Eminent domain raises legal concern
Joe Nelson, Staff Writer
Created: 07/04/2012 11:15:06 PM PDT

Legal analysts are giving conflicting views on whether a proposed program in San Bernardino County to help homeowners with negative equity stay in their homes could withstand a legal challenge.

San Francisco-based investment firm Mortgage Resolution Partners has proposed the county use eminent domain to seize control of underwater loans and then modify them for homeowners at affordable rates.

The loans would then be sold to hedge and pension funds or other investors, with the proceeds being used to pay off outside financiers, who would fund the eminent domain process.

Mortgage Resolution Partners would take a fee for each loan seized through eminent domain, a process typically used by government to seize private property, at fair market value, through court order for redevelopment or large-scale infrastructure projects.

San Bernardino County’s proposed program would be the first time eminent domain would be used to condemn private-label mortgage-backed securities, not real estate, in the public interest. The original bondholder would be left eating the difference between what was owed on the original mortgage and the renegotiated loan at current market value.

And that has prompted the lender and real estate community to start circling the wagons.

“Certainly banks, I think, are nervous the way this program is lined up,” said Brian Murray, an attorney for the law firm Jones Day, who heads the firm’s Issues and Appeals practice in Chicago. “The only people who take a loss on this are the holders of the mortgage-backed securities. We’re already formulating strategies for banks interested in fighting this.”

He argued that rather than taking property for public purposes as the state Constitution requires, the proposed program only functions if private investors – in this case, Mortgage Solutions Partners – extract profits from the mortgages, making any public benefits merely incidental.

“We believe the U.S. Supreme Court has made it clear that a taking has to be for a public purpose,” Murray said. “When this whole venture was set up to make money for this investor organization, that doesn’t sound like a public purpose.”

On June 19, the Board of Supervisors approved a joint powers authority (JPA) with the cities of Ontario and Fontana to begin discussing program options. While the county is intrigued with Mortgage Resolution Partners’ proposal, county Chief Executive Officer Greg Devereaux said no program will be approved without thorough vetting and public approval.

The first public meeting of the JPA will occur this month, but has not yet been scheduled, county spokesman David Wert said.

Robert C. Hockett, a professor of law at Cornell University who has been working as a consultant for Mortgage Resolution Partners, said the U.S. Supreme Court and the state Supreme Courts have maintained that urban blight, which San Bernardino County is arguing the underwater mortgage crisis has caused, is at the core of the public-use argument for eminent domain.

“That is a classic public use. There is no classic textbook case than urban blight,” Hockett said.

He cited a landmark case in 2005 in which the U.S. Supreme Court affirmed an expanded concept of eminent domain in its controversial Kelo v. New London decision.

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