Loan Seizure Plan Finds New Life
Industry Update: On July 17, National Mortgage News published an article titled Loan Seizure Plan Finds New Life.
Loan Seizure Plan Finds New Life
Steven Gluckstern, who’s spent more than a year pushing local governments to seize mortgages from bond trusts to cut balances and help homeowners, is renewing attempts with backing from cities in California and Nevada.
Gluckstern’s Mortgage Resolution Partners LLC recently sent letters to securities trustees and loan servicers asking them to verify their roles in specific deals and provide information about individual mortgages that could be purchased, he said. The firm must try to negotiate to buy the loans before municipalities can use powers known as eminent domain to force the sales, he said. They would then lower the principal owed.
“By the end of the summer, we’ll be well into the process of cities acquiring loans on behalf of their citizens,” Gluckstern said this week in a telephone interview.
The moves signal a revived battle over the initiative, which has drawn opposition from bondholders such as Pacific Investment Management Co. and DoubleLine Capital LP and at least 18 trade groups representing the finance industry, homebuilders and real estate firms. After considering the idea last year, municipalities including San Bernardino County, Calif., and Chicago shelved it even as the housing recovery fails to help many homeowners escape oversized debt burdens.
Gluckstern, a former insurance executive, ex-New York Islanders co-owner and member of the national finance committee for President Obama’s 2008 election, has pressed on, after gathering supporters from California Lt. Gov. Gavin Newsom to actor John Cusack.
With about 10 million homeowners owing in excess of what their property is worth more than five years after the housing bubble imploded, the program is needed to provide relief and reduce foreclosures, Gluckstern said.
Opponents, including bondholders, say it would cause unfair losses to investors including pension funds, push lenders to withdraw from markets and expose cities to legal risks.
Bondholders view the appeal to underwater homeowners as akin to “a snake-oil salesman with a process,” according to Vincent Fiorillo, a DoubleLine money manager who said he was speaking as the president of the Association of Mortgage Investors’ board.
“It’s not Wall Street, it’s Mr. and Mrs. America’s money they’re robbing,” he said, referring to investors in mortgage bonds through funds and pensions. “So many cities have said no to this; there has to be a rationale as to why the other cities have said ‘no’ and they should really think about that.”
Some bond investors, who often need to join together to direct debt trustees to take action on their behalf, have hired law firm Ropes & Gray LLP to coordinate a potential response, according to three people with knowledge of the matter who asked not to be identified because it’s private.
MRP has struck about a “half dozen” advisory agreements with local governments, including North Las Vegas and El Monte in California. The city of Richmond, also in California, is furthest along, Gluckstern said.
“It’ll go one step at a time and we’ll follow the advice we get from MRP in terms of when and what will be the next steps,” Bill Lindsay, city manager for Richmond, said in a telephone interview. City council members have “met and listened with those who are in opposition” and “they haven’t wavered in wanting to go ahead with the program,” he said.
With almost half of homeowners underwater in the city, officials have an obligation to try use the firm’s program to “stop this economic free-fall,” Richmond Mayor Gayle McLaughlin said in an email.
“The banks and financial institutions are not helping,” she said. “Their greed caused the problem and they have no solution for cities like Richmond.”
North Las Vegas’s council is planning to meet again on Aug. 21 to review a plan it authorized the firm to prepare last month, said Juliet Casey, a spokeswoman for the city manager’s office.
Wade Wagner, a dentist who was the sole member of the council to vote against working with MRP, said he doesn’t like the unprecedented use of eminent domain because it creates a “slippery slope” exposing other assets to government seizure. Historically, it’s used to take real estate for things like creating highways for the public good, he said.
“Also, you’re taking a loan from one company that makes money and giving to another company that makes money,” Wagner said. “Transferring it from one private company to another private company just doesn’t make any sense to me.”
After the initial step, a Nevada homeowner sued in June to stop the plan going forward, saying it violates the state constitution. Casey declined to comment on the lawsuit or criticism of the proposal.
Gluckstern said MRP would prefer to negotiate with bondholders rather than rely on eminent domain, which is typically used to seize real estate for the public good and requires court review.
“We are really the principal reduction guys,” Gluckstern said. “If you can get it to happen without having to use a controversial sovereign power, that’s great.”
Gluckstern says that the program could spur lending by stabilizing housing markets and help bondholders by paying fair value for the loans. He wouldn’t identify the firms that received letters.
Servicers, such as Ocwen Financial Corp., Nationstar Holdings Inc., JPMorgan Chase & Co. and Bank of America Corp., are responsible for dealing with homeowner payments and bad loans. Trustees, which include Bank of New York Mellon Corp. and Deutsche Bank AG, administer bond payments and oversee legal actions. Spokesmen at the companies either declined to comment on the letters or didn’t return messages.
Wells Fargo & Co., the nation’s largest servicer and a trustee, supports the positions offered by trade organizations, such as SIFMA and the Mortgage Bankers Association, Vickee Adams, a spokeswoman, said in an email.
MRP’s plan focuses on borrowers whose debt exceeds their homes’ values and who have made regular payments on mortgages packaged into bonds without government backing. The firm has said that delinquent homeowners, who are often aided by federal and private programs, could also be targeted.
A municipality would use its eminent domain powers to force the sale of a loan to a private investment fund, at prices based on financial models or comparable trades. The mortgages would be reduced and refinanced, potentially into new debt insured by the Federal Housing Administration.
In El Monte, the next step is to authorize MRP to make offers to bond trustees, “which hopefully will happen soon,” Mayor Andre Quintero said. “I see this as an economic development opportunity for this community.”
The profits of the private investors and MRP, which would administer the program for a fee, will be taken from bondholders, opponents have said. It’s also proving less necessary amid the real estate recovery, according to Chris Killian, head of the securitization group for the Securities Industry and Financial Markets Association.
Home prices climbed 12.1% in April from a year earlier, the most in more than seven years amid short supply, record-low mortgage rates and an improving job market, according to an S&P-Case-Shiller index of 20 major cities.
About 1.7 million homeowners regained positive home equity in 2012 as housing started to recover after a five-year slump, according to CoreLogic Inc. Still, with home prices 26% below the 2006 peak, about 9.7 million, or one in five residential properties with a mortgage, were still underwater on March 31, including more than 45% in Nevada.
“Despite the fact that there has been some modest recovery in the housing market in some select markets, in the areas we’re focused, that recovery has been minimal and had almost no effects,” Gluckstern said.
Federal lawmakers and regulators have been watching his firm’s efforts.
Texas Republican Jeb Hensarling on July 11 proposed legislation in the House of Representatives that would bar Fannie Mae, Freddie Mac and the Federal Housing Administration from backing mortgages in localities that use eminent domain to seize mortgages.
The language is part of a broad overhaul of housing finance winding down government support of the mortgage market that Hensarling and other House Republicans have drafted.
Last month, House Republican lawmakers from California, including Jon Campbell, Gary G. Miller and Ed Royce, wrote a letter to Housing and Urban Development secretary Shaun Donovan asking him to clarify the FHA’s policy on mortgage seizures.
The Federal Housing Finance Agency sought comments almost a year ago on its view that “action may be necessary on its part” to protect the investments of the firms it regulates, taxpayer-supported Fannie Mae and Freddie Mac and the government-chartered Federal Home Loan Banks.
Charles Coulter, deputy assistant secretary for single family housing, told a Congressional panel in May that Donovan had “expressed a very high degree of concern” about eminent domain seizures of mortgages.
“It would be highly improbable, I believe, for FHA to put itself in a position where we would be the only insurer on those types of refinance transactions,” Coulter told the House Financial Services Committee.
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Safeguard Properties is the largest mortgage field services company in the U.S. Founded in 1990 by Robert Klein and based in Valley View, Ohio, the company inspects and maintains defaulted and foreclosed properties for mortgage servicers, lenders, and other financial institutions. Safeguard employs approximately 1,700 people, in addition to a network of thousands of contractors nationally. Website: www.safeguardproperties.com.