Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
14y
Jake, can't follow the link, but without reading it, I can see the public purpose, however getting between a lender and a borrower may have some legal issues that they may not be able to afford to fight. I know they have tons setting empty and through ED, market value would be paid, be interesting to see what the strategy is....
Investor · Chattanooga, TN · Member since 2009 · 1k+ posts · 903 votes
14y
Bill Gulley, What this boils down to is a private entity using the force of law to usurp legal contracts between other private parties so that entity can in turn profit. At the end of the day, said entity will profit by having the loans they picked up at a discount refinanced by a govt insured agency (FHA, Fannie, etc) and dumped back onto the shoulders of the taxpayer. This program is only targeting non govt insured loans in the first place.
I admit, I didn't quite understand the whole concept, but it sounds like the wheels are already in motion. I will be interested to see what will come of this. If successful, I can see other areas following suit.
Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
14y
Seems to me that the valuation process will be a hill to climb through ED. To my knowledge there has never been a "cram down" reduction of principal amounts owed in any ED process, only through bankruptcy at the federal level. If the city has to pay off the property at par there would be no discount. And, the property would need to be appraised as well, yes the appraisal for ED come in lower than market, but that can be objected to and split between two appraisals in most cases.....
I'm usually not really for the use of ED to benefit any private venture.
Residential Real Estate Agent · Costa Mesa, CA · Member since 2008 · 1k+ posts · 380 votes
14y
I don't think the idea is to pay off the property at par.
In an easy numbers example, let's go with a house that has a $200K loan, but is worth $100K. My understanding is that the private entity/eminent doman JV would buy the note for $75K, then refinance the borrower for $100K (thought being, if they can afford the payment on a $200K loan, they can also afford it on a $100K loan), and they make the $25K in spread. My understanding is that the borrower must be current, and their property must be at least 15% underwater, so there isn't too much worry about moral hazard.
Sure, the investor in the initial loan loses big time on paper, but not much more (and maybe even less) than they would eventually lose in FC.
Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
14y
If it's worth 100K I'd think they would need to pay 100K and knock off 75K for the owner allowing them to stay, which would need to be agreed to before the property was purchased. When government takes any property fair compensation must be paid, taht being market value at that time. Establishing that seems to be a problem, but we will see I gues, you might run it just as you described Jake, but that would be at a discount. And you're right too Jake, the bank may come out better as well!
Investor · Central Valley, CA · Member since 2012 · 6k+ posts · 3k+ votes
14y
I'm not so sure it will get through the courts. Eminent domain may or may not apply to the strategy of forcing note sales. Lenders doing business in CA have every reason to fight this as it would be precedent setting. ED is for remedy for municipalities. Bringing in a JV note that then refinances the homeowner ? That would be individual benefit to the homeowner and forced loss on the lender. The way it's outlined in the article, the plan sounds convoluted. I can't imagine a court not looking at the issue of forced loss to lender and benefit to the homeowner in a supposed EM suit.
Winter Haven, FL · Member since 2012 · 8 posts · 3 votes
14y
Everything else aside, I think it's nice to see the both the public and private sectors trying to be creative to solve the housing crisis.
It definitely bad news for the private sector to know that the government may, in essence, nullify contracts that were made as a part of normal business, but then again, it's the private sector that is offering to loan funds to the government to pay fair market value to the homeowner, so they get at least a small piece of the pie.
Plus, later the investors can buy the seized property sooner than if it went the REO route, and at a cheap price.
It is definitely a little complicated to understand though, I think this video explains it really well http://bit.ly/MlSTgE
Real Estate Agent · Virginia Beach, VA · Member since 2012 · 2k+ posts · 1k+ votes
14y
It seems like a faulty eminent domain argument to me. I've seen some wacky government takeovers -- businesses that have been there for years, still employing and making profit, forced to sell because the new shopping center that wants in might make more revenue there. Even heard of old waterfront housing neighborhoods bought out to simply develop higher-density housing as it would make more money for the city having condos and a marina instead of old established waterfront homes. But seems very strange that they would be allowed to tell a bank that they will take one home on one street, not the neighbors or the whole street, just the current ones and say, Even though this is a current paying contract and we will not be using the property for a better purpose, you will now be forced to sell to us at a loss of 50% of your current contract. The house right next door, who happens to be late and may or may not foreclose, that bank can keep their current contract and we won't force a sale there, but you, the bank that did it's due diligence and lent to the responsible payer who could afford to buy the home and has actually kept it current through the great recession, you're screwed and your books are screwed because you'll be forced to write down losses on actual current loans in your portfolio.
How does that make sense? Am I not understanding this correctly?
Rental Property Investor · Northern, CA · Member since 2012 · 5k+ posts · 5k+ votes
14y
The newspaper in Sacramento just ran an article today announcing that the City of Sacramento is looking into doing this also. Personally, I think it's a plan with a lot of problems/issues surrounding it.
Realtor, General Contractor, and Developer · Redding, CA · Member since 2009 · 7k+ posts · 4k+ votes
14y
All of the areas of California are in huge financial messes. ANYTHING they can do to help keep property taxes coming in, make money off refinancing properties or anything else is on the table.
These areas have huge commitments to public employee unions, and have borrowed hundreds of millions and some billions, of dollars for improvements etc., they can no longer pay... California will become a wasteland in many areas if they don't come up with a creative way to borrow more money from Wallstreet. Stepping in and using Eminent Domain and then reselling the properties or refinancing them will help get the loans those cities/counties otherwise can't qualify for.
The bubble is bursting all over the state! The housing bubble was nothing compared to what is going to happen with all these cities and counties. In addition, the insurance companies that insured the original bonds are about to take huge losses when these municipalities file for Chapt 9 bankruptcy, and there's no telling what problems that is going to cause.
California is the poster child for out of control government spending, constant tax increases and fee increases to pay the tab.. and people should pay attention, because as the saying goes, as California goes, so goes the nation!
Real Estate Agent · Virginia Beach, VA · Member since 2012 · 2k+ posts · 1k+ votes
14y
It was my understanding (as someone not in the financial industry) that financial institutions did not have to write down current mortgages the same way they had to write down those late or in default. If they allow this to happen, doesn't that mean that financial institutions everywhere will have to start writing down all loans to lowest possible value in case the municipality they are in decides to do this forced sale on current loans? Forcing sales of homes actually current on their mortgage so the mortgage holders take losses to the benefit of whoever gets the contract from the municipality to buy the new refinances just doesn't seem ethical or legal to me. Like I said before, I don't understand it. It would be like me buying GE at $30 a few years back, then being told I am forced to sell at $15 tomorrow even though I am fully capable of holding it, no margin call or other issue, just somebody forcing me to sell for no reason, even though it might be $40 again in 2 years. How does the state benefit from forcing the sale of current mortgages? Wouldn't it be better for California to just get rid of whatever laws they have that make it a no-recourse loan state? That way, people couldn't just walk away from their homes without other assets being affected, and they might decide to ride the market out with more conviction.
Realtor, General Contractor, and Developer · Redding, CA · Member since 2009 · 7k+ posts · 4k+ votes
14y
Nothing about this is to help homeowners. It's all about trying to generate income for bankrupt cities/counties, and them figuring out a way to use private property owners homes as collateral on loans (in my opinion) because the cities/counties have -0- credit, and are making a hail mary pass to try to get their hands on money, someplace!
Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
14y
It's government and private sector working together alright, the private sector being politically connected venture capital/capitolists, lol.
I read somewhere that even the thought of private ownership of real property should be addressed, that property should be held by corporate interests and the public would benefit by their interests in the corporate structure......well, isn't that what we basically have, one document says you own the house a deed, the other says the bank has a lien on it and you only get to use it until the bank gives it back to you and that the goverment can step in for the public good and pay you what is basically assessed by government institutions?
Ya'll better raise cain about such issues........IMO.
Investor · Central Valley, CA · Member since 2012 · 6k+ posts · 3k+ votes
14y
This is not an example of private enterprise and government working together. This plan was cooked up by private enterprise and the only way they can get it to work is to get the munis to use eminent domain. The challenge here is that the properties are not being condemned for better and higher use. It's the notes that are in question here. ED is a law suit. I'm not sure the law suits have been filed yet, so we won't know the strategy and thinking behind forcing note sales via ED until we see the filed complaint.
It's creative thinking, no doubt about it. IMO, it's going to be a far out argument to show that forcing a note sale at FMV (what FMV? property FMV? note FMV?) is a good and proper use of ED. Not to mention who should get the opportunity to buy these notes and rewrite them for the supposed benefit of the muni and the borrower. Shouldn't the city or county have to take bids and proposals from interested note buyers/holders?
Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
14y
Agreed K. but there is usually no requirment for the sale of property obtained through ED as it is acquired for the public purpose, they can do with what they like, pave over it, build a bridge or highway or seel it to Joe and Steve. You'll not find ED laws being addressed as to better defining what the public good may be, like tax revenues or zoning, so it's the thought that we "own" our property.....truth is, you own it when the bank is repaid and so long as the government says you own it.
In many areas ED is used for condemnded properties, at what point is a property so unmaintained that it presents a true health or safety issue to the public and government can take it and do what it will?
That was a question that always came to mind as an "official" with the powers of ED. Some may become very liberal in that evaluation to the point that only the highest abd best used properties might be safe. IMO, it's one of our most dangerous laws and one that should be strictly limited. This issue may advance that discussion.
Investor · Central Valley, CA · Member since 2012 · 6k+ posts · 3k+ votes
14y
Bill Gulley I have to be careful to not get too caught up in ED law because, well, I could study up on that all day long. I'm a curious person and ED case law would be fun. But I have other things to do, like make money in RE as I have bills and college age kids, etc.
The purpose of ED is for a muni to obtain control, and change if necessary, the use of a property. I'm pretty sure every state law has some verbiage regarding the purpose and necessity of ED and that language would include, even if vague, something about higher and better use.
In CA, condemnation via ED is not the typical way to deal with "unmaintained" properties, such as those that are abandoned by borrowers or banks after foreclosure. All cities and counties here already have abatement procedures. Fees from such abatement eventually attach to the tax bill, which is attached to the property. The tax sale can be as early as 5 years after default. So, abandonment and maintenance issues are not at the heart of this ED scheme in San Bernardino county. Currently, their ED plan is to only include properties for which the borrower is current (!). It's an attempt at governmental assistance with cram down of debt, with profit included for the private enterprise that masterminds it. Even if the munis were to prevail at trial re ED, the FMV issue is huge. A note that is current on an upside down property? What's the definitive FMV of that?
Lots for the courts to consider. Forced sale of promissory notes via ED is not a slam dunk the way it's being presented by it's creators in San Bernardino County.
Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
14y
Agreed, and all that I have been associated with the value was alway higher the the mortgage owing, but did have one with other liens, taxes and judgments, which were cramed as to the lien but remained due from the owner, an unusaul situation.
Cram downs were rather common in bankruptcy years ago, where a lender may have to accept less, but ED is not a bankruptcy.
ED is usually for the taking of property for public projects and has been limited to such until recently when corporates have hit the communities up from the tax angle and highest and best use, IMO. If Wal-mart can't get an owner to sell for a new store, they may end up enlisting the help of a muni. Totally an unfair and abuse IMO. But that's the corporate world developing that we in a way, end up voting to uphold.....