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San Bernardino Moves Forward with Eminent Domain Plans

AUG 17, 2012 12:03pm ET
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San Bernardino County moved a step forward Thursday with its plans to restructure underwater mortgages through the use of eminent domain.

The county unanimously passed a resolution authorizing its staff to create a request for proposal, a formal mechanism for considering plans to address the glut of underwater borrowers.

During an hour-long meeting, the county's board of supervisors listened as 18 citizens, local activists and mortgage lenders all objected to a plan initially proposed by a San Francisco venture capital firm Mortgage Resolution Partners to use eminent domain to purchase and refinance loans.

Some homeowners voiced their mistrust of the venture capital firm and questioned its relationship with county officials. A few Realtors and lenders who also are homeowners in the county are also concerned that if the county uses eminent domain to seize loans, lenders would pull out of the market, reducing accessing to credit for future borrowers and potentially dragging down home prices.

Despite the objections, the county is moving forward. While passing the resolution was a procedural step, it demonstrates that the county "is not backing down" from the considerable amount of pressure from mortgage-backed securities investors and government agencies to scrap the plan altogether, says Isaac Boltansky, an analyst with Compass Point Research & Trading.

"The procedural wheels continue to spin in San Bernardino," Boltansky wrote in a report Thursday. "The one guarantee from today's hearing is that the debate is likely to continue for the foreseeable future as the procedural process to assess plans such as eminent domain is just now officially beginning."

Last week the Federal Housing Finance Agency threatened it would take action to stop local governments from seizing mortgages.

San Bernardino County recently joined forces with two of its cities, Fontana and Ontario, to form the Homeownership Protection Program Joint Powers Authority.

At the meeting, Gregory Devereaux, the chief executive of San Bernardino County, said the JPA "was formed to vet ideas."

One homeowner lashed out at Devereaux, rattling off a list of past deals he had previously made with private companies.

"I don't trust you," said homeowner Marjorie Michaels. "This is a gross waste of an opportunity to help people facing foreclosures. Instead of giving the money to underwater or distressed homeowners about to lose their homes or to lenders to give principal reductions, you're buying the loans."

She even cited the Supreme Court's 2005 decision in Kelo v. City of New London, which gave local governments the authority to seize private property in the name of economic development, and then added:

"You never said you were going to pay a reasonable value of those loans to the lenders."

In California, any party to an eminent domain case can request a jury trial to determine the value of the property or loan being condemned, says Rick Rayl, an eminent domain attorney and partner at the Irvine law firm Nossaman LLP.

"I think the concept is an interesting one but it just doesn't work financially," Rayl says. "The entire plan depends on the initial loans being acquired at well below their face value and well below the value of the underlying property."

The plan initially proposed by Mortgage Resolution Partners calls only for the seizure of loans in which borrowers are current but owe more on their mortgages than their homes are worth. Since the loans are performing and have higher-than-market interest rates, Rayl says banks will fight any attempt to seize the loans for less-than-market value.

"It would be nice to find some relief for homeowners but this proposal won't do that," he says.

Several speakers questioned how such a program would work and why the county would allow an investor group to make a profit off of it.

Carolyn McNamara, a realtor and director of the Victor Valley Association of Realtors, told county officials that eminent domain was "a misuse of power."

"The purpose of this is to benefit a few investors and it will handicap lenders and leave the county vulnerable to lawsuits," she said.

Chris Katopis, executive director of the Association of Mortgage Investors, told county officials that they were using incorrect data from Zillow, an online real estate database, that showed 60% of homeowners in San Bernardino were upside down on their mortgages. He provided data that showed 54% of underwater borrowers had used cash-out refinancings to take money out of the homes, while another 17% had put no money down to purchase their homes.

 

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