Landscape Architect Articles

Richmond Floats a Solution to Underwater Homes08-12-13 | News

Richmond Floats a Solution to Underwater Homes

Richmond, Calif., has proffered an idea to ameliorate the underwater mortgages of its citizens—a plan sure to incur the wrath of banks.

"Richmond rhymes with enrichment," notes the website of Richmond, Calif., a community on the eastern shores of San Pablo Bay in the San Francisco Bay area.

Enrichment is on the minds of the Richmond City Council, which includes Mayor Gayle McLaughlin.

On July 29, 2013, the city "sent letters to 32 banks and other mortgage holders offering to buy 624 underwater mortgages at discounts to the homes' current value," reports the S.F. Chronicle. What gives?

Here's how it would work: Underwater home on "Atlantis Street" is worth $200,000 at current prices, but has a $300,000 mortgage. The city buys the property for 80% of current value = $160,00. The homeowner, with assistance from the city and the firm Mortgage Resolution Partners (MRP), refinances the loan through the Federal Housing Administration at 95 percent of the current value = $190,000. The homeowner now has five percent equity in the home, i.e., no longer "underwater." But wait, that leaves $30K unaccounted for. MRP gets a flat fee of $4,500 for its services, and the city and investors the remainder = $25,500.

Pretty nifty, huh? You lift mortgages out of their watery depths, give homeowners a modicum of equity and a considerably smaller mortgage payment.

For the banks that financed these mortgages at considerably higher prices and interest rates, however, this is a script out of the "Legend of Hell House." The bank loses money every whichaway. Similarly, those on Wall Street who deal in buying and selling mortgage-backed securities will be apoplectic. As has often been noted during the economic housing crisis, even figuring out what entity actually owns a home is difficult, given the common practice of repacking hundreds of mortgages and selling them as mortgage-backed securities.

Anticipating hostility from the banks and Wall Street, MRP is on board to handle all legal costs. Mayor McLaughlin has stated the city would even consider using eminent domain if the banks are unwilling to negotiate a sale of the loans at a fair market value. If that happens, one expects MRP will be really busy in court.