In the foreclosure-battered inland stretches of California, local government officials desperate for change are weighing a controversial but inventive way to fix troubled mortgages: Condemn them.
Officials from San Bernardino County and two of its cities have formed a local agency to consider the plan. But investors who stand to lose money on their mortgage investments have been quick to register their displeasure.
Discussion of the idea is taking place in one of the epicenters of the housing crisis, a working-class region east of Los Angeles where housing prices have plummeted. Last week brought another sharp reminder of the crisis when the 210,000-strong city of San Bernardino, struggling after shrunken home prices walloped local tax revenues, announced it would seek bankruptcy protection.
Now — and amid skepticism on many fronts — officials from the surrounding county of San Bernardino and cities of Fontana and Ontario have created a joint powers authority to consider what role local governments could take to stem the crisis. The goal is to keep homeowners saddled by large mortgage payments from losing their homes — which are now valued at a fraction of what they were once worth.
"We just have too much pain and misery in this county to call off a public discussion like this," said David Wert, a county spokesman.
The idea was broached by a group of West Coast financiers who suggest using the power of eminent domain, which lets the government seize private property for public use. In this case, they would condemn troubled mortgages so they could seize them from the investors who own them. Then the mortgages would be rewritten so the borrowers would have significantly lower monthly payments.
Steven Gluckstern, chairman of the newly formed San Francisco-based Mortgage Resolution Partners, says his main concern is to help the economy, which is being held back by the mortgage crisis.
"This is not a bunch of Wall Street guys sitting around saying, 'How do we make money?'" he said. "This was a bunch of Wall Street guys sitting around saying, 'How do you solve this problem?'"
Typically, eminent domain has been used to clear property for infrastructure projects like highways, schools and sewage plants. In this case, supporters say, the public purpose is served because communities battered by foreclosures have seen tax rolls decimated and services gutted and have suffered economic blight.
The plan targets homeowners who are current on their mortgage payments but "under water," meaning they owe more on the mortgage than the home is worth. Here's how it would work for a hypothetical city:
— The city goes to court and argues that the public purpose is served by having the county own, and ultimately refinance, the mortgage.
— The city pays fair market value to the owner of the mortgage. That is usually a securitization trust, an otherwise passive financial entity used to bundle mortgages and sell pieces to investors that became a bigger part of the mortgage market during the 2000s housing boom.
— The city, the new owner of the mortgage, encourages and helps the homeowner to find refinancing. Now the principal is lower, and interest rates are at historic lows, so the homeowner winds up with easier monthly payments.
— Mortgage Resolution Partners collects a flat fee, $4,500 per loan, for helping the city find homeowners who can be helped and for handling the other mechanics of the process.
The company says everyone should wind up happy: The homeowners get lower payments, cities help clean up the mortgage crisis and shore up their tax base, and the mortgage-owning trusts unload a risky asset.
Rick Rayl, an eminent domain lawyer in Irvine, Calif., who is not connected to the company, said the plan could have unintended consequences, like discouraging banks and other lenders from making new mortgage loans in an area.
"The lenders are going to be livid," he said.
The company says that focusing on borrowers who are current on their loans is a smart way to do business, rewarding those who are already working hard to keep their homes. But, Rayl pointed out, those are also the exact mortgages that investors are eager to keep.
Already, the outcry was heard at the first meeting of the joint powers authority on Friday, even as chairman and San Bernardino County chief executive Greg Devereaux said the entity — which was inspired by Mortgage Resolution Partners' proposal — has not yet decided on a specific course of action.
Timothy Cameron, managing director of the Securities Industry and Financial Markets Association's asset managers group, told the authority that residents of the region would find it harder to get loans and investors — including pensioners — would suffer losses. He also said such a move would invite costly litigation.
"The use of eminent domain will do more harm than good," he said. "We need mortgage investors and lenders to come back to these fragile markets — but this plan will force both groups to avoid them."
Robert Hockett, a Cornell University law professor, said the plan forces the hand of some investment bankers who bundle mortgage loans into securities and sell pieces to investors.
The bankers have sometimes stifled plans to reduce mortgage payments, he said. Their objections to this plan, he said, are "kind of like saying a loan shark objects to anti-predatory lending laws."
Theodore Woodard, a 62-year-old retired air conditioner installer, said he'd welcome the help on his five-bedroom home in Fontana. So far, he and his wife have kept up with monthly $3,100 payments, plus taxes and insurance, but it hasn't been easy, and they have watched several neighbors in the well-manicured neighborhood some 50 miles east of Los Angeles lose their homes to foreclosure.
"We've been making our monthly payments, barely making them, but we just pay them and try to survive off what's left," said Woodard, who estimates his house has lost a third of its value since 2004.
In San Bernardino County, the problem is clear. The median home price has plunged to $150,000 from $370,000 in five years. The combined San Bernardino-Riverside metro area has the highest foreclosure rate of any large metro area in the country, at four times the national average, according to RealtyTrac, which tracks foreclosure properties.
Devereaux, who has seen other plans to fix the housing crisis peter out, is cautious.
"I don't know whether this will work or not," he said. "But we do think we have a responsibility to explore it."
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