San Bernardino Eminent Domain Proposal Arousing Concern From Mortgage Industry

An Innovative Proposal That Has The Mortgage Industry Worried
A San Bernardino sign on I-10 East is seen on Wednesday, July 11, 2012 in San Bernardino, Calif. The San Bernardino city council voted Tuesday night in favor of the city filing for bankruptcy. (AP Photo/Grant Hindsley)
A San Bernardino sign on I-10 East is seen on Wednesday, July 11, 2012 in San Bernardino, Calif. The San Bernardino city council voted Tuesday night in favor of the city filing for bankruptcy. (AP Photo/Grant Hindsley)

SAN BERNARDINO, Calif. -- Representatives from the mortgage finance industry flocked to this sun-baked county east of Los Angeles on Thursday to warn of dire consequences should local officials go forward with a proposal to use eminent domain to condemn underwater mortgages.

"We believe using eminent domain would reduce access to credit for borrowers and would, at a minimum, result in lengthy and costly litigation," said Timothy Cameron, a managing director of the Securities Industry and Financial Markets Association.

"The math around eminent domain does not work under any circumstances," said Chris Katopis, the executive director of the Association of Mortgage Investors. "You would be robbing Peter to pay Paul."

"We are worried about a clampdown on credit," said Clem Zirole Jr., the president of First Mortgage, a lender in nearby Ontario, Calif.

The comments came at a public hearing of a special governmental body that was recently created to weigh plans that might provide relief to homeowners -- and stimulate a stagnant economy -- in a region among the hardest hit in the United States by the collapse in home values. More than half of all homeowners countywide are underwater, meaning they owe more on their mortgages than their homes are worth, and the foreclosure rate is more than three times the national average.

While the purpose of the hearing was technically to start the ball rolling on a call for mortgage relief plans, most speakers came to address a controversial proposal by a private venture fund in San Francisco that would have local governments use eminent domain to seize control of underwater home loans not in default or foreclosure from private mortgage trusts.

Under the plan, Mortgage Resolution Partners would front money to local governments to purchase the loans at market value in exchange for a fixed fee of $4,500 each. Homeowners could then refinance at the lower value, potentially saving hundreds of thousands of dollars each month in mortgage payments -- while also injecting a shot of adrenaline into moribund local economies.

More than a dozen local governments, including those in Suffolk County, N.Y., in Berkeley, Calif., and in Chicago are considering the proposal. But government officials, including Chicago Mayor Rahm Emanuel and Edward DeMarco at the Federal Housing Finance Agency, have expressed skepticism of using eminent domain in this way, as has the mortgage and finance industry, which has not-so-subtly threatened an expensive legal fight should any governmental entity go forward with such a plan.

For their part, San Bernardino officials say they have not decided anything yet -- and, in fact, have not even come close to doing so.

"Never ever did we say that this is something we want to do or intend to do," said Greg Devereaux, the San Bernardino County chief executive in an interview with The Huffington Post in his office on Wednesday.

The Mortgage Resolution Partners plan would apply to only the 10 percent or so of loans held by private security trusts, which means just a small fraction of the 150,000 or so homeowners in San Bernardino could potentially see some relief.

Left unsaid by the mortgage industry is who, exactly, would mount a legal challenge, but it is likely that SIFMA, which represents hundreds of banks and asset managers, would lead the charge. Over the past few months the industry group has released a series of statements warning of dire consequences should San Bernardino -- or any of the dozen or so other local government groups considering an eminent domain measure -- pursue such a remedy.

SIFMA has described the proposal as unconstitutional, and claimed that using eminent domain in this fashion would harm everyday investors and pensioners and would undermine the U.S. mortgage market. Using eminent domain in such a fashion would actually "exacerbate the problem" of depressed property values, Cameron warned, because borrowers in any area that embraces eminent domain may find new mortgages and refinancings more costly and more difficult to obtain.

But homeowners who showed up at the meeting said they are skeptical of the mortgage finance industry's motives. "We've seen a bailout of the banking industry, but no bailout for homeowners," said Arie Giddens, a San Bernardino resident whose home is worth less than half the $300,000 she paid for it in 2005, according to an estimate by Zillow, a real estate website.

Giddens said she missed a few payments when she lost her job last year, and is now in a trial loan modification through her loan servicer, Citigroup. She has not been offered principal reduction by the bank, she said.

Giddens' loan is owned by a private investor, and thus would potentially qualify for a principal reduction under the Mortgage Resolution Partners plan -- but she lives in the city of San Bernardino, which is separate from the county now considering homeowner relief proposals. "I think it's time we got some help out here," she said.

CORRECTION: 8:30 p.m. -- This article has been updated to show that the proposal is to condemn underwater mortgages. An earlier version wrongly said the proposal is to condemn properties with underwater mortgages.

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