A controversial proposal that would allow local government officials to use the authority of eminent domain to condemn residences with distressed mortgages is reportedly gaining traction in California once again.
The proposal is being resurrected after facing sharp criticism a few months ago from Wall Street trade associations, such as the Securities Industry and Financial Markets Association and the Association of Mortgage Investors, as well as investors in mortgage-backed securities.
However, Mortgage Resolution Partners (MRP), a San Francisco-based financier group, has signed advisory agreements with five California towns that would permit MRP to negotiate “a sharp reduction in the dollar value of distressed loans that are held in securities administered by banks and mortgage service firms,” Reuters reports. MRP’s strategy is reportedly to get voluntary agreement among servicers and banks to reduce the principal owed on underwater loans or to use eminent domain to “forcibly seize the loans and restructure them at a lower price,” Reuters reports.
MRP has argued that eminent domain provides municipalities an opportunity to help home owners who are struggling to pay their mortgage. However, critics argue that using eminent domain to rewrite home loans would violate agreements between a bank and a borrower.
“This type of government intervention is only going to harm the housing market,” Chris Katopis, executive director of the Association of Mortgage Investors, told Reuters. “This is not a fair and equitable solution.”
MRP’s agreement has been signed with the Californian cities of Richmond, El Monte, La Puente, San Joaquin, and Orange Cove. MRP is reportedly also negotiating with local officials in North Las Vegas, Nev.
“It’s not a panacea to deal with the broad issue of foreclosure, but it is another tool that could be potentially effective,” Bill Lindsay, the manager for Richmond, Calif., told Reuters.
Is now the time to invest in real estate?
As long as people have wanted to live indoors there has been a need for rental real estate. Today, according to the Census Bureau, we have 114.2 million occupied housing units in the US, including 39.3 million rentals.
Rental housing is necessary to the American economy and so it follows that the government has tried to encourage investing through a series of tax preferences and other advantages. Invest in real estate and you can typically deduct such expenses as mortgage interest, property taxes, insurance, management, association fees, repairs and depreciation.
But is now the time to invest in rental real estate?
There are several reasons to suggest that in many markets the answer is yes. Here’s why:
Prices are low. The federal government said that in May home prices nationwide were 17 percent below the peak seen in April 2007. At the same time the National Association of Realtors reported that home values rose in 110 out of 147 major metro areas during the second quarter.
A big catch is that large numbers of distressed homes remain available at discount, homes which in many cases are suitable for residential or investment use. There is a pricing hierarchy in the marketplace with non-distressed homes as a base, short sales (also called pre-foreclosures) priced below and homes held by lenders at the bottom.
“Our first quarter foreclosure sales report showed that the average price of a pre-foreclosure home was more than $27,000 higher than the average price of a bank-owned home,” said Brandon Moore, the CEO of RealtyTrac. He added that during the past five years there have been an average of 1.6 million foreclosure starts annually.
Although home values have generally fallen the story with rental rates is different. The cost to rent has gone up. Figures from Reis.com show that effective rental rates for apartments nationwide were up 3.4 percent when compared with the second quarter of 2011.
Why are rental rates increasing? Several reasons: The population is growing, many people who have lost their homes to foreclosure now need rentals and single-family new home construction is down 50 percent from five years ago.
The Reality of Risk
For all the great stories of investment success, which have been broadcast on late-night television the fact is that perspective is required. In the same way that stocks and bonds are not a sure thing the same is true with real estate. It’s important to investigate local options and check rental trends in your area. For additional information contact Lhuillier Fine Properties.