El Monte is considering a novel and controversial plan to take over underwater mortgages using its eminent domain power -- an idea highly unpopular among representatives of the financial industry but backed by anti-Wall Street groups.
Eminent domain usually is used to seize land -- not loans -- to serve the public good, as when local governments seize blighted property. But the unorthodox plan to use eminent domain to buy home mortgages, write down those loans and refinance homeowners has been hotly debated at public meetings in municipalities across the country.
Last week, the city of Richmond, Calif., became the first municipality in the nation to formally adopt the eminent domain plan, announcing that it had sent notice to the holders of more than 620 underwater mortgages on homes in the city, asking servicers and trustees to sell those loans to the city. The city said it will use its eminent domain power to buy those loans if it has to.
El Monte is weighing adopting a similar plan. Last week Mayor Andre Quintero and City Manager Raul Godinez II met with several financial industry groups to listen to their concerns over the proposal, the mayor said Monday in an interview with The Times.
In attendance at that meeting were representatives from the Securities Industry and Financial Markets Assn. -- a powerful Wall Street lobbying group -- as well as representatives from the Newport Beach-based Pacific Investment Management Co., the mayor said. Representatives of banking associations and real estate groups were there too, the mayor said.
“They were sharing with us, essentially, the parade of horribles that would happen if we decided to go ahead and move forward with making an offer for these underwater homes,” Quintero said. “The council has to get briefed on that meeting and decide whether we want to do what the city of Richmond did.”
A representative of Mortgage Resolution Partners -- the San Francisco firm that is pitching the eminent domain plan to municipalities across the country -- was also at the meeting last week, the mayor said.
The City Council is to discuss the plan, and any potential litigation, during the closed-session portion of its meeting Tuesday evening. It will discuss the matter privately because it does not want to reveal any potential legal strategies involving the proposal, the mayor said, but eventually the idea will be discussed publicly.
Last year, Mortgage Resolution Partners pitched the plan to San Bernardino County and its cities of Fontana and Ontario. The county and cities, the first communities to consider the proposal, formed a Joint Powers Authority to explore the option, but then shelved it after Wall Street groups voiced strong opposition and little public support materialized.
The Securities Industry and Financial Markets Assn. has been a hefty opponent of the eminent domain plan, with its managing director appearing at a number of municipal meetings to speak against it. A number of other groups -- from banking interests to those who invested in mortgage-backed securities -- have also spoken publicly against the proposal.
Using eminent domain in this way would result in losses for public pension plans, 401(k) plans and individual investors who bought mortgage-backed securities, these opponents have said. Potential home buyers could also face higher borrowing costs in areas where the eminent domain plan is adopted, they have said.
In his interview with The Times, Quintero said he is an advocate of the plan despite the powerful opposition.
“It is a little frustrating,” Quintero said. “Wall Street got a lot of the bailouts and benefits, and you are seeing the market has really shot back to life in really a huge way, but Main Street is still suffering.”