Eminent Domain

Unincorporated San Bernardino County and the cities of Fontana and Ontario, CA are considering “using the power of eminent domain--not to take control of the house itself, but to take control of the mortgage instead.”

Following are:

  • Letter from the MBA and 17 other federal and state trade associations sent to officials in San Bernardino County and the cities of Fontana and Ontario in California
  • Several related media reports

    Letter from the MBA and 17 other federal and state trade associations

    Fitch Ratings
    Eminent Domain Would Increase U.S. RMBS Risk

    KABC TV Report
    Plan would use eminent domain to reclaim 'underwater' IE mortgages
    SAN BERNARDINO, Calif. (KABC) -- A possible new way to deal with the housing crisis? San Bernardino County is considering a rare legal move to try to save homeowners who are "underwater." The county wants to use eminent domain.

    Struggling homeowners know how difficult it can be trying to get a loan modification. But in San Bernardino County, there could soon be another option. The county is talking about using the power of eminent domain -- not to take control of the house itself, but to take control of the mortgage instead.

    "This isn't about taking anybody's home. This is about plucking a mortgage out of a pool that otherwise isn't going to be rewritten in order to keep people in their homes," said Greg Devereaux, chief executive officer of San Bernardino County.

    If the county moves forward with this plan, it says it would start taking mortgages away from private equity groups first before going after banks.

    Here's how it would work: The county would decide which homeowners are eligible. Then, using eminent domain, it would seize that home's mortgage, and then offer the homeowner a new loan at or even below current market value.

    It's possible this plan could be challenged in court, but Devereaux says not only is it legal, but it's critical for the local economy.

    "Until we start having homebuilding be healthy again in San Bernardino County, our economy is not going to get healthy," said Devereaux.

    But the Association of Mortgage Investors says this would have a devastating impact on other people. The association said in a statement: "This program would jeopardize retirement benefits because a lot of mortgages are tied to people's 401(k) accounts."

    Some area residents said it might be worth it.

    At this point, only the cities of Fontana and Ontario, as well as unincorporated San Bernardino County are talking about taking part in this plan. If approved, it could go into effect by the end of the year.

    American Banker
    City Bankruptcy Could Raise Hurdles for Mortgage Seizure Plan
    San Bernardino County is forging ahead with deliberations on a proposal to seize delinquent mortgages, despite its largest city's decision Tuesday night to seek bankruptcy.

    The California city is not directly involved in the proposal, but industry members say its bankruptcy could interrupt funding and create other hurdles for the county and its partners.

    San Bernardino County, which is considering a plan to use eminent domain to restructure underwater mortgages, is still planning to host its first meeting to discuss mortgage modification proposals on Friday, spokesman David Wert said on Wednesday. The proposal has raised the ire of investors in private-label mortgage-backed securities, who could face significant losses if the loans are seized.

    The county recently joined forces with two of its cities, Fontana and Ontario, to form the Homeownership Protection Program Joint Powers Authority, which would be empowered to use eminent domain for the modifications if the county decides to go forward with the plan.

    The city of San Bernardino is not currently part of the JPA, and Wert downplayed the influence of the potential bankruptcy on the county's eminent domain proposal.

    "The City of San Bernardino bankruptcy issue would have no impact on the JPA, primarily because the City is not a member of the JPA. The JPA's only members at this point are the County of San Bernardino and the cities of Fontana and Ontario," he said in an email. "But even if the City of San Bernardino were to join the JPA, the bankruptcy issue wouldn't come into play because no public funds would be involved in any of the proposals to be considered by the JPA."

    However, lawyers argue that the city's bankruptcy could indeed have an impact on how the county and its partners would finance the proposal. The plan to invoke eminent domain was initially proposed by Mortgage Resolution Partners, a San Francisco venture capital firm that will partner with municipalities to purchase and modify the loans. The firm has hired investment banks Evercore Partners and Westwood Capital to raise funds from private investors that would be used by the San Bernardino County government to purchase the loans.

    "The bankruptcy wouldn't stop that plan from going forward," says Karol Denniston, a partner at Schiff Hardin. "But what it may do is make the fundraising for the whole project much more difficult."

    "If a major city is in bankruptcy, that's going to have a knock-on effect on credit ratings," making investors warier and fundraising more expensive, Denniston adds. "It has its ability to work its way up the food chain, in terms of the market reactions."

    Part of that investor concern could stem from fears of contagion, the notion that one bankruptcy filing could trigger a domino effect.

    "The notion is, if one municipality does it, will others do it? If there's an unwillingness to pay or to live up to your obligation, will that bad act be followed by others?" says James Spiotto, a partner at Chapman and Cutler.

    A spokesperson for Mortgage Resolution Partners referred questions to the county.

    San Bernardino County's eminent domain authority is restricted to the jurisdictions that are member agencies of the JPA, currently just the cities of Fontana and Ontario and unincorporated areas of the county, according to Wert.

    But if the city of San Bernardino were to join the JPA down the line, it could also potentially hamper the city's efforts to revive its desperately-needed revenue, says Michael Sweet, a partner at Fox Rothschild. Depending on how the modifications are conducted, they could potentially trigger property value reassessments down to the fair market values of the homes, thus reducing the amount of taxes the city could collect on the properties.

    "The problem that San Bernardino and other cities have has to do with insufficient revenue to cover expenses …and most of that revenue is property-tax driven," Sweet says.

    "If the plan cuts the underlying value of the real estate in the city …that would further reduce revenue, because it cuts the amount of property tax the City will be collecting."

    For now, much about the mortgage modification plan is still up in the air.

    Wert told American Banker last week that the county is exploring the option of using eminent domain to obtain underwater mortgages and restructure the loans, but that it had not made a final decision on the plan.

    The meeting on Friday will be "strictly organizational in nature" and "there will be no discussion on any of the various homeownership protection program proposals the JPA will eventually examine," according to a meeting announcement.

    To view the online article, please click here.

    Wall Street Journal
    Eighteen banking, securities and housing groups on Thursday issued a stern warning to three California municipalities pondering the use of eminent domain to seize troubled mortgages from investors.

    The group, led by the Securities Industry and Financial Markets Association, jointly sent letters to city governments of Fontana and Ontario, Calif., and the county of San Bernardino, Calif. to object to the proposed “Homeownership Protection Plan,” telling officials that implementation would likely significantly reduce their residents’ access to home loans. The municipalities are in the Inland Empire, an area east of Los Angeles that has been particularly hard hit by the housing crisis.

    The municipalities earlier this month approved a resolution that would allow them to acquire underwater mortgages under the right of eminent domain. The mortgages would then be modified to encourage and enable the homeowners to stay in the houses.

    But the plan has outraged investors who own the mortgages in the form of private-label mortgage-backed securities. Using eminent domain would raise “very serious legal and constitutional issues,” and undermine the sanctity of contracts between borrowers and creditors, they say.

    In doing so, the amount of credit that is offered in those areas may be reduced, exacerbating the housing problem, said the group, which amounts to an unusual alliance between banks and investors who have often been at odds over how to deal with delinquent borrowers, loan modifications and foreclosures.

    “We expect that credit availability for home purchases and refinancing of all San Bernardino loans would be significantly compromised if this plan would be put into effect,” the group wrote in its letter to San Bernardino.

    Also in the group are the American Securitization Forum, and top banking lobbyists including the Mortgage Bankers Association and the American Bankers Association. Investors are also represented by the Association of Mortgage Investors.

    Analysts at Amherst Securities Group on Thursday said the use of eminent domain would set a troubling precedent as it targets performing loans in private-label mortgage bonds, or securities packaged by banks and other firms without federal guarantees.

    The government is relying on the private mortgage capital to help reduce the role of federally backed agencies, such as Fannie Mae and Freddie Mac, that have cost taxpayers more than $150 billion since the financial crisis. Violating contracts with eminent domain would chill that process, which participants say is already stunted by persistent government competition and uncertainty over regulations.

    But Steven Gluckstern, head of Mortgage Resolution Partners, which hopes to manage the program that it has been proposing to local governments, said he’d “completely disagree” with assertions that the plan would upend the mortgage industry and private securitizations that have been sidelined for years.

    “There is no market now,” Mr. Gluckstern said. “We believe, like these groups, that the return of a private sector market is important for the American mortgage industry but we don’t believe that it happens until this problem (of underwater loans) is cleared.”

    To view the online article, please click here.

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