Last Updated:March 26 @ 05:10 pm

Calif cities eye plan to condemn troubled mortgages

By Amy Taxin and Christina Rexrode

FONTANA, Calif. (AP) - In the foreclosure-battered inland stretches of California, local government officials desperate for change are weighing a controversial but inventive way to fix troubled mortgages: Condemn them.

Officials from San Bernardino County and two of its cities have formed a local agency to consider the plan. But investors who stand to lose money on their mortgage investments have been quick to register their displeasure.

Discussion of the idea is taking place in one of the epicenters of the housing crisis, a working-class region east of Los Angeles where housing prices have plummeted. Last week brought another sharp reminder of the crisis when the 210,000-strong city of San Bernardino, struggling after shrunken home prices walloped local tax revenues, announced it would seek bankruptcy protection.

Now - and amid skepticism on many fronts - officials from the surrounding county of San Bernardino and cities of Fontana and Ontario have created a joint powers authority to consider what role local governments could take to stem the crisis. The goal is to keep homeowners saddled by large mortgage payments from losing their homes - which are now valued at a fraction of what they were once worth.

"We just have too much pain and misery in this county to call off a public discussion like this," said David Wert, a county spokesman.

The idea was broached by a group of West Coast financiers who suggest using the power of eminent domain, which lets the government seize private property for public use. In this case, they would condemn troubled mortgages so they could seize them from the investors who own them. Then the mortgages would be rewritten so the borrowers would have significantly lower monthly payments.

Steven Gluckstern, chairman of the newly formed San Francisco-based Mortgage Resolution Partners, says his main concern is to help the economy, which is being held back by the mortgage crisis.

"This is not a bunch of Wall Street guys sitting around saying, `How do we make money?'" he said. "This was a bunch of Wall Street guys sitting around saying, `How do you solve this problem?'"

Typically, eminent domain has been used to clear property for infrastructure projects like highways, schools and sewage plants. But supporters say that giving help to struggling borrowers is also a legitimate use of eminent domain, because it's in the public interest.

Under the proposal, a city or county would sign on as a client of Mortgage Resolution Partners, then condemn certain mortgages. The mortgages are typically owned by private investors like hedge funds and pension funds.

Under eminent domain, the city or county would be required to pay those investors "fair value" for the seized mortgages. So Mortgage Resolution Partners would find private investors to fund that.

Mortgage Resolution Partners will focus on mortgages where the borrowers are current on their payments but are "under water," meaning their mortgage costs more than the home is worth. After being condemned and seized, the mortgages would be rewritten based on the homes' current values. The borrowers would get to stay, but with cheaper monthly payments. The city or county would resell the loans to other private investors, so it could pay back the investors who funded the seizure and pay a flat fee to Mortgage Resolution Partners.

The company says that overall, all parties will be happy. The homeowners, for obvious reasons. The cities, for stemming economic blight without using taxpayer bailouts. And even the investors whose mortgage investments are seized. Mortgage Resolution Partners figures they should be glad to unload a risky asset.

Rick Rayl, an eminent domain lawyer in Irvine, Calif., who is not connected to the company, isn't so sure.

"The lenders are going to be livid," he said. He thinks the plan could have unintended consequences, like discouraging banks and other lenders from making new mortgage loans in an area.

The company says that focusing on borrowers who are current on their loans is a smart way to do business, rewarding those who are already working hard to keep their homes. But, Rayl pointed out, those are also the exact mortgages that investors are eager to keep.

Already, the outcry was heard at the first meeting of the joint powers authority on Friday, even as chairman and San Bernardino County chief executive Greg Devereaux said the entity - which was inspired by Mortgage Resolution Partners' proposal - has not yet decided on a specific course of action.

Timothy Cameron, managing director of the Securities Industry and Financial Markets Association's asset managers group, told the authority that residents of the region would find it harder to get loans and investors - including pensioners - would suffer losses. He also said such a move would invite costly litigation.

"The use of eminent domain will do more harm than good," he said. "We need mortgage investors and lenders to come back to these fragile markets - but this plan will force both groups to avoid them."

But Robert Hockett, a Cornell University law professor who serves as an unpaid adviser to Mortgage Resolution Partners, was unsympathetic. He likes how the plan forces the hand of uncooperative investors, who have sometimes stifled plans to reduce mortgage payments.

"It's kind of like saying a loan shark objects to anti-predatory lending laws," Hockett said.

Theodore Woodard, a 62-year-old retired air conditioner installer, said he'd welcome the help on his five-bedroom home in Fontana. So far, he and his wife have kept up with monthly $3,100 payments, plus taxes and insurance, but it hasn't been easy, and they have watched several neighbors in the well-manicured neighborhood some 50 miles east of Los Angeles lose their homes to foreclosure.

"We've been making our monthly payments, barely making them, but we just pay them and try to survive off what's left," said Woodard, who estimates his house has lost a third of its value since 2004.

In San Bernardino County, the problem is clear. The median home price has plunged to $150,000 from $370,000 in five years. The combined San Bernardino-Riverside metro area has the highest foreclosure rate of any large metro area in the country, at four times the national average, according to RealtyTrac, which tracks foreclosure properties.

Devereaux, who has seen other plans to fix the housing crisis peter out, is cautious.

"I don't know whether this will work or not," he said. "But we do think we have a responsibility to explore it."


Rexrode reported from New York. AP Business Writer Daniel Wagner contributed to this report from Washington, D.C

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  1. BillzillaComment by Billzilla
    July 16, 2012 @ 10:46 am

    Brilliant! Someone takes out a mortgage to buy a home, and when the economy goes into a recession as it has now for the past four years, and they can’t make the payments… the local government seizes the home, and refinances with Mortgage Resolution Partners, who came up with this scheme, and the original lender receives a fraction back of their investment.

    That will certainly encourage lenders to make more loans to people who live in this area, and as an added bonus: The many attorneys who will be involved in the resulting litigation, will be overjoyed, as they’ll get paid, win or lose.

    How can it get any better than that?!?!

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    Rating: 4.8/5 (8 votes cast)
  2. middlegroundComment by middleground
    July 16, 2012 @ 11:11 am

    We already have this procedure. It’s called a sherrif’s sale and my parents bought a home in 1935 from such a sale for $600.00 because the home was owned by a couple who couldn’t get enough rent from it to pay the taxes. The house was in a university town and faculty salaries had not increased since 1910 and so faculty and staff couldn’t afford to pay enough for the landlord to pay property taxes. Currently, in many towns property taxes still reflect inflated values and so conditions are similar in that respect to 1935, but unlike 1935 we now have Section 8 assistance.

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    Rating: 4.0/5 (7 votes cast)
  3. fallschComment by fallsch
    July 16, 2012 @ 12:07 pm

    This is complete insanity. Another shining example of how the government thinks they are the answer to everything and will only cause further damage.

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    Rating: 4.8/5 (5 votes cast)
  4. lanimom229Comment by lanimom229
    July 16, 2012 @ 12:40 pm

    Not to be unkind but will someone please remind me WHOM, IN THE FIRST PLACE, LOWERED THE STANDARDS FOR HOME OWNERSHIP???
    And why this was allowed to happen? Yes, you guessed correctly, it was our great big progressive government. They just stepped up to the plate and GAVE AWAY the american dream (?), of home ownership, that at one time, was achieved through hard work and sacrifice. So sad that this is no longer the case. Because of government intrusion, families that now want and would qualify cannot obtain a mortgage. Anyone want to expound on these statements? I’ll be happy to read all you can send.

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  5. librabobComment by librabob
    July 17, 2012 @ 10:17 am

    This is total non-sense. You want the investors holding these upside down mortgages to just eat the loss so that the property owners, who are current on their payments, can get their payments reduced. So who will bail out the investors for their losses? People all over the country are upside down on their home and automobile loans. So what, live with it. No one forced these people to sign the loan contract. No one promised them they would make money on their purchase. Bail-outs do more harm than good in the long term. The government needs to just back off and let the real estate problems resolve themselves naturally over time through the free market system.

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