BY IMRAN GHORI
Published: 18 June 2012 07:48 AM
Six years after Cathy Piper purchased her 1,100-square-foot Rancho Cucamonga home for $420,000, she has seen its value drop to $232,300.
But like millions of homeowners across the country with underwater mortgages, she struggles to meet her $2,475 monthly mortgage payment even as she is stuck with a loan that is more than the property is worth.
“I live paycheck to paycheck – drive a 9-year-old car,’’ Piper said. “I’d like to get out from under this debt, but there are no programs out there if you’re current on your mortgage and your credit is good.”
Piper is the kind of homeowner that San Bernardino County is hoping to help with an unusual and untested approach to the home mortgage crisis it is considering that involves the use of condemnation proceedings to acquire mortgage notes and reduce loan payments.
The county, partnering with the cities of Fontana and Ontario, could be one of the first in the nation to try the strategy, advocated by the San Francisco investment group Mortgage Resolution Partners.
Under the proposal, the county and its partner cities would select qualified homeowners with underwater mortgages and use eminent domain authority to seize ownership of the loans – not the actual homes. The loans would remain in the hands of the local government agencies, but the purchase would be funded by private investors. Homeowners would get new loans or renegotiated loans that reflect the current market value of their property.
The proposal has raised concerns among some in the mortgage and real estate industry, who question whether there’s been enough public review of what they see as an expansion of government influence. While homeowners would benefit from reduced loan payments, investors would take the loss on the difference between current market value and what was owed on the old mortgage.
Eminent domain is a common government agency tool for acquiring property through a court order, but using it to seize mortgage loans held by private investors and financial institutions is novel.
“We’re the only ones we know of who are doing anything like this,” said Robert Hockett, a Cornell University law school professor specializing in finance regulation who has been working with Mortgage Resolution Partners.
Hockett, who said he has no financial interest in the proposal, and the company’s founders said they had been searching for a solution to the mortgage crisis, which they believe will continue to be a drag on the economy unless homeowners get some aid.
“We consider this problem one of the fundamental issues facing this country,” said Steven Gluckstern, CEO and a founder of Mortgage Resolution Partners.
The company, which formed about a year ago, is proposing to deal with a particular segment of the market – securitized mortgages. Instead of being held by a single lender, such as a bank or a savings and loan, the mortgages are bundled together and sold to tens of thousands of investors who take a risk on their value.
Because of that structure, homeowners may be unable to renegotiate their loans because there is no single entity to deal with, while creditors are unable to coordinate and act in their own interest, Hockett said.
The banks that act as the loan servicers for bundled securities also are unable to act because many of the agreements limit restructuring of the loans, he said. “Most of these agreements or contracts were firmed when nobody thought that real estate could drop.”
Hockett, who has been researching the issue since the start of the housing bust in 2007, said the solution he came upon is that someone needed take a coordinated “collective action” on behalf of those investors. Initially, he thought the federal government might take that role, but he later came to the conclusion that cities and counties closest to the problem were better situated to do so.
While eminent domain has not been used for mortgage notes, Hockett said it’s not unusual for it to be used to acquire intangible property such as stocks, bonds or securities. In a famed case, the city of Oakland tried to use eminent domain to seize the Oakland Raiders in 1980 when the team moved to Los Angeles.
Government has broad powers under the U.S. Constitution to use eminent domain if it can show a public benefit, Hockett said.
“This is a case where the only real surprise is it hasn’t been heard of or tried before,” Hockett said. “It’s very common for eminent domain to be used for purposes of forced sale of intangible property, as well as tangible property, including financial products.”
In a paper he published in April, Hockett describes how a government agency could do that through the creation of a joint powers authority that, working with investors, purchases at fair market value underwater mortgage loans. The paper uses San Bernardino County as its case study, noting its high foreclosure rate.
A May report found that the Riverside-San Bernardino metropolitan area had the highest foreclosure rate among 20 metropolitan areas. One of 179 housing units had a foreclosure filing – more than 3.5 times the national rate.
The program would be geared toward homeowners with a good credit history who are regularly making their loan payments, Gluckstern said. It would be their choice to participate.
The company – which is lining up investors to fund the effort – would purchase the mortgage notes at current market value, and they would be held by the joint powers authority, he said. The loans would be restructured at lower rates for homeowners and then resold on the market as safer assets, such as government-backed securities.
Mortgage Resolution Partners, which could bring more than a billion dollars worth of investment to the effort, would collect a fee on each transaction, according a presentation prepared by the company. That fee and the return investors get would be determined by the agreements negotiated with local officials, Gluckstern said.
As with property condemnations, lien holders would have recourse through the courts to determine fair market value, Gluckstern said.
Chris Katopis, executive director of the Association of Mortgage Investors, a Washington, D.C.-based lobbying group, said investors don’t see the need to use eminent domain.
“We have no guarantee what’s going on is anything more than a land grab,” he said. “They’re going to come in and say, `This is the value because we say it is.’ They’re not discussing this with investors.”
Katopis said the mortgage industry favors finding ways to help homeowners refinance, such as a recently introduced bill by Sen. Dianne Feinstein, D-California, that would provide mortgage insurance from the Federal Housing Authority.
The proposal advocated by Mortgage Resolution Partners could have serious unintended consequences for investors and borrowers, undermining the value of securities and mortgages across the county, Katopis said.
JOINT POWERS AUTHORITY
San Bernardino County Chief Executive Officer Greg Devereaux said he met with a representative from Mortgage Resolution Partners in late 2011 and was intrigued by the idea.
“It’s the first thing we’ve heard about that may be able to deal with enough of the problem to actually impact in a positive way our market and the economy here,” he said.
The county has more than 150,000 homes with underwater mortgages – 20 percent of which are held by bundled securities, Devereaux said.
He said he approached county supervisors informally to see if he should pursue the idea and then began putting together a plan to form a joint powers authority – an alliance of government agencies for a specific purpose.
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