Proposal to seize troubled loans is back for debate
San Bernardino County and two of its cities last year created a national stir with a proposal to use eminent domain to seize troubled mortgages and write down debt for homeowners.
That debate returns to the county this week, with the first public meeting on the matter since August scheduled for Thursday. Meanwhile, the San Francisco investment firm that initially pushed the plan, Mortgage Resolution Partners, is renewing its call for aggressive action in the epicenter of the state’s housing crash.
“It really is ground zero, because it is the hardest-hit community in the state,” said Steven Gluckstern, chairman of Mortgage Resolution Partners. “It is very important to me that we are successful in Southern California.”
Eminent domain is usually used to seize land -- not loans -- to serve the public good, as when local governments seize blighted properties. The San Bernardino effort would be the first widespread attempt at using eminent domain to seize residential mortgages.
The county and the cities last year formed the Joint Powers Authority to consider the eminent domain idea. On Thursday, members of the authority will consider seeking proposals from outside contractors to manage a homeowner-rescue program. Chaired by county Chief Executive Gregory C. Devereaux, the authority has the ability to enact a program without additional city and county approvals.
County spokesman David Wert said the authority had made no decisions and would consider a range of options to help homeowners. Devereaux was unavailable for comment, Wert said.
San Bernardino County was among the hardest hit by the housing bust, with plummeting prices trapping tens of thousands of homeowners in underwater mortgages. The county’s housing market has just recently started to recover, as investors and cash buyers pour in looking for deals.
Last month, the median home price hit $180,000 in San Bernardino -- a 20% rise year over year, although still down 53% from the county’s $380,000 peak in November 2006, according to real estate research firm DataQuick.
The authority’s draft request for a program manager does not specify how the program would work. But the pitch from Mortgage Resolution Partners -- expected to contend for a management contract -- calls for seizing the mortgages, writing down debt to match home values and refinancing the loans. Mortgage Resolution Partners on Tuesday provided The Times with a detailed breakdown of its plan.
The authority was created to discuss the eminent domain idea after the San Francisco firm approached the county last year.
Ever since the authority’s first meeting last July, advocates of the mortgage and investment industries have called the plan a government overreach that would nullify valid contracts and hurt the local housing market. The result would be protracted litigation, a surge in mortgage rates and a tightened market for borrowers with less-than-perfect credit, critics have said.
“Any proposal involving eminent domain will do more harm than good to the markets,” said Tim Cameron, a managing director for the powerful Securities Industry and Financial Markets Assn., or SIFMA. “Put yourself in the position of an investor investing in a product: That is an additional risk, an unquantifiable risk ... and that’s the type of thing that causes premiums to go up.”
Dustin Hobbs, a spokesman for the California Mortgage Bankers Assn., said the banking industry worries that the idea could spread to other communities.
“Hopefully, they will choose a direction that helps homeowners without eminent domain,” Hobbs said. “It’s pretty clear at this point that everybody is waiting to see what happens in San Bernardino first.”
The plan from Mortgage Resolution Partners would have municipalities seize mortgages held in so-called private-label securities. Such mortgage bonds are composed of home loans that failed to meet the criteria for backing by government-sponsored mortgage giants such as Fannie Mae and Freddie Mac.
According to an analysis by Mortgage Resolution Partners, about 59,000 private-label security loans exist in San Bernardino County -- with 42,000 of them underwater, which means borrowers owe more than the home’s value.
Many such securities were backed by high-risk home loans that fueled the housing bubble. Mortgage Resolution Partners argues that these types of mortgages are ideal for seizure and principal reduction, because these securities are often valued less than the actual homes. That’s because of the high likelihood of default.
In their plan provided to The Times, Mortgage Resolution Partners gave a hypothetical example of how the program might work on a typical house.
If a house purchased for $400,000 in 2007 is now worth $200,000, a buyer might still owe $300,000. With a judge’s permission, the city-county authority would seize the loan and pay the mortgage holder something less than $200,000 -- an amount not specified in the example.
The authority would then help the homeowner get a new mortgage, probably one backed by the Federal Housing Administration, for $190,000, leaving the owner 10% equity in the new loan.
In reality, that process would be hard to pull off and probably would face legal challenges, Mortgage Resolution Partners acknowledges. Gluckstern, in an interview Tuesday, said his group would cover any legal costs and would be willing to press the case to the highest court that would take it up.