Richmond, California has developed a new trick, achieving an effect similar to principal reduction:
Richmond condemns mortgages on homes that are now worth far less than what the borrower owes. The note holders — investors such as pension funds and mutual funds – are forced to settle for the current fair market value. The city pays for this with cash from a new set of investors, who now own the mortgage. The new price is set by the current market, and the homeowner settles into a more manageable loan.
From Lydia DePillis at Wonkbook, the full story is here. This part is interesting too:
Richmond couldn’t get insurance to shield it from a crushing judgment — if it lost its bid to spare struggling homeowners, the city could find itself underwater.
In the backlash to the plan, the market boycotted the city’s most recent bond issuance, forcing it to withdraw the $34 million offer, which was supposed to refinance earlier debt.
Richmond’s leaders stared hard at the threats. In the end, it seemed to only harden their resolve.
The seizures have not yet happened, but are pending, and it is expected that Richmond will need to defend itself in court.