The purpose of this measure is to establish the bank of the State of Hawaii in order to develop a program to acquire residential property in situations where the mortgagor is an owner-occupant who has defaulted on a mortgage or been denied a mortgage loan modification and the mortgagee is a securitized trust that cannot adequately demonstrate that it is a holder in due course.
The bill provides that in cases of foreclosure in which the mortgagee cannot prove its right to foreclose or to collect on the mortgage, foreclosure shall be stayed and the bank of the State of Hawaii may offer to buy the property from the owner-occupant for a sum not exceeding 75% of the principal balance due on the mortgage loan. The bank of the State of Hawaii can then rent or sell the property back to the owner-occupant at a fair price on reasonable terms.
Arizona Senate Bill 1451, which just passed the Senate Banking Committee 6 to 0, would do something similar for homeowners who are current on their payments but whose mortgages are underwater (exceeding the property's current fair market value). Martin Andelman calls the bill a "revolutionary approach to revitalizing the state's increasingly water-logged housing market, which has left over 500,000 of Arizona's homeowners in a hopelessly immobile state."
The bill would establish an Arizona Housing Finance Reform Authority to refinance the mortgages of Arizona homeowners who owe more than their homes are currently worth. The existing mortgage would be replaced with a new mortgage from AHFRA in an amount up to 125% of the home's current fair market value. The existing lender would get paid 101% of the home's fair market value, and would get a non-interest-bearing note called a "loss recapture certificate" covering a portion of any underwater amounts, to be paid over time. The capital to refinance the mortgages would come from floating revenue bonds, and payment on the bonds would come solely from monies paid by the homeowner-borrowers. An Arizona Home Insurance Fund would create a cash reserve of up to 20 percent of the bond and would be used to insure against losses. The bill would thus cost the state nothing.
Critics of the Arizona bill maintain that it shifts losses from
collapsed property values onto banks and investors, violating the law of
contracts; and critics of the Hawaii bill maintain that the state bank could
wind up having paid more than market value for a slew of underwater homes. An option that would avoid both of these
objections is one suggested by Michael Sauvante of the Commonwealth Group,
discussed earlier here:
the state or county could exercise its right of eminent domain on blighted,
foreclosed and abandoned properties. It
could offer to pay fair market value to anyone who could prove title (something
that with today's defective title records normally can't be done), then dispose
of the property through a publicly-owned land bank as equity and fairness dictates. If a bank or trust could prove title, the
claimant would get fair market value, which would be no less than it would have
gotten at an auction; and if it could not prove title, it legally would have no
claim to the property. Investors who
could prove actual monetary damages would still have an unsecured claim in
equity against the mortgagors for any sums owed.
Rhode Island Next?
As
the housing crisis lingers on with little sign of relief from the Feds, innovative
state and local solutions like these are gaining adherents in other states; and
one of them is Rhode Island, which is in serious need of relief. According to The Pew Center
on the States , "The
country's smallest state . . . was one of the first states to fall into the
recession because of the housing crisis and may be one of the last to emerge."
Rhode Islanders are proud of having been first in a number of more positive
achievements, including being the first of the 13 original colonies to declare independence from British
rule . A
state bank presentation was made to the president
of the Rhode Island Senate and other key leaders earlier this month that was
reportedly well received. Proponents
have ambitions of making Rhode Island the first state in this century to move
its money out of Wall Street into its own state bank, one owned and operated by
the people for the people.
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