Eminent domain, as defined by the U.S. Department of Housing and Urban Development, is ‘an exercise of the power of government or quasi-government agencies (such as airport authorities, highway commissions, community development agencies and utility companies) to take private property for public use.’ In California, however, eminent domain is being redefined with a controversial plan to seize underwater mortgages and restructure them in order to alleviate the continued problems facing the local housing market.
This new approach has been designed by San Francisco-based Mortgage Resolution Partners, which proposes having a local government entity invoke eminent domain laws to take control of the title to a home loan that is currently underwater. The government entity would pay the original mortgage owner the fair value with funds provided by institutional investors recruited by Mortgage Resolution Partners – which, in turn, would restructure the loans to allow the homeowner to enjoy reduced monthly mortgage payments.
The restructured loans would be sold to institutional investors, with proceeds reimbursing the outside financiers that supported the restructuring. Mortgage Resolution Partners would collect a $4,500 fee on each loan that is seized, restructured and resold. Mortgage Resolution Partners, which describes itself as an organization focused on keeping homeowners in their homes, says an eminent-domain-based condemnation of underwater mortgages represents ‘the only practical way to modify mortgages on a large-enough scale to solve the housing crisis.’
San Bernardino's county government and the municipal governments in Fontana and Ontario have established a joint powers authority that will allow them to seize underwater mortgages on residential properties by invoking eminent domain laws. The county has been particularly hard hit during the housing crisis, with median home prices falling over the past five years from $370,000 to $150,000.
Within the mortgage banking industry, reaction to this plan has been negative. A coalition of industry trade organizations led by the Securities Industry and Financial Markets Association (SIFMA) submitted a letter to the localities in the joint powers authority, warning that the ‘contemplated use of eminent domain raises very serious legal and constitutional issues.’
‘This is just bad policy – a bad idea,’ says Chris Killian, managing director of SIFMA. ‘Regardless of the legal merits or lack thereof, this is not a way to deal with these problems.’
According to Marc Savitt, president of the National Association of Independent Housing Professionals, the proposed strategy is tantamount to rewriting the eminent domain laws.
‘Eminent domain is supposed to be used when in the best interest of the public,’ Savitt observes. ‘For example, if a road needs to be widened, the city government would either strike an agreement with homeowners or condemn that specific piece of property but still give the homeowners fair market value.’
‘I am not sure this is really the battle they should be fighting,’ says Mark Greco, president of Austin, Texas-based 360 Mortgage Group, which conducts business in California. ‘From a mortgage banking perspective, no one wants to foreclose on a property – when we get to that point, it becomes a losing proposition for everybody.’
However, properties facing foreclosure are not the intended targets of this plan. The eminent domain strategy would exclude homeowners who are not current on their mortgage payments.
Stan Gordon, principal at DC Solutions Group, based in Orange County, Calif., objects to this core concept of the plan offered by Mortgage Resolution Partners.
‘This group's concept of seizing mortgages when loans are performing and making a profit for themselves and the county is not what eminent domain is for,’ he says. ‘I am not sure they really defined the program. They are going to run into a buzz saw in terms of valuation and the proper use of eminent domain authority.’
Also, the only home loans eligible for seizure are those in private-label securitization. Mortgages that are owned or guaranteed by the government-sponsored enterprises (GSEs) or the Federal Housing Administration will not be considered for this plan.
A report issued on June 28 by Amherst Securities Group LP believes that the exclusion of government-backed mortgages is a reflection of problems in the private-label sector.
‘This reflects the fact that private-label securitizations were poorly designed,’ says Amherst Securities in its report. ‘The private-label structure does not provide for a responsible party whose duty it would be to ensure that such a taking was legal and the 'fair market' price was actually fair. If this program were to target GSE loans, the case would be certain to end up in court, challenged both on the legality of the program and the fair market determination.’
Nonetheless, many mortgage banking leaders are particularly concerned about the impact this could have on the market for non-agency mortgage-backed securities.
‘No one would buy a mortgage or mortgage-backed security knowing that the government may take that asset – creating an instant and sizable loss – at any time,’ says Benton Neese, president of the board of directors of REOMAC. ‘In fact, driving investors out of the market will drive down property values and leave thousands of homes empty and unkempt for even longer periods of time.’
‘How will investors be able to price the risk of investing in mortgages if they're not sure if a contract is secure from government seizure?’ asks Dustin Hobbs, communications director at the California Mortgage Bankers Association. ‘This extra risk will also result in an extra cost for future borrowers, which will chill lending.’
Greco agrees, noting that this could not come at a worse time.
‘California's housing market over the last few years was making a comeback,’ he says. ‘In the long run, if they uphold this, the consumer will pay the price. It will become more and more difficult for California consumers to obtain financing – and if this happens, there will be a negative impact on the California real estate market.’
The new joint powers authority has not set a date on when it might commence following this strategy. Gordon observes that the authority has yet to generate any significant support for its endeavors.
‘The public has been sort of surprised,’ he says. ‘Most people don't think of eminent domain in these terms. And the California Supreme Court will not go for this – it is a relatively conservative court, and the purpose [of the plan] has not been defined well enough.’
However, David Wert, a San Bernardino County spokesperson, recently told the Associated Press that the joint powers authority has no immediate plans to back down.
‘We just have too much pain and misery in this county to call off a public discussion like this,’ he says.
Phil Hall is the editor of MortgageOrb. He can be reached at firstname.lastname@example.org.