banking and real estate industries are strongly opposed to the use of mortgage eminent domain.

An example provided by Mortgage Resolution Partners: A home with a $300,000 mortgage is now only worth $200,000 in the open real estate market. The mortgage re-seller would buy that $200,000 loan for, say, $160,000, based on a 20 percent discount of the value of the real estate.  A new loan for $190,000 would be offered the homeowner by the mortgage re-seller. The mortgage re-seller would make a $30,000 profit ($190,000 minus $160,000).

The city’s mortgage re-seller would then split the $30,000 in profits: $10,000 for its expenses including a $4,500 fee or profit; $10,000 profit off the top for its investors; and $10,000 to the city.  A detailed breakdown this example is provided below.

In this example, the current owner, the secondary mortgage lender’s investors, would lose $140,000. (The original $300,000 mortgage would be cut down to $160,000; producing a $140,000 loss.)

The investors for Mortgage Resolution Partners would provide $190,000 in new loan money to the homeowner.  However, real estate brokers are afraid lenders would not make any more home loans in Richmond. The only market for homes could thus be “all-cash buyers,” which is what happened in the Great Depression of the 1930s. Thus, homeowners would get a mortgage reduction, but could not be assured of being able to re-sell their homes due to a lack of loan money for new buyers.

Mortgage Resolution Partners’ investors would make $10,000 in pure profit on top of whatever mortgage interest rate they would receive on the new loan.  So this is a scheme whereby Mortgage Resolutions Partners’ investors would reap a windfall at the expense of the secondary mortgage investors (pension funds, insurance companies, etc.).

The Mercury News reported there are 4,649 over-mortgaged properties (also called “underwater mortgages”) in Richmond.  The city would stand to reap about $46 million if the courts approved such a scheme.

You can’t take the well without buying the whole farm

An unaddressed legal obstacle for the city is whether eminent domain probably cannot be used to selectively take the best mortgages out of lender’s pool of loans without valuing the whole mortgage portfolio.  For example, under eminent domain law, government cannot take a farmer’s water well and underground water rights without paying damages to the whole farm.  How the city of Richmond and Mortgage Resolution Partners could expect any court to approve its scheme is a highly dubious assumption.

Richmond understandably is desperate. As with so many California cities, such as bankrupt San Bernadino and Stockton, it spent too much during the good times and now is struggling during the bad times.

However, here is the biggest unmentioned drawback of mortgage eminent domain: If it were enacted and passed the legal hurdles, what could stop a city from just seizing home equity, personal bank accounts or any other assets?

Detailed Breakdown of Eminent Domain Mortgage Example

Amount MortgageRe-Seller/Mortgage Resolution Partners Homeowner Loan Balance Secondary Mortgage Market Lender City of Richmond
Mortgage balance $300,000 $300,000 $300,000
Home value in real estate market $200,000 $200,000
Amount Over-Mortgaged $100,000 $100,000
Amount loan acquired for by eminent domain $160,000 $160,000 $160,000
Mortgage Lender’s Loss $140,000 ($140,000)
Percent Loan Discount (Loss) 47%
Amount New Loan to Homeowner $190,000 $190,000 $190,000
Homeowner Loan Reduction $110,000 $110,000
(37%)
Amount New Loan Markup by Reseller $190,000($160,000)=$30,000 $30,000
Re-Seller’s Expenses $5,500 $5,500
Profit to Re-seller $4,500 $4,500
Profit to Re-seller’s Investor’s $10,000 $10,000
Profit to City $10,000 $10,000

 

12 comments

Write a comment
  1. surfpunk
    surfpunk 7 June, 2013, 11:17

    agenda 21,one bay area,if they like it so do you!Get in now the veiws will be stunning,i want a penthouse with veiws of both bridges,maybe we should get rid of that dirty refinery.Richmond could be so green.

    Reply this comment
  2. Paul
    Paul 7 June, 2013, 11:22

    Communist at work in Kommiefornia…PLAIN AND SIMPLE!!! And their called LIBERALS AND DEMOCRATS!

    Reply this comment
  3. Donkey
    Donkey 8 June, 2013, 06:36

    We will move money around from bureaucracy to bureaucracy and act as if we have created wealth. We pay taxes too. What will you do without first responders to protect you, how will you survive?

    The above statments are all classic RAGWUS feeder propaganda we hear all the time falling from the mouths of unproductive parasites. Let the cities clost their doors, doer citizens will step up take care of business. The system in place now does not hve the ability to move forward and do waht is right for the non-conneceted citizens. 🙂

    Reply this comment
  4. surfpunk
    surfpunk 8 June, 2013, 12:00

    pay your prop. taxes thru escrow! the only way to really get the message across is to stop feeding THEM . Tax revolt stop paying your prop. tax,yes it will cost you in fines,kind of scary putting your castle at risk.50% of ca. prop. owners would get there attention.

    Reply this comment
  5. The Ted Understanding Machinees
    The Ted Understanding Machinees 8 June, 2013, 17:44

    Duncey and surfpunk…mmmmm a match made in heaven!

    Reply this comment
  6. Ulysses Uhaul
    Ulysses Uhaul 8 June, 2013, 20:14

    What a joke…….Big Sis and Sutter watching you…

    Reply this comment
  7. Ulysses
    Ulysses 9 June, 2013, 18:44

    Teddy….some of these posters were xtras on the VIKINGS TV show…..go lite on em….

    Reply this comment
  8. The Ted Enormity
    The Ted Enormity 9 June, 2013, 21:58

    Good point.

    Reply this comment
  9. Hondo
    Hondo 10 June, 2013, 13:34

    The first house they should seize in Jerry Browns. The next, Ulysses and Teddy’s. I believe it is one in the same.
    Hondo…..

    Reply this comment
  10. Queeg
    Queeg 10 June, 2013, 20:24

    Hondo is a real work…..me casa not ye casa…..comprende?

    Teddy ibrings balance to CWD…..he is edgy……needed on this negative site…..

    Ulysses is a struggling rental yard guy…….specializing in bon voyaging gloomers and bunker types…..

    Best boss ever……

    Reply this comment
  11. Ted Steele, The Decider
    Ted Steele, The Decider 11 June, 2013, 20:00

    Thanks Quuegster– I try to help these guys! It aint easy!!

    Reply this comment
  12. Interested
    Interested 27 July, 2013, 07:30

    This was one of the most understandable explanations of the MRP plan. However, there are three major flaws in this report.
    1-Each home owner has the choice to participate. Every one can decide to play or not to play. At todays rates the average mortgage payment will be roughly cut in half
    2-MRP charges only $4500 for the service. It make no additional ‘profit’. The $10,000 you mention actually goes to the city as well as the other $10,000. And that money,by law, would be earmarked for infrastructure improvement.
    3-In the secondary mortgage business each time a mortgage is sold it is discounted. For instance, your $300K loan which has been bought and sold a variety of times would now be worth $160K on the secondary market. So, the offering is a fair market offering and has to be approved by a judge in the eminent domain hearing.

    This is a voluntary program where no parties are injured. The financial industry sees it as a loss of control but will not lose as it puts these people back in the real world to move, buy local, change jobs, take care of their lawn, etc

    Reply this comment

Write a Comment

Leave a Reply



Related Articles

Bernanke’s QE3 slamming California economy

Sept. 17, 2012 By Wayne Lusvardi Those desperately in search of a cure for cancer will often try apricot pits

Pension funds’ goal: High returns or symbolic stands?

Government pension funds around America have for years been pressured to take stands on political issues by investing or not