Wells Fargo Bank, National Association et al v. City of Richmond, California et al

Filing 9

Declaration of John Ertman in Support of 8 MOTION for Preliminary Injunction filed byDeutsche Bank National Trust Company, Deutsche Bank Trust Company Americas, Wells Fargo Bank, National Association. (Attachments: # 1 Exhibit A, # 2 Exhibit B, # 3 Exhibit C, # 4 Exhibit D, # 5 Exhibit E, # 6 Exhibit F, # 7 Exhibit G, # 8 Exhibit H, # 9 Exhibit I, # 10 Exhibit J, # 11 Exhibit K, # 12 Exhibit L, # 13 Exhibit M)(Related document(s) 8 ) (Tsai, Rocky) (Filed on 8/8/2013)

EXHIBIT J

Richmond CARES
Community Action to Restore Equity and Stability
Saving Homes, Saving Cities
Solving the Mortgage Crisis Locally

Summary
• An average foreclosure costs the local government $19,277 (HUD)
• An average foreclosure costs adjacent neighbors $14,531 (HUD)
• 1,468 first mortgages in Richmond are in Private Label Securities
• 734 of these will be foreclosed (Fannie Mae estimate)
• These foreclosures will cost Richmond $25 million
4.9 million
in PLS

• Reducing principal to below home values will stop foreclosures
• Richmond has the power to reduce principal
• No one else has any incentive to prevent foreclosures
• Mortgage Resolution Partners can help

Mortgage Resolution Partners LLC
Pier 33 South Embarcadero, Suite 201| San Francisco, CA 94111 | 415.795.2032

2

The Cost of a Foreclosure*

Local Governments

$19,227

- Lost Property Taxes
- Unpaid Utility Bills
- Property Upkeep
- Policing
- Legal costs, building inspections
- Demand for social services

Borrowers

$10,300**

Close Neighbors

$14,531***

Mortgage Resolution Partners LLC
Pier 33 South Embarcadero, Suite 201| San Francisco, CA 94111 | 415.795.2032

*HUD Economic Impact Analysis of the FHA Refinance Program for Borrowers in Negative Equity Position
**Household moving costs, legal fees and administrative charges
3
***Negative impact on the property value of close neighbors

Richmond Foreclosures
Cost of Foreclosures

Housing
Owneroccupied
Renteroccupied

# of
Units*

Private Label
Mortgages

Future
Foreclosures Of
Private Label
Mortgages**

18,659

1,468

734

17,434

Richmond

Adjacent
Neighbors

$14 million

$11 million

4.9 million
in PLS

**Fannie Mae Predicts that 50% of PLS Will Result in Foreclosures

Mortgage Resolution Partners LLC
Pier 33 South Embarcadero, Suite 201| San Francisco, CA 94111 | 415.795.2032

*Source: 2010 Census
** Source: Fannie Mae 2011 10k

4

Problem

•
•
•
•
•
•

Mortgages Held In Private Label Securities

4.5 million loans placed in securities not guaranteed by U.S. Government
Loans not eligible for 15 federal programs created since the housing crash
Loans are much more likely to be underwater.
Riskier loans created in 2004 to 2007 helped create housing boom
Have not been originated since 2007
4.9 million
Securities prohibit principal reduction
in PLS

“If we are going to stabilize the housing market, we have to address” PLS loans.
Federal Housing Finance Agency 2009

Result

Fannie Predicts that 50% of PLS Will Result in Foreclosures

Mortgage Resolution Partners LLC
Pier 33 South Embarcadero, Suite 201| San Francisco, CA 94111 | 415.795.2032

5

The Solution – Principal Reduction
“Most economists see principal reductions as central to preventing foreclosures.” Alan Blinder, former Vice
Chairman at the Federal Reserve (Oct. 20, 2011)
“Government should reduce mortgage principal when it exceeds 110 percent of the home value.” Martin S.
Feldstein, former Chairman of the Council of Economic Advisers under President Reagan (Oct. 12, 2011)
“Surely there is a strong case for experimentation with principal reduction strategies at the local level.”
Lawrence Summers, former Treasury Secretary under President Clinton and former Economic Adviser under
President Obama (Oct. 24, 2011)
Example: JP Morgan Chase and Bank of America unilaterally reduce principal on option ARM portfolio loans in
order to reduce defaults and losses

Principal reduction will prevent future defaults and foreclosures
Mortgage Resolution Partners LLC
Pier 33 South Embarcadero, Suite 201| San Francisco, CA 94111 | 415.795.2032

6

Why Does Principal Reduction Help?
This is an illustrative example for the level of benefits that participating families may
realize. Communities benefit from greatly reduced probability of foreclosure.
Original
Loan

Today

After
Program

Home Value

$400,000

$200,000

$200,000

Mortgage Balance

$320,000

300,000

$190,000

Home Equity

$80,000

($100,000)

$10,000

80%

150%

95%

$1,798

$1,798

$907

Loan to Value Ratio (LTV)
Monthly Payment

Assumes a 6%, 30 year, fully amortizing mortgage is refinanced by a 4%, 30 year, fully amortizing mortgage. Some loan
programs may also require insurance, which may add $175 per to the After Program monthly payment.

Probability of Default Drops from ~80% to ~7.5%
Mortgage Resolution Partners LLC
Pier 33 South Embarcadero, Suite 201| San Francisco, CA 94111 | 415.795.2032

(FHA actuarial assumption, 95%LTV)

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Method of PLS Principal Reduction
Communities Take Action

Securitization agreements and tax laws prohibit the sale of PLS mortgages except
when the mortgages are condemned
Local government, using their constitutional power of eminent domain,
can purchase PLS mortgages when public purpose exists by paying fair value
Then local governments can reduce the principal balance on the condemned PLS
mortgages, thereby reducing underwater PLS in their community

Governments Can Use Eminent Domain To Avoid Unnecessary Foreclosures
Mortgage Resolution Partners LLC
Pier 33 South Embarcadero, Suite 201| San Francisco, CA 94111 | 415.795.2032

8

Who Supports the Program?
Broad community-focused support for the program
•

AFSCME

•

Americans for Financial Reform

•

Center for Popular Democracy

•

National Community Reinvestment Coalition

•

Federal Banking Regulators

Representing
• 1.6 million state and local government employees
• 600 local housing focused organizations
• 250 national, state and local groups working on financial industry reform

Program Addresses Concerns Of Local Homeowners And Community-focused
Organizations
Mortgage Resolution Partners LLC
Pier 33 South Embarcadero, Suite 201| San Francisco, CA 94111 | 415.795.2032

9

MRP is a Community Advisory Firm
MRP clients are state, county, and city governments that purchase underwater PLS
mortgages and resolve them to the benefit of their communities. In order, MRP provides,
under an advisory contract with the community, the following services:
•

Identify and value PLS mortgages

•

Educate the community

•

Arrange acquisition financing

•

Advise community in filing eminent domain motion
Demonstrate the public purpose
Determine fair market value of mortgages

•

Arrange servicing of acquired mortgages

•

Arrange resolution of acquired mortgages

MRP Provides These Services No Cost To Cities or Homeowners
Mortgage Resolution Partners LLC
Pier 33 South Embarcadero, Suite 201| San Francisco, CA 94111 | 415.795.2032

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Communities That Have Engaged MRP

•

El Monte, CA

•

La Puente, CA

•

San Joaquin, CA

•

Orange Cove, CA

MRP is in active discussions with these communities and many more
Mortgage Resolution Partners LLC
Pier 33 South Embarcadero, Suite 201| San Francisco, CA 94111 | 415.795.2032

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Next Steps
1. The City retains MRP at no cost per the terms of the MRP Advisory Agreement as modified
by the City and agreed to by MRP.
2. The City is in control, at each step in the process the City has the option to terminate the
Agreement and must approve the next step before it is taken.
3. The City does not pay any costs of the program.
4. Nothing in the Agreement obligates the City to file an eminent domain motion.

Mortgage Resolution Partners LLC
Pier 33 South Embarcadero, Suite 201| San Francisco, CA 94111 | 415.795.2032

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Key Steps To The MRP Process
1. The City hires MRP at no cost per the terms of the MRP Advisory Agreement as modified by
the City and agreed to by MRP. At each step in the process the City has the option to
terminate the Agreement and must approve the next step before it is taken. The City does
not pay any costs of the program. Nothing in the Agreement obligates the City to file an
eminent domain motion.
2. The City pre approves all communications with the homeowners and the community.
3. Before or after the City files an eminent domain motion the Homeowner may opt out of the
program and their mortgage will be dropped from the motion before it is purchased.
4. Qualified homeowners who opt into the program may elect to refinance for less than the
current value of their home.
5. Qualified homeowners who opt into the program may elect to sell their home in full
satisfaction of their mortgage and lease back their home with an option to purchase it in the
future.
6. Homeowners who opt into the program, but do not qualify for a refinance or a lease will be
dropped from the eminent domain motion before their mortgage is purchased.
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Step 1. City Controls The Process
PLS Trustee
Receives offer to
purchase loan
Proceed to
prepackaged
eminent domain
settlement

yes

MRP
Identifies Possible
Homeowners

City
Start:
Hires MRP, Signs
Advisory Agreement
Appoints Staff

Accept
offer?

Appoints Counsel

no
Prepares offer to
purchase loans
Makes offer to
purchase loans

no
Proceed?

Stop

yes
no
Proceed?

Builds community
consensus to proceed with
Eminent Domain motion.
Drops homeowners that
opt out.

Stop

yes

no
Proceed?

Prepare Resolution
of Necessity
Material

Stop

yes
RON
Approved?

no
Stop

yes
File Eminent
Domain Motion

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Step 2. Home Owner May Opt Out
City

Start:
City Files Eminent
Domain Motion –
May be consensual

MRP/Local Realtors

Presents program
to homeowners

Home Owner

no

Dropped
From
Motion

yes

To
Refinance
Option

Interested?

yes
City approves
homeowner
presentation
materials

Qualifies
for refi?
no

Qualifies
For Lease?
no
Dropped
From
Motion

yes

To Lease
Option

Step 3: Lease/Purchase Solution
PLS Trustee

Receives $160,000
Agreed Upon Fair
Market Value of
Underwater PLS
Mortgage

Funder

Funds $160,000
Loan Acquisition
Price

City

Mortgage
Home Buyer
Servicer/
Title Company

Home Owner Opts
For Lease/Purchase
Holds
Underwater PLS
Mortgage For
City/Funder

Applies for CHFA
Grant

Signs Lease,
Buys Home When
City Owns PLS
Mortgage

Receives $190,000
Invests $9,500 to
stabilize local
housing

Selects a Local
Realtor as advisor

Start:

Obtains Order For
Possession of
Mortgage

Delivers Underwater
PLS Mortgage

Home Owner

Signs a market rate
lease with an option
to purchase. Sells
home to buyer.

Sends $190,000
home purchase
price to servicer

Underwater
Mortgage Paid Off
Sends $9,500 to City
(5%)

Credits a portion of
rent to tenant’s
purchase account

Pays rent

Sends $4,750 to
Realtor representing
Seller (2.5%)
Pays $3,260 of
other expenses
Pays $4,500 to
MRP

Sends $175,750 to
Funder

May buy home or
continues to rent

16

Step 3: Refinance Solution
PLS Trustee
Receives $160,000
Agreed Upon Fair
Market Value of
Underwater PLS
Mortgage

Funder
Funds $160,000
Loan Acquisition
Price

City

Mortgage
Servicer

FHA Lender Home Owner
Start:

Obtains Order For
Possession of
Mortgage

Home Owner Opts
to Refinance

Holds
Underwater PLS
Mortgage For
City/Funder
Receives $190,000

Delivers Underwater
PLS Mortgage

Records the new
$190,000 FHA
Mortgage

Gets a new
$190,000 FHA
Mortgage @ no cost
= 95% of home
value

Sends $190,000 to
payoff old mortgage

Underwater
Mortgage Paid Off
Invests $9,500 to
stabilize local
housing

Sends $9,500 to City
(5%)

Applies for CHFA
Grant
Pays $3,260 of
other expenses
Pays $4,500 to
MRP

Receives monthly
mortgage payments
from Home Owner

Sends reduced
monthly mortgage
payments to new
FHA Lender

Sends $180,500 to
Funder

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Follow the Money
Sale and Leaseback Solution

Who Pays?

When?

Who is Paid?

Cash Flow

Legal Expenses
50% of MRP Fee

MRP
Funder

Before eminent domain motion is filed
Eminent domain motion filed

Atty’s selected by City
MRP

(300)
(2,250)

Legal Expenses

Funder

After eminent domain motion is filed,
prior to possession being awarded

Atty’s selected by City

(1,700)

Fair Value Paid For Loan

Funder

Possession of mortgage awarded to city

PLS Trust

Real Estate Commission

Home Buyer

Home sold

Realtors selected by home owner

(4,750)

Closing Costs

Home Buyer

Home sold

Vendors selected by home
owner/realtor

(2,000)

Home Sales Proceeds
Community Housing Reserve
50% of MRP Fee
Investment Banking Fee
Reimbursement of MRP Advances

Home Buyer
Funder
Funder
Funder
Funder

Home Sold
Home Sold
Home Sold
Home Sold
Home Sold

Funder
City
MRP
MRP’s investment bank
MRP

MRP Cash
Funder Cash
Balance
Balance
(300)
1,950
(2,250)

Refinance Solution

Who Pays?

When?

250

(160,000)

Who is Paid?

183,250
(9,500)
(2,250)
(560)
(2,000)

Cash Flow

(162,250)

2,500
4,500

21,000
11,500
9,250
8,690
6,690

MRP Cash
Funder Cash
Balance
Balance
(300)
(600)
1,650
(2,250)

Legal Expenses
Homeowner Education
50% of MRP Fee

MRP
MRP
Funder

Before eminent domain motion is filed
Before eminent domain motion is filed
Eminent domain motion filed

Atty’s selected by City
Vendor approved by City
MRP

(300)
(300)
(2,250)

Legal Expenses

MRP

After eminent domain motion is filed,
prior to possession being awarded

Atty’s selected by City

(1,650)

-

Homeowner Education

MRP

After eminent domain motion is filed,
prior to possession being awarded

Vendor approved by City

(300)

(300)

Fair Value Paid For Loan

Funder

Possession of mortgage awarded to city

PLS Trust

Mortgage Servicing

Funder

After possession of mortgage by city until
Servicer of underwater mortgage
resolution

Refinance Proceeds
Community Housing Reserve
50% of MRP Fee
Investment Banking Fee
Reimbursement of MRP Advances

FHA Lender
Funder
Funder
Funder
Funder

Refinance Completed
Refinance Completed
Refinance Completed
Refinance Completed
Refinance Completed

Funder
City
MRP
MRP’s investment bank
MRP

(160,000)

(162,250)

(100)

(162,350)

190,000
(9,500)
(2,250)
(560)
(2,550)

27,650
18,150
15,900
15,340
12,790

1,950
4,500

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