Joe Nelson and Andrew Edwards, Staff Writers
Posted: 09/15/2012 12:43:49 AM PDT

Related stories: Future is uncertain for foreclosure idea | The basics | The pros and cons | What would stop it? | Meet some of the key players A San Francisco investment firm is poised to take on Wall Street and the mortgage industry with an unprecedented proposal to have local government use eminent domain to acquire underwater mortgages.

Mortgage Resolution Partners has pitched the idea to municipalities across the U.S. hardest hit by the subprime mortgage crisis, including Sacramento, Berkeley, Las Vegas and Chicago.

But San Bernardino County is the first to have taken actual steps to consider the unique proposal, and all eyes appear to be on the county to see what action it will take.

“I think they’re kind of waiting to see what happens here,” said Inland Empire economist John Husing, who believes the idea presents the first clear path in developing a strategy that could ultimately solve the subprime mortgage crisis. “Whether it’s Mortgage Resolution Partners or some other strategy, the fact is, if you can’t figure out a way to bring down what people owe (on their mortgages), then we’re stuck in this recession for multiple years.”

Eminent domain is typically used by government as a tool to acquire private property, at fair market value and via court order, for redevelopment or infrastructure projects. But Mortgage Resolution Partners’ proposal, if implemented, could establish new case law as to how the process is used.

San Bernardino County is among the country’s most severely affected areas in terms of foreclosures. Out of 317,000 mortgages in the county, about 150,000 of them are underwater.

Success or failure in solving the problem via eminent domain or some other means may influence how other communities attempt to solve their own problems.

But it’s Inland Empire officials who find themselves in the role of deciding whether to press forward with an untested solution to a problem that has eluded a political resolution for about half of a decade.

But questions abound, and those questions are generating political heat, from Wall Street to Main Street, from Congress to Sacramento and from The Wall Street Journal to the Huffington Post. Is the proposal legal? Will it stimulate or depress economies? Is it even necessary, given some tentative signs the housing market may finally be on the upswing after five years of weakness?

Taking communities back

Mortgage Resolution Partners Chairman Steven Gluckstern isn’t derailed by the questions.

For him, the plan is about erasing debt and giving households breathing room to stay in their homes, make more purchases, and thus propping up the overall economy.

And it hits the heart of Wall Street, which created the housing bust in the first place, he said.

Here’s the way it works:

Local governments would identify which loans are most likely to default or which have defaulted, and then “seize” them using eminent domain.

They would identify them from a pool of debt held by “private label” mortgage-backed securities – sliced and diced pieces of loans held in trust that are bundled and sold in bulk to private investors across the globe.

Mortgage Resolution Partners would use its investors’ dollars to pay off the holder of the mortgage at a fair market rate.

The county, once securing the loan notes, would modify the loans to current market value, which would lower monthly mortgage payments and allow homeowners to build equity.

The loans would then be sold to hedge and pension funds or other investors, with the proceeds being used to pay off the outside investors who funded the eminent domain process. Mortgage Resolution Partners would take a flat fee of $4,500 for each loan seized.

Homeowners would have no say about whether their loans would be purchased, and there is no way for them to opt out of the program. They can decline, however, to refinance.

In the end, it would all come at little to no cost to taxpayers, according to the firm.

Originally, the plan would have helped only a small fraction of homeowners who had been current on their mortgage payments for at least 12 months.

But this month the firm expanded its idea to include homeowners who have defaulted or who are delinquent on their loan payments.

That, according to the firm, would expand the pool of homeowners who could be helped from about 5,000 to 15,000, and up to 42,000 families countywide – if other local cities were to join a joint-powers agency set up to explore the proposal.

At the moment, the agency includes the cities of Ontario and Fontana, and the county.

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