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‘Life Rafts’ Keep Underwater Mortgages in San Bernardino Afloat: Fed

In a recent blog post from the ""Federal Reserve Bank of New York"":http://www.newyorkfed.org/index.html, three Fed researchers shared their findings on mortgages that would have been targeted by a controversial use of eminent domain proposed in San Bernardino County.


Although mortgages in San Bernardino County are plagued with negative equity, the researchers still found good news to keep in mind when considering eminent domain to address underwater mortgages.

Mortgage Resolution Partners first proposed the controversial use of eminent domain to county officials, but the idea was recently ""rejected"":http://dsnews.comarticles/san-bernardino-county-rejects-eminent-domain-proposal-2013-01-28?no_redirect=true by the Joint Powers Authority (JPA), which was created last year to consider proposals addressing the issue of negative equity in the area.

The proposed use of eminent domain involved seizing underwater mortgages at fair market value. The mortgages would then be refinanced with new terms based on the property's current value.

For their analysis, the authors--Andreas Fuster, Caitlin Gorback, and Paul Willen--used loan data from CoreLogic containing loan-level information on nearly all privately issued mortgage securitizations.


In San Bernardino County, the researchers located about 456,000 first-lien mortgages, of which about 280,000 would be considered subprime loans, 142,000 Alt-A loans, and 34,00 prime jumbo loans. The overwhelming majority--70 percent--were adjustable-rate mortgages (ARMs).

As of August 2012, about 68,000 (15 percent) were still open, 275,000 (60 percent) were prepaid voluntarily, and 112,000 (25 percent) were foreclosed on or are currently in foreclosure proceedings.

Out of the loans that were still open, 51,500 (76 percent) were current, 5,000 (7 percent) were thirty days delinquent (an early-stage delinquency often reversed in the subsequent month), and 11,500 (17 percent) were sixty or more days delinquent.

The researchers just focused on the loans that were still open and found only 11 percent of the open loans were not underwater. Despite the depressing state of the loans, the researchers found the first lien payments on the mortgages have fallen ""dramatically,"" with about one-third of ARM borrowers seeing a 40 percent reduction compared to five years ago.

In addition to the decreased payments, prices in the area have been on the rise since February 2012 after falling by more than half from peak to trough, according to the researchers. In eight months through October, prices have risen 9 percent or at an annualized growth rate of more than 13 percent, the blog post noted.

""Overall, the situation in San Bernardino County appears to be improving. While a large fraction of borrowers remain dramatically underwater, a number of life rafts in the form of low interest rates, loan modifications, and recently increasing house prices have kept many from drowning,"" the authors wrote.

The authors concluded by advising that such facts ""should be important considerations in the cost-benefit analysis of the eminent-domain idea or related proposals.""

About Author: Esther Cho


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