Eminent Domain a Worthy Fix for Troubled Mortgages?

By Christina Rexrode

FONTANA, Calif. -- 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.

A Fix for the Economy?

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 that 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.

Aimed at Underwater Homes

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.

'More Harm Than Good'

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.

Mary Kissel on California Municipalities' Use of Seizures

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 that 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."

Copyright 2012 The Associated Press. The information contained in the AP news report may not be published, broadcast, rewritten or otherwise distributed without the prior written authority of The Associated Press. Active hyperlinks have been inserted by AOL.

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Eminent Domain a Worthy Fix for Troubled Mortgages?

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Inside the home, there are five bedrooms (all with walk-in closets), an expansive foyer, vaulted ceilings, tiled floors, balconies and an up-to-date kitchen.

Outside, there are fruit trees, an automatic watering system and a swimming pool. And the garage has room for four cars.

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According to listing agent John Rurkowski, it's a rarity. "We just don't make land like that in Pinellas County," he said.

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According to Rurkowski, deals like this may not last long. The local market for large homes is gaining steam, he said. During the two months through April, home prices on all types of homes in the Tampa-metro area were on the rise, according to the S&P/Case-Shiller home price index.

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Now, she said, "There are buyers at all price points. Buyers are finally feeling more optimistic."

Demand for homes like this one has picked up, she said.

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That has opened up the market for existing homeowners to sell their homes and trade up to bigger ones, said Bill Jenkins, an agent with Keller Williams Realty. And many of them are taking advantage of the deep discounts in the area to get the home of their dreams.

This house, which was built in 2007, is in "immaculate condition," he said and selling at 57  percent discount to its last sale price three years ago. It features a columned portico, a balcony and an attached three-car garage. Inside, there's a large kitchen with hardwood cabinets, granite countertops, tile floors and lots of built-ins.

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The 6,000-square-foot home, which is being sold in a short sale, was damaged and stripped by a previous occupant.

Those willing to put in some elbow grease will get plenty of space and amenities in return, including five bedrooms and 4 bathrooms, in which there are two Jacuzzi tubs and three saunas. Outside is a huge pool.

Aaron Eyerman of Blue Water Realty said he has seen a pick-up in demand for larger homes in the area. "On our website, we've definitely noticed a surge in interest in four-bedroom homes and up," he said. "[P]eople figure 'Why not get more for your money.'"

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Miami's once beaten-down market is starting to make a comeback. And those looking for the really big deals will have to act fast.

"While there are still some real bargains in the area, it's no longer a buyer's market," said listing agent Justin Willard.

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