WSJ - Cities Consider Seizing Mortgages ?

[ratto]

There is an article on WSJ today about cities are considering to seize mortgages using eminent domain power to prevent foreclosure which erodes their local tax revenue. Not sure how much impact this will have on the portfolios of already/to be FIRED should it become enacted. Shouldn't they be required to disclose when they're trying repackage and "resell the reduced mortgages to new investors"? The outcome probably won't be pretty, as there might be a lot of [-]smaller[/-] bubble bursts waiting to happen.

Here are some excerpts:

Eminent domain allows a government to forcibly acquire property that is then reused in a way considered good for the public—new housing, roads, shopping centers and the like. Owners of the properties are entitled to compensation, which is usually determined by a court.

But instead of tearing down property, California's San Bernardino County and two of its largest cities, Ontario and Fontana, want to put eminent domain to a highly unorthodox use to keep people in their homes.

The municipalities, about 45 minutes east of Los Angeles, would acquire underwater mortgages from investors and cut the loan principal to match the current property value. Then, they would resell the reduced mortgages to new investors.

For a home with an existing $300,000 mortgage that now has a market value of $150,000, Mortgage Resolution Partners might argue the loan is worth only $120,000. If a judge agreed, the program's private financiers would fund the city's seizure of the loan, paying the current loan investors that reduced amount. Then, they could offer to help the homeowner refinance into a new $145,000 30-year mortgage backed by the Federal Housing Administration, which has a program allowing borrowers to have as little as 2.25% in equity. That would leave $25,000 in profit, minus the origination costs, to be divided between the city, Mortgage Resolution Partners and its investors.

Proponents say this would help residents shed debt loads that are restraining economic growth, while preventing foreclosures that are eroding the tax base. But unlike the beneficiaries of most recent mortgage-modification efforts, who must show hardship, these borrowers would have to be current on their payments to participate. And the program initially would focus only on mortgage-backed securities that aren't federally guaranteed—about 10% of all outstanding U.S. mortgages.

"A number of cities, mayors, city managers have come to me and said, 'How soon can we get in?' " said Greg Devereaux, San Bernardino County's chief executive. He said he learned of the program last year from a California state official. He said county officials haven't yet made a firm decision on whether to proceed. "We think it would be irresponsible, given the size of the problem in our county, not to at least explore it," he said.

 

[ziggy29]

Interesting idea, but pricing the market value of these nonperforming mortgages this would be rather difficult. I think any city that thinks about this needs to have a valuation done by a completely neutral third party -- if they had a hand in setting the market value (what they had to pay as "just compensation") there would be a massive conflict of interest and serious potential for abuse.

 

[W2R]

Interesting idea, but pricing the market value of these nonperforming mortgages this would be rather difficult. I think any city that thinks about this needs to have a valuation done by a completely neutral third party -- if they had a hand in setting the market value (what they had to pay as "just compensation") there would be a massive conflict of interest and serious potential for abuse.

Yes, I agree and to me this seems like it could possibly be opening the barn door to corruption, so to speak.

Here, sometimes the owners of blighted homes just stop paying their mortgages and property tax. After a long process New Orleans seizes these homes for non-payment and sells them for the amount due on property tax. Then the original homeowner can get the home back if they can pay all the back taxes within a period of time (a year?). If that happens the buyer is SOL, but if not then he has a bargain renovation project. It's a gamble. In either case, the homeowner is the one having to deal with his own mortgage obligations, not the city and not the new homeowner. The city has its property taxes and doesn't have to pay a thing to get them. Seems to me that something like this could work elsewhere.

 

[Koolau]

Such a gambit by cities would probably not encourage mortgage lenders to loosen their already very tight fists right now. Using ED to seize properties could well be very short sighted if it leads to even lower prices for current housing. I wonder if cities are ready to purchase whole neighborhoods.

 

[ratto]

but pricing the market value of these nonperforming mortgages this would be rather difficult.

I agree that it is indeed very difficult, not even considering if a judge needs to process a lot of similar cases flooding in. Also when cities want to get a share of pie from the final profit, there is almost no way to avoid self interest conflict through imminent domain approach. This probably will put more uncertainty on already twisted mortgage backed investment vehicles which are (in)directly included in our portfolios even though we might not like the idea at the first place. It makes modeling via FIRECalc so unpredictable.

 

[Texas Proud]

Interesting idea, but pricing the market value of these nonperforming mortgages this would be rather difficult. I think any city that thinks about this needs to have a valuation done by a completely neutral third party -- if they had a hand in setting the market value (what they had to pay as "just compensation") there would be a massive conflict of interest and serious potential for abuse.

Since I can not read the article, I have to rely on the OP....

But he put in a quote that said they have to be current on their mortgage... so no nonperforming loans would be included....

 

[Texas Proud]

Yes, I agree and to me this seems like it could possibly be opening the barn door to corruption, so to speak.

Here, sometimes the owners of blighted homes just stop paying their mortgages and property tax. After a long process New Orleans seizes these homes for non-payment and sells them for the amount due on property tax. Then the original homeowner can get the home back if they can pay all the back taxes within a period of time (a year?). If that happens the buyer is SOL, but if not then he has a bargain renovation project. It's a gamble. In either case, the homeowner is the one having to deal with his own mortgage obligations, not the city and not the new homeowner. The city has its property taxes and doesn't have to pay a thing to get them. Seems to me that something like this could work elsewhere.

Concerning property tax sales... first, I am by no means any kind of expert... only have read a few things...

But, if you buy a property and the person does come back and pay off the taxes, he has to pay you back.... and from what I remember, with interest... so it is not a complete SOL if it happens....

 

[Texas Proud]

I would bet that this would be fought in court with entities that have a LOT of money... and also a lot of money at stake....


I just do not see how they could do this legally.... but some strange laws are out.... there was a SC case that did allow taking of property that I would not have thought would have been legal...

 

[ziggy29]

I would bet that this would be fought in court with entities that have a LOT of money... and also a lot of money at stake....

Entities with a lot money should not generally be in danger of foreclosure. If they have enough to mount a very expensive legal defense, they have enough to make the mortgage payments.

I just do not see how they could do this legally.... but some strange laws are out.... there was a SC case that did allow taking of property that I would not have thought would have been legal...

It could be argued that this is for developing tax revenue (part of the basis for the Kelo decision).

 

[W2R]

Concerning property tax sales... first, I am by no means any kind of expert... only have read a few things...

But, if you buy a property and the person does come back and pay off the taxes, he has to pay you back.... and from what I remember, with interest... so it is not a complete SOL if it happens....

WOW!!! So under Napoleonic code, upon which our legal system here is based, no agreement with New Orleans could possibly have been legally crafted under which the new owner would have agreed in writing to not being paid back under these circumstances?

Amazing and thank you for that information. Apparently every report ever made by the parties involved in these transactions has been wrong. Wait until our local lawyers find out... it will keep them busy for years.

 

[Texas Proud]

Entities with a lot money should not generally be in danger of foreclosure. If they have enough to mount a very expensive legal defense, they have enough to make the mortgage payments.


It could be argued that this is for developing tax revenue (part of the basis for the Kelo decision).

What I meant was that if you are going to 'take property' using emminant domain, and pay the current value of the property to the mortgage holder, then the mortgage holder (the ones with a lot of money and money at risk) will fight the taking of the property... the banks are not going to sit by and be paid $120K on a $300K mortgage if they can help it....

I do not see how it helps tax revenue.... the house has a tax base that I would assume would not change... and might be argued that it would go down....

thanks for the reference to the case.... I might have to take a look at it...

 

[Texas Proud]

WOW!!! So under Napoleonic code, upon which our legal system here is based, no agreement with New Orleans could possibly have been legally crafted under which the new owner would have agreed in writing to not being paid back under these circumstances?

Amazing and thank you for that information. Apparently every report ever made by the parties involved in these transactions has been wrong. Wait until our local lawyers find out... it will keep them busy for years.

Hey, I forgot you live 'over there'



Edit to add.... here is the law for Texas.. so if you bought a property, you do get your money back if they do redeem it.... plus 25% or 50%...

"...may redeem the property on or before the second anniversary of the date on which the purchaser's deed is filed for record by paying the purchaser the amount the purchaser bid for the property, the amount of the deed recording fee, and the amount paid by the purchaser as taxes, penalties, interest, and costs on the property, plus a redemption premium of 25 percent of the aggregate total if the property is redeemed during the first year of the redemption period or 50 percent of the aggregate total if the property is redeemed during the second year of the redemption period."

 

[W2R]

Hey, I forgot you live 'over there'

Yes, and I am intimately close with people who have a strong interest in these transactions. But hey, I could be wrong. Often am.

 

[ziggy29]

I do not see how it helps tax revenue.... the house has a tax base that I would assume would not change... and might be argued that it would go down....

I assume the thinking is that if a house is badly in arrears with respect to the mortgage payments, it's likely also in arrears with respect to owing back taxes.

 

[Texas Proud]

I assume the thinking is that if a house is badly in arrears with respect to the mortgage payments, it's likely also in arrears with respect to owing back taxes.

Just curious if you read the article... I do not have the WSJ and can only go by what was posted by the OP...

But, included was this:

"But unlike the beneficiaries of most recent mortgage-modification efforts, who must show hardship, these borrowers would have to be current on their payments to participate."

If I am reading this right, then they can not be in arrears on their payments...

 

[haha]

R.I.P. market economy. Of course, it is mostly dead already.

 

[ziggy29]

Just curious if you read the article... I do not have the WSJ and can only go by what was posted by the OP...

But, included was this:

"But unlike the beneficiaries of most recent mortgage-modification efforts, who must show hardship, these borrowers would have to be current on their payments to participate."

If I am reading this right, then they can not be in arrears on their payments...

I also read this snippet:

Proponents say this would help residents shed debt loads that are restraining economic growth, while preventing foreclosures that are eroding the tax base.

The thinking, I assume, is that if you think you're going to lose your home to foreclosure you have little incentive to pay the property taxes.

 

[ratto]

Just curious if you read the article... I do not have the WSJ and can only go by what was posted by the OP...

Except for some sections with political references, pretty much the majority pieces are quoted.

The thinking, I assume, is that if you think you're going to lose your home to foreclosure you have little incentive to pay the property taxes.

Regardless how messy and how long the legal battles will turn into, this is indeed an alternative way to keep some home owners with underwater mortgage from delaying to pay property tax, or even strategically walking away. I just don't know if anyone has appetite for the newly packaged mortgage investments issued under this proposal powered by ED. But if they do get blended in, then it will be difficult to know until it's too late.

 

[traineeinvestor]

As good a way as any to discourage mortgage lending going forward and reduce the number of jobs in that sector of the economy.

The tax implications may be interesting:

1. if the proposal has the effect of crystalising a loss by the mortgagee, does that mean that they get to reduce their taxable income or or would they have already done this by "marking to market"? If the mortgagees get to write off a loss that has not previously been written off, it is possible that there may not be any gain in net tax revenue;

2. if the mortgagor gets relieved of the balance of their mortgage obligation, is that taxable income?

My knowledge of US tax law is pretty limited, so I would be interested to know how this would work out.

 

[Texas Proud]

I also read this snippet:

The thinking, I assume, is that if you think you're going to lose your home to foreclosure you have little incentive to pay the property taxes.

I read it that you had to be current.... and that doing this eminent domain thing would give the homeowner and incentive to stay in the house instead of walking away from the mortgage even though he can pay... that the prevention of foreclosure would be a future event in some cases....

There are a number of people buying a new home and walking on their old one... having their mortgage reduced gives an incentive to stay...

However, if they can pay what they agreed to... then why should they get a reduction That is the question that a lot will be asking... especially the lien holder....


Also, if you do not pay your taxes..... they still are due and the bank would have to pay them when they foreclosed...... right?

 

[Semiretired2008]

2. if the mortgagor gets relieved of the balance of their mortgage obligation, is that taxable income?

My knowledge of US tax law is pretty limited, so I would be interested to know how this would work out.

This gives a short summary for your question. In summary the answer is - it depends...

Tax Consequences When a Creditor Writes Off or Settles a Debt | Nolo.com

 

[Independent]

For a home with an existing $300,000 mortgage that now has a market value of $150,000, Mortgage Resolution Partners might argue the loan is worth only $120,000.
...
But unlike the beneficiaries of most recent mortgage-modification efforts, who must show hardship, these borrowers would have to be current on their payments to participate.

If I'm the judge, I'll let the city argue that the mortgage is only worth $120k, but I'll rule against them.

The value of the mortgage is the present value of the expected future payments (and that PV will be a little more or less than the outstanding principal, depending on interest rate changes).
If the homeowner is current, why would I assume that those future payments aren't going to be made?

 

[M Paquette]

If I'm the judge, I'll let the city argue that the mortgage is only worth $120k, but I'll rule against them.

The value of the mortgage is the present value of the expected future payments (and that PV will be a little more or less than the outstanding principal, depending on interest rate changes).
If the homeowner is current, why would I assume that those future payments aren't going to be made?

At which point the homeowner drops the deed and keys on the table in front of the lender on the way out of court.

The homeowner has been making payments in good faith that the lender providing the first mortgage and sharing in the joint investment and risk of the home purchase (for that is how first mortgages are constructed in California and a number of other states) would in turn in good faith recognize the drop in value of the home. Since the judge has now determined that the homeowner is a reliable sucker who can be counted on to pay off a mortgage worth considerably more that the property securing it, rather than continuing to pay this sunk cost, the homeowner logically cuts his losses, and releases the security for the mortgage back to the lender. Complaints about the morality or ethics of this are irrelevant. This is a matter of contract law.

Things get much messier with a second mortgage, because of the differing nature of the laws covering such secondaries, and the contractual obligations of these mortgages. A judge can come in handy in setting the priorities between the multiple lenders.

 

[frank]

If you owned property worth say 300,000 and sold it on contract to someone else, who then say 3 years later came to you and said " that property you sold me is now only worth 200,00, so we'll have to revise our agreement" what would you say? be it a piece of land, a house, or any physical property. the agreed price is what you would expect to recieve or you get the property back. when government uses eminent domain in this context it is bad for everyone.

 

[MooreBonds]

The value of the mortgage is the present value of the expected future payments (and that PV will be a little more or less than the outstanding principal, depending on interest rate changes).
If the homeowner is current, why would I assume that those future payments aren't going to be made?

...

At which point the homeowner drops the deed and keys on the table in front of the lender on the way out of court.

So then let the homeowner drop their keys and walk out - and then start the multi-month foreclosure proceeding, which is what established foreclosure law is about.

You're asking a large industry to summarily willfully reneg on their contracts solely in order for the local government to share in the profits.

The local community isn't taking an interest in other foreclosed homes to reduce their supply and improve the community, nor is it interested in helping displaced homeowners who lost their homes to line up financing to buy a different home at the current (lower) market price - which would truly help eliminate the supply of vacant homes and stabilize the community.

Is it similar to ED practices to level some homes to build a shopping mall? Well, all I can say is, hopefully those homeowners forced to sell in order to build a SuperWalMart at least received a market price for their homes - they didn't buy their home for $100,000, and had the gov't force them to sell at $50,000, which is what they appear to want to do with a select minority of the mortgages.

And before I say the next part, for the record, I'm not a strong proponent of using ED mainly to satisfy the whims of a local developer and increase tax revenue....but, with this selective mortgage ED seizure, the community is only doing this to increase their revenue, and they're doing it on a selective, 'random' basis. It's not like they can point to the corner of Washington and Carver St, and say "this is a major intersection, and it would somewhat benefit the community to have more competition with more retail choices" (as with Retail Development ED), or point to an entire neighborhood and say "30% of the homes in this subdivision are already vacant and foreclosed on, we need to help stop even more foreclosures and revitalize the neighborhood to avoid suburban blight" - it's purely on a random basis (for those mortgages not involved in gov't guarantees), and solely to increase revenue.