Sub-Prime Fall-out

There are repercussions to everything. During the latest real estate boom the mortgages that were given were all based on the fact real estate values would just keep increasing 15% each year. Even if a bank gave some 100% financing with no documentation, what is the risk since you can always foreclose and still realize a gain from the equity. What happens, however, when real estate values start dropping??

We all know the answer that now. Owners of these 100% non-doc mortgages walk away, property value plummet, banks go out of business, credit markets tighten, foreclosures skyrocket and property values drop. Many people may be quite surprised when they see their 401(K) statement and see that their value have in their "safe" mortgage and bond account. It does not end there, however.

During this latest real estate boom the City of Worcester has loaned out millions and millions in HUD HOME funds in the form of "soft" second mortgages to help many first-time home buyers, mostly through CDC's, around the City of Worcester to buy houses. Here is how it works. You buy a property for $200,000 and get a mortgage for almost the entire amount from the out-of-control mortgage industry.

In addition to the first mortgage, there is a 2nd and sometimes a 3rd mortgage from the City of Worcester, but the home-buyer does not have to make payments, thus the term "soft" second. Although the first-time home-owner only pays back the 1st mortgage of $200,000, they may actually owe $240,000 or $250,000 if you add in the 2nd and 3rd mortgage. The deal is that the 1st time home-owner, who is low-mod income, does not have to pay back the "soft" mortgages if they hold the house during the "affordability" period or sell it to another low-mod income home-owner. Typically this "affordability" period is 15 years, although I have seen shorter and longer.

There are some very "hard" terms, however, to this "soft" mortgage. First the developer of the underlying property receives cold hard cash. Second, the "soft" mortgage needs to be paid back if onwnership is changed to someone, who is not low-mod income. Who needs to pay it back?

Answer: the PJ, which means presiding jurisdiction, the the City of Worcester!! In the above example if the underlying property was became owned by someone who is not low-mod, the City of Worcester would have to pay back $40,000 or $50,000.

Bottom line is that many of these "soft" seconds could come back as a liability to the City of Worcester. Please note again this is not a small number!!! Bottom line is that the City of Worcester has a vested interest to help home-owners, with "soft" seconds in foreclosure, since the possibility of a non low-mod income person or entity taking ownership could cost the city much much more.