Seize the Day or the Mortgage
Industry Update: On August 14, MortgageOrb published an article titled Seize The Day - Or The Mortgage.
Seize The Day - Or The Mortgage
Cities look at eminent domain to ease underwater mortgages.
Some U.S. cities are finding that no matter how you use eminent domain or propose to use it, the concept will generate controversy. When the New York Times and other news outlets reported recently that Richmond, Calif., and other municipalities are proposing to use eminent domain to restructure certain mortgages, industry experts were quick to post their opposition to the idea.
The topic of governments purchasing private property for public good is not new, but the twist this time is that these cities are proposing to purchase mortgages, not physical properties.
Robert C. Hockett, a professor of law at Cornell Law School in Ithaca, N.Y., says that concept is not new. "Eminent domain has always applied to intangible property as well as tangible," says Hockett, an advocate for the plan. "We just don't tend to be as aware of this because it is obvious for all to see when land is purchased for a road or bridge, while loans, stocks, insurance policies, other intangibles are invisible to all but the buyers and sellers."
The City of Richmond, whose tagline is "The City of Pride & Purpose," partnered with San Francisco-based Mortgage Resolution Partners (MRP), which calls itself a "community advisory firm." According to the advisory services agreement posted on the City of Richmond's website, MRP will work with the city to identify mortgage loans to target for purchase and will assist in negotiating contracts with third parties, including owners of loans and attorneys. MRP will receive $4,500 for each loan acquired by the city.
In July, Richmond sent letters to mortgage servicers, asking to buy 626 underwater but mostly performing loans. The offers are for "fair market value," or about 80% of the current value of the property, an amount that is lower than the amount the homeowner borrowed. Then, the city, working with investors, would write down the debt and allow the borrower to refinance. If the servicers do not accept the offer, the city could begin the eminent domain process.
Hockett says eminent domain will work more effectively than other loan modification programs. "First, the federal programs focus on term extensions and interest rate reductions. Those don't work for severely underwater loans. Only principal reduction works for that. Second, voluntary principal reduction, for its part, is nearly impossible for securitized loans even when it benefits creditor and debtor alike by eliminating or significantly diminishing default risk."
Others disagree: The California Association of Realtors (CAR) opposes the use of eminent domain to seize mortgages. On its website, the Los Angeles-based association notes that the plan would deter lending because future mortgages would be vulnerable to seizure. "The only party that would directly benefit financially from every note seized is MRP, while Richmond residents are left to deal with the high cost or lack of mortgages for years to come," CAR says in its statement.
The Washington, D.C.-based Securities Industry and Financial Markets Association says on its website, "It is a serious mistake to pursue a plan that would harm investors, constrict credit for borrowers and depress housing prices just as the housing recovery is gaining steam."
Last week, the law firm Ropes & Gray filed a lawsuit against Richmond in federal court in San Francisco. The firm filed the suit on behalf of Wells Fargo and Deutsche Bank, asking for an injunction to stop the eminent domain action.
Eminent domain has gained attention nationally. In July, Rep. John Campbell, R-Calif., reintroduced "The Defending American Taxpayers From Abusive Government Takings Act," a bill that died in committee last year. The act would prevent Fannie Mae and Freddie Mac from purchasing, the Federal Housing Administration from insuring and the Department of Veterans Affairs from guaranteeing a mortgage in a county that uses eminent domain to take over mortgages.
Meanwhile, the Federal Housing Finance Agency (FHFA) concluded its review of the issue. In August 2012, the FHFA posted a notice, "Use of Eminent Domain to Restructure Performing Loans," in the Federal Register and asked for public input. A year later, the agency reports it has serious concerns about using eminent domain to restructure existing financial contracts "and has determined such use presents a clear threat to the safe and sound operations of Fannie Mae, Freddie Mac and the Federal Home Loan Banks."
In a General Counsel Memorandum, the FHFA cited legal issues, such as whether using eminent domain for intangible assets fits within state laws authorizing eminent domain by localities and whether eminent domain violates the Takings Clause of the Fifth Amendment of the U.S. Constitution, because the loan is no real threat to the community and there is no assurance the asset will cease performing.
The FHFA also noted there is a risk in taking over mortgages of properties in certain regions that might raise questions of redlining and fair housing laws. Also, "fair market value" is difficult to estimate, and "just compensation" has been the crux of many legal disputes. Besides, the FHFA says, home values are stabilizing and moving upward.
Meanwhile, other municipalities are reportedly considering eminent domain.
In New Jersey, the Irvington township council passed a resolution on foreclosure in July, noting, "Eminent domain must be used as a tool for mortgage principal reduction." The resolution also called for other actions, for example, "There must be federal and state criminal investigations of lender wrongdoing in the housing bubble," and "There must be comprehensive and uncompensated write-downs of overvalued mortgage bubble principles [sic] to reflect the true market value of homes."
In January, San Bernardino County, Calif., announced it was seeking plans to address the mortgage crisis in the county but would not consider proposals that would include the use of eminent domain.
Nora Caley is a Denver-based freelance writer.
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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.