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Tuesday, October 9, 2012

What to do about underwater homes...

One of the key issues in real estate locally is the current shortage of homes on the market. There are several factors involved in that problem, not the least of which is FUD – Fear Uncertainty and Doubt – about the economy and the future. Another big factor is that so many homes are underwater; but how many? That depends upon where you live, but Zillow has an interesting interactive map that you can access to see what their data says about your area (at least to the county level).

According to the Zillow data 42% of homes in Oakland County are worth less than the homeowners current owe on their mortgages – they are underwater. Macomb County is worse at 50% but Livingston County fares better at only 39%. All three Counties are in  a dubious group called the highest 20% in the country of underwater homes, with Oakland County in the highest 10% and Macomb in the highest 5% (along with Detroit, I might add). To see all of the data and other counties in the area, visit the Zillow map.

Since this issue alone has stalled out a significant portion of the local real estate market, the question of what to do about it has been uppermost on many minds for a while. At least one company in California has figured out one way to resolve the issue while making money doing so. Mortgage Resolution Partners (MRP) is a company founded in California, but now operating in several of the hardest hit areas of the country.

What MRP does is to work with local government entities to establish a program that it calls C.A.R.E.S. -  Community Action to Restore Equity and Stability. (You always have to have a catchy acronym for these programs – ed.) The program is based upon the simple principal in law that allows governmental bodies to exercise the right of eminent domain over properties (and apparently mortgages) in the community, for the overall good of the community. MRP makes money by charging a flat fee to facilitate the transaction. I’m sure that the “no government is good government” foes of this process are having apoplectic fits about this whole thing. You can read more about MRP and the program from an article at the RealtyTimes web site by clicking here. There is a link to the MRP web site there too.

Basically what this program is designed to do in California and elsewhere is to encourage local governments to declare that underwater mortgages are harmful to the community and thus need to be taken through eminent domain and the homeowner be allowed to refinance at the current value. The justification used is that many underwater properties will eventually fall into foreclosure and the high potential for further deterioration of the property and the neighborhood values will hurt the whole community.

The process works by the governmental body taking the mortgage under eminent domain and paying the mortgage holder the current market value of the property (a requirement under eminent domain) and then helping the homeowner regain ownership by remortgaging at the current value and at current mortgage rates. The primary target for this process has so far been homes for which the mortgage is held by private investors or investment pools and not the mortgages held by banks or entities like Fannie Mae or Freddie Mac. Those mortgage holders, the program organizers say, have the power to reduce the principal on the mortgage that they hold, if they choose to do so.

The need to find a way to reduce the huge overhang of principal that was lost in the current recession has been sitting there like the proverbial elephant in the room since day one, with no viable alternative programs suggested by the lender, so far. It was almost always going to have to come down to some mandate of some sort to get the lenders to do something. It is worthy of note that the California Association of Realtors is backing legislation to ban this practice (read about that here). C.A.R. says its worries are based upon concerns about misuse of government powers and the potential for wholesale devaluation of neighborhoods. C.A.R. sees no reason to seize what are basically performing loans, just because the property is underwater.

So, is this the answer to the biggest issue that we face? Perhaps, perhaps not. One always has to be leery about any program that involves government trying to save us from ourselves; however, the lenders have certainly shown no empathy for the mess that they got us into with their lax and even aggressive lending practices, nor any real creativity in helping people get out from under the questionable loans that they made during the real estate bubble run-up.

It would likely help everyone if the lenders would just allow underwater homeowners to refinance at the current low mortgage rates, even if they had to refinance an amount that no longer reflects the current value of the home. That might have been possible until the advent of the securitization of mortgages into vast pools that are no longer owned or controlled by the lenders themselves. Now it’s the bondholders that would have to eat the reduced return on those mortgages. No easy sale; but, perhaps there is enough self-interest at stake there for consideration.

My suspicion is that all of these so-called “private investors” are waiting for some sort of federal bailout on the losses that they need to take. The Fed is already taking some action on the loans held by the quasi-governmental entities, but is unlikely to extend those programs to the private sector. What are your ideas for a solution to this mess?

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