Richmond, Calif. Buying Underwater Mortgages: A Good Solution?

This past week, Richmond, Calif., announced its bailout for all homeowners currently dealing with underwater mortgages in the city. The city, which has half of all its mortgages underwater, plans to buy these properties by eminent domain and assistance from investors, and sell them back to the struggling homeowners. In the process, the homeowners end up with positive equity.

Richmond is supposedly the first U.S. city to do such an undertaking, although others are apparently contemplating such an approach. The strategy, however, is not without adversity, as the city is now facing lawsuits and threats from banks.

Beyond the issue in Richmond, underwater issues have been a hot discussion topic this month. The Atlantic Cities pointed out that purchasing and then restructuring these loans – a goal of the Mortgage Resolution Fund, highlighted in their piece – should have been done years ago.

On the other hand, although 10 million U.S. homeowners continue to struggle with the predicament of negative equity, a Cleveland.com article pointed out that these properties don’t hold back homeowners from relocating for employment – an assumption that persisted since the start of the Great Recession and real estate market collapse. And, on a similar note, we mentioned in June 2013, underwater mortgages have steadily declined since 2011, making up just 19.8 percent of all home loans nationally now.

But if you don’t live in Richmond, Calif., and are handling an underwater mortgage, what options do you have for resolving the situation and, essentially, putting more money into your pocket and back into the economy?

For some homeowners, refinancing is an option, albeit a bit of a challenge. Many lenders require that refinancing homeowners have some equity in the property (20 percent, on average).

If this doesn’t sound like your situation, HARP has proved to be of assistance for those paying off a property with a mortgage 105 to 125 percent of the current market value. Keep in mind that, if you decide to use HARP, you cannot be filing for foreclosure and cannot be delinquent on any payments over the past 12 months. The loan, as well, must be from Fannie Mae or Freddie Mac.

HAMP has appeared as a third option, but as we saw last week, the program has proven to be less successful than it could have been, with a significant percentage of homeowners re-defaulting. Not a refinancing initiative, this loan modification requires the lender to get involved in changing the mortgage contract and lowering payments.