Will Trapped Loans Snap Richmond's Home Scheme?

Calwatchdog.com ^ | September 20, 2013 | Wayne Lusvardi

[WayneLusvardi]

The City of Richmond’s move to seize the loans of over-mortgaged homes can continue, U.S. District Court Judge Charles Breyer ruled this week.

According to the San Francisco Chronicle, the reason was because “he felt the case, brought by Wells Fargo and Deutsche Bank on behalf of holders of loans on over-mortgaged homes, was not ‘ripe for determination’ since Richmond had not exercised eminent domain and might never do so.”

Despite an initial win in federal court, will Richmond first have to prove that loans on over-mortgaged homes in its city are “trapped” to meet the “blight” criteria of California redevelopment law? A recent study by the Wall Street Journal indicates that Richmond would have to prove loans on over-mortgaged properties are “trapped” before they can justify there is public necessity to take the loans.

A “trapped” loan is where a government secondary mortgage market lender such as Fannie Mae or Freddie Mac won’t buy up sub-prime mortgages from primary lenders or other secondary lenders. Therefore, homeowners with over-mortgaged homes cannot refinance by taking advantage of HARP or other mortgage payment programs. Their high-interest rate loans are “trapped” without any ability to refinance.