Richmond Eminent Domain
August 1, 2013 at 10:49 am
At Reason, Matt Welch has an excellent post highlighting some of the bias in a front-page New York Times article reporting that the city of Richmond, Calif., is going ahead with a plan to attempt to use its eminent domain power to modify home loans that are owned by private investors. But there's even more to it than Mr. Welch reports. The Times article concludes with an anecdote about an individual homeowner:
Many of the communities considering eminent domain were targeted by lenders who steered minority families eligible for conventional mortgages into loans with higher interest rates and ballooning payments. Robert and Patricia Castillo bought a three-bedroom, one-bathroom home in Richmond because their son, who is severely autistic, would anger landlords with his destructive impulses. They paid $420,000 for a home that is now worth $125,000, Mr. Castillo, a mechanic, said.
They have watched as their daughter's playmates on the block have, one by one, lost their homes. But they are reluctant to walk away from the house in part for the sake of their son.
"We're in a bad situation," Mr. Castillo, 44, said. "Not only me and my family, but the whole of Richmond."
From an email forwarded to Smartertimes.com from a banker familiar with details of the mortgage:
The story fails to mention that the Castillos went delinquent back in July 2009 and within 4 months they received a principal and interest rate modification plus the loan was turned into an Interest Only. Their existing 1st lien mortgage, which is sitting in LXS 2006-GP4 and is serviced by GMAC Mortgage, had their interest rate reduced from 5% to 2% with $40,000 of principal deferred. This combined with turning the loan into an IO, drastically reduced their payment from $2064.81 to $638, which is a 69% reduction. This new payment was effective in November 2009 and the Castillos have been current ever since.
Why would the Castillos walk away from a $636 monthly payment?? This payment is equivalent to a $150,000, 30 year loan at 3%.
The story also fails to mention that when the Castillos "purchased" their home in April 2005, they put NO MONEY DOWN. Their original 1st lien was for $336,000 and their original 2nd lien was for $84,000. This totals to $420,000, which is their purchase price. By May 2006, they refinanced into a Greenpoint Option ARM 1st lien of $381,300 combined with a revolving credit line of $55,200.
Their home is a 3BR/1BA 1160SF built in 1948 on a 4469 SF lot. A smaller home in the same subdivision (2BR/1BA 872 SF built in 1940) sold for $148,500 in April 2013. More similar homes within 0.3 miles of the home, have sold from $190,000 to $246,000. 835 31st St located 0.14 miles away, which is a 3BR/1BA 1251 SF built in 1949 on 5000SF lot sold for $246,000 in May 2013. Their home is definitely underwater, but not [worth only] the $125,000 that the story claims.
Investors are owed $422,805.43 on this loan.
That is a remarkably different tale than the one told by the Times. But in the second story, the market has worked; in the Times version of the story, the Castillos are victims awaiting a rescue by the government from the evil bankers.
The Times article also omits the ties to Warren Buffett, George Soros, and President Obama of the firm, Mortgage Resolution Partners, that is pushing the eminent domain grab.
This whole mortgage-eminent domain power grab is a really big story because it involves the use of government power to trample property rights in the housing market. If you think a mortgage is hard to get now — and it is — wait until word gets out that the government can come around and change the terms of the note whenever it is politically convenient and works to the advantage of some other firm with more political juice than the firm that holds the note.