Eminent Domain as a Mortgage Fixer?

The housing crash of 2008 is still sitting heavy on many homeowners.  Many who bought a house during the peak of the market were left with houses that they’d bought at nearly twice the current value of the home.  Much has been said about the dilemma that those homeowners find themselves in.  As the economy receded, so too did their jobs, and their pay, causing many to simply walk away from their homes when they could no longer afford the mortgage.

Foreclosure is a bit of a messy deal.  The bank takes the home back, and then sells it, attempting to recoup some of the value of the mortgage.  We’ve seen many different methods of attempting to avoid the bulk foreclosure of homes in America.  From Government sponsored programs that help with restructuring of the loan, to banks voluntarily restructuring the loan, to what is a rather disturbing new program in Richmond, CA.

The program is laid out in this recent article on CNN Money. (California city’s drastic foreclosure remedy: seizure)  In the article, the City has started a program to attempt to purchase the mortgages of many underwater loans in the city.  It’s an attempt to avoid the decline of low-income neighborhoods, and those neighborhoods already hit hard by the economy.  Seems pretty normal, until you read a bit further.

But if the holders of the loans, who are mostly investors, refuse to sell by Aug. 14, the city said it will invoke eminent domain to seize the mortgages so it has more control over the process of making them affordable.

Eminent Domain Mortgage FixerThat’s right.  If the investors refuse to sell by August 14th, the city will invoke eminent domain and seize the mortgages in order to bring those mortgages into the program.

There are several things at play here.  I don’t argue that there are many who are nearing foreclosure, and that in many cases, they were preyed upon by the banks and investors by being given loans for houses they couldn’t afford in the first place.  I don’t think that excuses the buyers from not knowing that they couldn’t afford the mortgage.  I’m sure there are those that could afford the house at the time of purchase, but have since fallen on hard times.  In some cases, I do think that there should be something in place to help people ease the pain of their mortgage.  But, that’s another article.

Back to Richmond, CA, and their silly new program.  They plan on using eminent domain to seize the mortgage.  As is pointed out in the CNN Money article, eminent domain is usually used by public entities to seize physical properties to make way for public parks, malls, and right-of-ways for transportation initiatives.

The article alludes to the fact that eminent domain, to be legal, must be used for that are in the public interest.  Meaning that the people of the city (or neighborhood) must have something to gain from the seizure. I think this is a bit of a grey area, and is likely to end up in court.  It’s legality, in the seizure of only certain mortgages, and not the mortgages of the entire neighborhood, makes its usage for the public interest somewhat shaky.  After all, who among us wouldn’t want to participate in a program that cut our mortgage in half and reduced the payments by the same?  Absolutely!  But, who among us has anything to gain by having our neighbor across the street participate in the program, and not us?  Yeah.  Even if I can afford my mortgage, I’d be a bit jealous.  If I really wanted to cause a scene, I’d sue the city.

Legality aside, I still think the program is a mistake.  Many places around the country are facing the same dilemma, and many are trying to find innovative solutions to fix the problem.  The city of Detroit just declared bankruptcy because the population of the city, and thus it’s tax-base, has dropped so drastically over recent years.  Perhaps the city of Richmond fears the same problem.  What they should be spending their time fixing, however, is their local economy.  They’ll spend all kinds of money executing this program, then defending it in court, only to still have the same economy.

If they can find ways to improve the economy by pushing local businesses, promoting local producers, and making improvements to the structures to do so, I think they’ll find that many of those foreclosures start getting picked up by new homeowners.

Maybe I’m wrong.  I’m certainly not an expert in economics, least of all economics in California.  What do you think?  Is the usage of eminent domain here a valid one?  Will it be challenged legally?  How would you feel if your city had a program like this?

Original image credit: End Eminent Domain Abuse by Paparutzi, on Flickr

3 Ways Young Homeowners Can Save $3745 (at least) Each Year

If you recently bought your first home let me congratulate you. This is possibly the very best time to buy real estate that you’ll ever see in your lifetime. You made a smart move. And because you are a smart real estate investor, I know you’ll be interested in taking advantage of the following 3 ways young homeowners can save even more “moolah”.

1. Home Warranty

I owned a home warranty program for years and it was a waste of money. Of course it felt great not to have to worry about running into major unexpected expenses, but the cost just didn’t justify it. First of all, you are stuck with any repair person the home protection company sends out. Next, the deductible you have to pay is often pretty close to the amount you’d have to pay to a contractor of your own choosing. Last, when you do have a major repair, you are stuck (again) with whoever the company sends out unless you are willing to go through a great deal of red tape.

You’re always responsible for upgrades, code changes and any problems associated with misuse or poor maintenance. I cancelled my home protection plan several years ago and it turned out to be a fantastic decision. If you follow my lead on this, you’ll save at least $600 a year.

2. Life Insurance

If you are a young homeowner you might have a young family or plan on having one. As a result, you definitely need life insurance. But when it comes to term life vs. whole life – play it smart. Term life is your best friend. It’s cheap and it does the job. It’s true that at some point (20 or 30 years down the road) your term insurance will expire. But by that time, you may not need life insurance anyway. Term life is so much cheaper than whole life that you can take that savings and invest it. This way probably you’ll have much more than the whole life promises.

One of the biggest problems with whole life (and I feel it’s criminal) is that agents sell you the whole life you can afford because it pays them a whole lot more commission. (Maybe that’s why they call it “whole” life.) And because it buys a great deal less insurance than term, people end up dangerously under-insured. You could save several thousands of dollars each year and have better coverage just by having term instead of whole life insurance. Look into this ASAP.

3. Good Credit Score

Because you are a young homeowner, you’ll be using your credit for a very long time. And you might have to lean on that plastic a lot right now to pay for all that new furniture and appliances. If you able to get even a slightly better credit score, you might end up savings a bundle every month. That’s because a higher credit score will help you get lower interest rates on credit cards and mortgages.

Find out what your score is and make sure there are no errors. If there are mistakes, fix them. You can easily do most of this without paying a cent. You can even get your credit score for free and sign up for services that provide updates whenever there is a change to your rating. This has helped me a great deal.

As a young homeowner you might be facing some pretty hefty expenses and that can be daunting. Take these 3 steps. Dump the home protection plan. Get rid of your whole life insurance and buy term instead. Finally make sure your credit score is as high as possible.

Will you save $3745? I don’t know. You could save a lot more. You’ll never know until you start taking action.

What are the biggest expenses you face as a young homeowner? What have you done to reduce those costs?

This was a guest post written by Neal Frankle. He is a Certified Financial Planner ® and owns Wealth Pilgrim – a great personal finance blog. He writes extensively about ways to help people make smart financial decisions. One of his most in-depth posts was his review of CIT Bank.

Ready to Buy a Home—Really?

Most of us reach a point in our lives when we think we are ready to buy our own home. If you’ve been thinking that yourself lately … pause for a minute and examine your reasons carefully. After all, home ownership is possibly the largest single investment of your lifetime and such a momentous decision deserves careful consideration. I am going to help you think this through by asking a few questions that will stimulate some introspection.

Consider these Questions

  • Do you have children? If the answer is yes, do you have all the children you plan to have or are you considering adding to your family?
  • Is your job stable?
  • If you are married or living with your significant other, is his or her job stable?
  • Do you think you may be required to move at some point in the future to meet the demands of your employer or for other reasons?
  • Are you “handy” or would you need to hire outside help for routine repairs to your home. (ed. note: See my DIY Deck!)
  • Do you regard the purchase of a home as an investment?
  • What do you think is the principal advantage of home ownership?
  • Have you considered the additional costs of home ownership beyond the mortgage payment?
  • Have you been living independently for at least five years?

Asked and Answered

If you’ve already asked and answered these questions in the course of contemplating home ownership, then you are probably ready to make the jump. If you haven’t, then I suggest you spend some serious time in contemplation. Home ownership is not for the careless!

Other Fees

That said, let’s look at why these questions are important. If you are buying a home, you are paying for appraisals, inspections, and a host of other fees. Given an economic climate where growth in value is not assured, it is prudent to buy with future needs in mind. How many bedrooms and bathrooms do you need? Do you need a yard? Does it need to be a large yard? Knowing these things in advance will allow you to buy as much home as you require and no more.

How’s Your Job?

Having stable employment will make it easier for you to secure a mortgage and ease the stress of home ownership overall. If you are relying on the income of your spouse or significant other, you must be reasonably certain of the reliability of that income stream. As a practical matter, I would not recommend buying a home whose mortgage payment cannot be met on one income. I realize this is a conservative position, but it is the most prudent approach.

Staying Put?

If you or your significant other has a job that is likely to require relocation in less than five years, you may want to consider remaining a renter. Homes aren’t appreciating at the same rate they were 10 years ago. You could find yourself in the unfortunate position of being forced to sell your home at break-even price or possibly at a loss.

Home Repair

Even if you buy a new home, repairs are inevitable. You must be prepared to pay out of pocket for repairs if you are not capable of accomplishing them yourself. Your lender is not going to be sympathetic if you miss a payment because you had to replace your water heater. Tuck some money away.

Don’t forget that once you’ve bought your dream home you’ll likely need a lawnmower, furniture, tools, appliances, curtains, etc. I wouldn’t recommend borrowing to acquire these necessities since you’ve already got a mortgage payment to pay.

Investing in Real Estate?

As an investment, homes represent a better bargain than stocks right now. Prices for existing homes are at their lowest since 2003. On the flip side, this means that previous owners lost 9 years of equity gains and that could happen again! I am not trying to discourage you from a decision in favor of buying. I just want to make you aware that there are downside risks. Do I think it is likely that home prices will continue to fall? Not really, and if they do, it will not be a significant drop.

The advantages of home ownership are many and varied. I just think it is important for you to have a clear vision of your reasons for buying a home. Buyer’s remorse can cost you more than just your money.

Independence

If you’ve answered yes to the question of living independently for at least 5 years, you have likely developed the level of self-discipline and life experience necessary to see you through the adventure of home ownership.

What did you stop to consider before buying a home? Was there anything you wanted to achieve or to have before you started looking for a house?

Dominique Brown is a financial planner, landord, personal finance blogger and video blogger. He is the owner of YourFinancesSimplified.com where he talks about everything from being a new father to his worst financial mistakes. He is also the owner of InsiderRealEstateTips.com where he talks about real estate exclusively. He’s been featured on the Huffington Post and H&R Block. You can find him either on Twitter, Facebook,Youtube or Instagram.