A decision by three California municipalities to use their powers of eminent domain to purchase underwater loans out of private-label MBS and secure principal reductions for their residents is drawing fire from industry groups.
The cities of San Bernardino, Ontario and Fontana have passed resolutions to purchase the underwater loans of city residents and Mortgage Resolution Partners will refinance the loans.
The San Francisco-based lender is expected to use the FHA short refinancing program. As a result, the borrowers will end up with 5% to 10% equity in their homes and more affordable payments, according to Cornell University professor Robert Hockett, who is promoting the eminent domain concept. It is estimated that home values in the three cities have dropped by nearly 50% since the 2006.
Industry groups representing banks, securitization firms, mortgage and title companies are warning city officials that the use of eminent domain to seize mortgages will “significantly reduce access to credit” for mortgage borrowers in their cities.
“We expect that credit availability for home purchases and refinancing of all Fontana loans would be significantly compromised if this plan were to be put in place,” a joint letter says.
An analysis of Hockett’s “Homeownership Protection Program” by the Amherst Securities Group found that legacy private-label securities structures provide no protection from such a “taking” under eminent domain, “which makes these loans such an attractive target.”
The ASG analysts also noted in the June 28 report that the passive nature of the PLS trusts “provide no mechanism for restructuring a performing loan.”
At an Americans for Financial Reform forum on Thursday, Hockett noted that the use of eminent domain will allow refinancing of the current homeowners, prevent foreclosures, further declines in property values and blight.
He acknowledged, however, that second-lien holders could block refinancings of the first mortgages.
Investors will provide the cities with necessary funds to purchase the loans at fair value and they have committed enough funds for the “first wave of loans,” Hockett said.
