Thursday, September 12, 2013

How will a lender ever do business in Richmond CA again?

It was reported yesterday that Richmond California has approved the plan to use Eminent Domain to condemn underwater mortgages. has the best review.

We've discussed it in detail previously but the most obvious negative impacts boil down to:
  • Lenders will likely flee the market now that the City has created a new law effectively nullifying centuries of contract law. I certainly would not write a mortgage in a municipality that would invalidate it because the collateral value had declined (shouldn't the borrower post MORE collateral in this case?)
  • Borrowing costs to individuals are likely to increase dramatically if any lenders remain in the market. The risk to the Lender just went through the roof, they're going to require compensation to offset the risk. This may come through a rate increase or some innovative product such as a home price protection swap or insurance (not mortgage insurance, but systemic price protection "insurance").
  • The risk extends to the city and will make it very costly to borrow money at the municipal level. As the Zerohedge article highlights, this has already happened - the city is going to be mired in lawsuits for decades, but somehow has failed to see the future despite a suit already filed in district court with the first motion hearing next week.
  • The ripple effects will damage home prices in the city substantially. The first person who wants to sell their house will discover that there are no buyers (unless they're all cash) because there are no lenders. The lower home prices will likely cause the city to try to condemn additional mortgages as it slowly amputates whatever remaining value there is in the local housing market.


Anonymous said...

Weird, it's like all this excess debt actually distorts real value of prices? Who'da thought. If the banks and WS can't get their pound of flesh then it's touted as a disaster.

While I agree it's unprecedented and will likely damage the housing market there, I can't help but think that it's necessary to stop the flow of funds from the poor to the rich. Revolting with dollars will get attention (however negative) but may show a way out instead of dealing with serivers that WS et all put in unwinnable sitauatios by exploiting old laws for their personal gain (i.e. well if we ramp prices and lending, get paid huge this year and then fuck evreyone else next year I got paid suckers!)

so yeah I see what you mean but you have to realize that people who aren't on WS are suffering and this is a shot across the bow.


crabsofsteel said...

If you're going to point the finger at anyone, shouldn't it be at the party which provided the money to make bad loans in the first place? Whose fault is it that there were no appraisal-reduction or LTV maintenance-type mechanisms in these loans. Subprime loans even had prepayment lockout provisions to make sure the pain endured. A bad lender deserves to be punished. I like what's happening in Richmond.

Anonymous said...

Richmond's idea sounds more like a 'law firm stimulus' plan than a housing plan.