This Day On The Street
Continue to site
ADVERTISEMENT
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here

Eminent Domain Plan to Seize Underwater Mortgages Could Sink City

Richmond, along with Mortgage Resolution Partners (MRP), the main proponent of the proposal, argues that underwater mortgages are most at risk of default and hence writing down principal and refinancing these loans is the best way to prevent foreclosures.

But these are borrowers who have been under water for five years. Investors argue there is nothing to suggest that they will start defaulting now when the economy is improving and property prices are rising. Home prices in Richmond have risen more than 20% over the past year, according to Zillow.

Mortgage analysts point out that about 40% of the 624 loans that Richmond plans to buy or seize have already received a modification. The Wall Street Journal reports that at least three loans have a mortgage balance of over $880,000 suggesting that these homes were likely million-dollar homes at the market peak.

"The loans were appraised by an independent, third party valuation expert, whose appraisal takes into consideration the likelihood of default and the loss given default," said John Vlahopolus, a founder of MRP, in an email to TheStreet. "The appraisal of the fair values of the loans reflects these independent judgments. Many of the loans have received modifications, and the independent appraisal takes those modifications into account. Modifications like these have shown a high likelihood to re-default because they still leave the homeowner deeply underwater."

But even if Richmond successfully argues that there is a public benefit in seizing these mortgage loans -- courts have over time interpreted the definition of public use fairly loosely -- they will still likely fight a prolonged legal battle with investors over compensation.

Eminent domain allows the state to seize private property for public use for a "reasonable compensation" or fair market value, determined by court.

Richmond and MRP say fair market value of a mortgage loan that is worth, say, $300,000 on a home currently worth say, $200,000, is actually just $160,000. The discount to the property value, they argue, is necessary because of the chance of default. Essentially, they are expecting investors in this example to swallow a loss of nearly 50% on a current mortgage.

2 of 4

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Only $9.95
14-Days Free
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!
SYM TRADE IT LAST %CHG
BLK $371.89 0.00%
FNMA $2.61 0.00%
FMCC $2.51 0.00%
WFC $54.97 0.00%
AAPL $134.49 1.40%

Markets

DOW 18,037.97 -42.17 -0.23%
S&P 500 2,108.92 -8.77 -0.41%
NASDAQ 5,060.2460 -31.8390 -0.63%

Partners Compare Online Brokers

Free Reports

Top Rated Stocks Top Rated Funds Top Rated ETFs