In the News
A proposal in San Bernardino, Calif., that would use eminent domain to seize mortgages to help reduce the area’s massive negative equity does not adequately protect investors, analysts at Amherst Securities Group says.
In late 2011, San Francisco investment group Mortgage Resolution Partners proposed a program in which the local government would seize underwater mortgages at fair market value and restructure them, allowing the homeowner to stay in the home.
Like many areas across the nation, San Bernardino County is drowing in negative equity. Fifty percent of mortgages in the county are underwater, San Bernardino County Chief Executive Greg Devereaux says. The May jobless rate for the Riverside-San Bernardino-Ontario metro area was 11.8%, one of the highest for metros with 1 million or more people, according to the Bureau of Labor Statistics.
Borrowers current on their payments, but who hold underwater loans in private-label securitizations, are targets of the proposal. The county would use eminent domain, which is normally used to seize real estate, to take title to the loans and pay private-label security trusts with money provided by, for example, Mortgage Resolution Partners. When the loans are refinanced, the proceeds would be used to repay investors who financed the program.
“I don’t see this as interruptive to the financial system,” Steven Gluckstern, chairman of Mortgage Resolution Partners, told HousingWire. “I think it begins to recognize losses that have already been taken through the private-label security system. And more importantly, it begins to restore consumer confidence because this is a drag on the whole economy.”
Devereaux stresses that at this point the proposal in only in an exploratory stage. Along with two other counties in California, San Bernardino recently created the Joint Powers Authority to consider ideas brought forth.
Laurie Goodman and her team at Amherst are troubled by the idea because the use of eminent domain to seize mortgages, they say, does not have a built-in mechanism that would protect investors against purchases at less than fair value. Since it appears that neither servicer nor trustee have the fiduciary obligation to fight for fair value in eminent domain takings, investors would have very little representation.
“Eminent domain could conceivably be used to do what the pooling and servicing agreements do not allow for — restructuring of performing loans under tightly guarded parameters,” the analysts said in a resea