California Cities Mull Proposed Government Foreclosures Scheme
May 5th, 2009 by 
Joseph Smith
A government foreclosures scheme proposed by Los Gatos-based private company EARN and nonprofit group Northern California Urban Development is being studied by the city officials of Menlo Park and East Palo Alto.
The proposed government foreclosures scheme aims to help homeowners more than 3 months behind in their mortgage payments. Program officers would negotiate with mortgage lenders to buy the delinquent mortgage at current market values, which would approximate the amount the lender would receive if it pursues a foreclosure filing. The lender is expected to agree to negotiate because it will save foreclosure costs and will free itself from time-consuming foreclosure procedures.
A portion of the mortgage, preferably 70 percent, would then be refinanced by a local community lender. The other 30 percent would be financed by the city as its cash investment in the home, allowing the homeowner to pay only the 70-percent community bank loan.
With the record low mortgage rates available these days, the borrower’s monthly payments could be reduced to half of the borrower’s original monthly payments.
The city would get back its 30-percent investment when the loan is repaid and would also get 50 percent of profits gained if home prices appreciate above current home values. If the house is lost to private lender or government foreclosures, the city could suffer a loss, since the bank which refinanced the bigger portion of the mortgage takes precedence over the city’s investment.
According to David Shapiro, chief executive of EARN Group, developer of real estate financing schemes, said major lenders have expressed support for the program. The Community Trust credit union in East Palo Alto has committed to make refinancing for Menlo Park and East Palo Alto homeowners.
Marc Prioleau, board member of the NCUD, said the proposed government foreclosures program is able to help homeowners keep their homes and prevent neighborhood blight.
Shapiro admits that the proposed government foreclosures scheme requires large cash investments, so it cannot be implemented for a large number of homeowners initially. Part of the investments could also be lost because the loan will be repaid in many years. Besides, many taxpayers do not like the idea of spending tax money for people who they see are reckless and foolish for borrowing beyond their means.
But Shapiro argues that once the program becomes successful in Menlo Park, which can afford to experiment because of its relatively big reserves, it can capture the interest of large organizations and funds like the California State Teachers’ Retirement System and the California Public Employees’ Retirement System, which had suffered financial losses due to private lender and government foreclosures.
