Local taxpayer money is about to be spent keeping the well-being (read: property values) of many California communities from falling prey to vacant, repossessed homes. Menlo Park is one such community considering doing something to stop such neighborhood destruction from happening to their town. The Menlo Park City Council is looking into a Foreclosure Prevention Program, a pre-foreclosure workout for homeowners more than 90 days delinquent. Mortgage consultants would approach lenders and ask for a discount on the sale of the loan to a local bank and the city for the net value of the home’s current fair market value. The local bank would refinance the home for 70% of the home’s value with the city putting up 30% of the funds. The city would get their investment back under an appreciation participation arrangement with the delinquent homeowner when the property gets resold or refinanced during the next several years.
ft take: This program is a combination of old standing mortgage consultant services offered by HUD free to every delinquent homeowner in California (which is a highly regulated private service in California) and the totally failed congressional attempt to enact legislation, requiring lenders to cramdown mortgages and refinance that cramdown amount sufficient to receive FHA Section 257 insurance with the ability to cash out that loan in the secondary mortgage market. [See first tuesday articles “HR3221: The Unfortunate Housing Act of 2008” and SB 1137 in the “April 2009 Legislative Watch“]
The reason for the failure: No lender will discount by cramming down the principal to the property value (90% of value for the loan to be FHA 257 insured) as they would rather foreclose en masse than reduce the principal on an existing loan. Lenders are talking the talk about this moral risk issue, but do not consider walking that walk themselves. Then taxpayers are asked to pay lenders more than the lender will get for the loan under any circumstances in the current mortgage market, and to do so based on the erroneous belief that an equity sharing arrangement with the delinquent homeowners will produce a return of the city’s investment as a junior lien holder with an equity sharing position on that house. This is absolutely a surefire way to lose taxpayer money, and the mortgage lender with the toxic loan will be smiling all the way to the bank. Oh yes, the homeowner will most likely re-default; the financial incentives under this sort of plan offer nothing of long-term benefit to a rational property owner.
Re: “New Menlo Park idea to cut foreclosures” – from The San Francisco Chronicle