A recent article on Governing magazine continues to profile the controversial approach taken by a town in California to combat rampant foreclosures.

From the article:

With the rhetoric rising, it’s time to review the basics of the concept and spell out the pros and cons.

How does it work?

When mortgage loans are held or owned by individual banks, the banks can write down bad loans. But with securitized mortgage loans, that can’t happen in the same way. To get around that hurdle, localities can start by asking the owners of the loans to sell them at prices based on financial models or comparable trades sanctioned by courts.

If the owners refuse to sell, under Hockett’s strategy the locality could then move to seize the mortgages and pay fair market value for them. The purchase money would come from a pool of investors, and the city would refinance the loans and write down the principle. The new debt would be insured by the Federal Housing Administration. Homeowners would no longer owe more on their houses than the houses are worth. Repayments on the loans would be paid to the investors who bought them.

The article lays out the policy and legal arguments for and against the practice – all available online at the Governing website.

See previous Conduit Street coverage of this topic: California City’s New Anti-Foreclosure Tactic: Eminent Domain