Can your city seize your mortgage?
3 California governments aim to invoke eminent domain to fight blight — and help restructure borrowers' underwater mortgages.
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A handful of local officials in California who say the housing bust is a public blight on their cities may invoke their eminent-domain powers to restructure mortgages as a way to help some borrowers who owe more than their home is worth. (Bing: What is eminent domain?)
Investors holding the mortgages predict the move will backfire by driving up borrowing costs and further depressing property values.
"I don't see how you could find it anything other than appalling," said Scott Simon, a managing director at Pacific Investment Management Co., a unit of Allianz SE.
How it works
Eminent domain allows a government to use force to acquire property that is reused in a way that is considered good for the public — new housing, roads, shopping centers and the like. Property owners are entitled to compensation, which a court usually determines.
Instead of tearing down property, California's San Bernardino County and two of its largest cities, Ontario and Fontana, want to put eminent domain to an unorthodox use to keep people in their homes.
The municipalities, about 45 minutes east of Los Angeles, would acquire underwater mortgages from investors and cut the loan principal to match the current property value. Then they would resell the reduced mortgages to new investors.
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The eminent-domain gambit is the brainchild of San Francisco-based venture-capital firm Mortgage Resolution Partners, which has hired investment banks Evercore Partners and Westwood Capital to raise money from private investors. The company's chief executive, Graham Williams, is a mortgage-industry veteran who helped pioneer lending programs for low-income borrowers at Bank of America in the early 1990s. Its chairman, Steven Gluckstern, is an entrepreneur who once owned the New York Islanders hockey franchise. Evercore's founder and co-chairman, Roger Altman, served in President Bill Clinton's administration.
For a home with an existing $300,000 mortgage that now has a market value of $150,000, Mortgage Resolution Partners might argue the loan is worth only $120,000. If a judge agrees, the program's private financiers would fund the city's seizure of the loan, paying the current loan investors that reduced amount. Then, they could offer to help the homeowner refinance into a new $145,000, 30-year mortgage backed by the Federal Housing Administration, which has a program allowing borrowers to have as little as 2.25% in equity. That would leave $25,000 in profit, minus the origination costs, to be divided among the city, Mortgage Resolution Partners and its investors.
Proponents say this would help residents shed debt that is restraining economic growth, while preventing foreclosures that are eroding the tax base. But unlike the beneficiaries of most recent mortgage-modification efforts, who must show hardship, these borrowers would have to be current on their payments to participate. The program initially would focus only on mortgage-backed securities that aren't federally guaranteed. These comprise about 10% of all outstanding U.S. mortgages.
Cities in need
The move is yet another sign of the desperate measures taken by cities still reeling from the effects of the housing bust. Several have declared bankruptcy.
"A number of cities, mayors, city managers have come to me and said, 'How soon can we get in? " said Greg Devereaux, San Bernardino County's chief executive.
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He said he learned of the program last year from a California state official. He said county officials haven't yet decided on whether to proceed.
"We think it would be irresponsible, given the size of the problem in our county, not to at least explore it," Devereaux said.
Unemployment in San Bernardino County, the nation's 12th-most-populous county, is among the nation's highest and tops 30% in some parts. More than two in five borrowers with a mortgage owed more than what their home was worth at the end of March.
The seizure of home-mortgage liens, but not the homes themselves, has never been conducted through eminent domain, as far as the group's principals can tell. Although they believe they have a strong legal case, they expect loan owners to sue.
"California legal precedent and political posture favor the program and constitute an ideal proving ground," Mortgage Resolution Partners said in a presentation to investors reviewed by The Wall Street Journal.
The document said it would begin with a $5 billion effort in California that could grow to 3 million mortgages as part of a $500 billion, multistate effort.
Several states have authorized the taking of other intangible property, such as insurance policies, shares of stock or rights of way, said Robert Hockett, a Cornell University professor of law and adviser to Mortgage Resolution Partners.
In 1984, the U.S. Supreme Court upheld Hawaii's use of eminent domain to transfer residential tracts of land to renters to break up a landownership oligopoly and stabilize home prices. In 2005, the court affirmed a Connecticut town's right to use eminent domain to transfer nonblighted homes to a private developer to spur redevelopment. That spurred several states to pass laws restricting these powers.
The three local California governments have created joint authorities that don't need permission from their city councils or boards of supervisors to move forward, unless they need public money. That means if the agencies back proposals that are privately financed, the plans could only be stopped from moving forward in court.
Mortgage-bond investors — who are the property owners, for eminent-domain purposes — say the program would do nothing to deal with the biggest problems: borrowers already in default.
"Shouldn't that be the first priority?" said Laurie Goodman, senior managing director at broker-dealer Amherst Securities Group LP.
In late June, 18 trade associations, led by the Securities Industry and Financial Markets Association, warned in a letter to city leaders that such a move "could actually serve to further depress housing values" by making banks less willing to lend.
The plan's backers are unfazed.
"The exact opposite is true. There's no private market right now," Gluckstern said. "Until you clear out this problem [of underwater loans], private lending will not come back."
If I were a bank and this program were in effect, I would be irresponsible if I loaned anyone money to buy a house without something like a 60% down payment. I would strongly consider pulling all my loan banking business from the state, because any contract that I might enter into there can at the whim of the people be negated.
Eminent domain, which is the legal confiscation of personal and business property, should be extremely limited in scope. Using it to reduce a borrower's debt is unconscionable.
California and its liberal populous live over their heads, as individuals and as a government. Why should financially responsible Americans support the financial irresponsibility of others? Who would bail us out, if we were all equally irresponsible?
nothing short of psychotic. Only in a lib-tard stronghold could such an insane idea even be considered. NO business is safe where people that try crazy chit like that have any power.
And NO bank will ever make another loan in that county. Unbelievably stupid
John, so exactly when did California become its own country? Is the next "fact" youre going to be saying is that California is its own planet? Isnt California still a state? Keep in mind, John, when you start saying stupid stuff, people tend to laugh at your dumbness and never belive any "facts" that you come up with because you really are the idiot in this case... HAHAHA Sorry, Bud, try again!!!!!
I believe most people in America are hard working and reading this article one can argue that bailing out individuals out of mortgages is wrong. If you read the article carefully you can see that the City is not using any of its money. It is creating a strategic partnership with a venture capital firm that has figured out a way to generate cash with little or no risk. The City invokes eminent-domain gets legal judgment on value and increase refinance price and splits profits with the venture capital firm.
The statement about providing opportunities to keep people in their homes is not the primary concern. The first concern is to deflate the market to allow growth. Second is to free up income to get people spending, and third is to create short term realized earnings for the City and their corporate partners. It is not an issue of bailing out people it is a simple issue of liquidity.
First off, I feel bad for anyone that loses their home because of the economy. However, I don't think it's the governments place to bail out mortgages. The feds need to get out of peoples presonal business.
2nd off, California is the only reason we aren't a 3rd world country? You have to be kidding. If California was such a great place why are they in such financial trouble? What's going to happen is California will spend to the point that the feds will have to bail them out just like the banks and GM.
Ah, The land of granola! What ain't fruit and nuts, is a bunch of flakes.
California has one of the largest budget deficits in the country. The unemployment rate is around 13%
and hispanics now out-number whites. You have an attitude of "let the government take care of me" and the government was never intended to be a nurse maid to those who do not wish to work. You have a massive welfare state and millions on food assistance. California is certainly not the "GEM" it once was. Too many of it's citizens want a government hand-out instead of working hard and making it on their own.
John, do you have any proof of these so-called facts you speak of? If they are true then I am sure you can easily provide all of us a link to an article. “They have dont this forever." That’s a really awesome sentence you wrote! Who's really the idiot here??
A lot of homes are simply no longer worth what people agreed to pay for them not so many years ago. It is unfortunate but a fact and one that is not likely to change in the foreseeable future. I don't think this program sounds like a good idea, although I understand why a city might find it appealing. Someone is going to take a loss on these homes it is just a question if who. If you have little invested in the house then the smart business decision could very well be to walk away and let the bank take the hit. If you still have significant equity in the house even if the balance of your mortgage makes you technically underwater you are probably going to continue paying the loan. The challenge is to remove the emotion form the decision. Don't let yourself be conned into making taking a personal loss to save the butt of a bank and its investors. Any time you loan someone money you are making a calculated risk. If the banks were too stupid or greedy too asses the risks properly that is their problem because that is their business.