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LEGAL ISSUES UPDATE Eminent Domain for Underwater Mortgages

Posted By USFN, Wednesday, February 6, 2013
Updated: Monday, November 30, 2015

February 6, 2013


by Hassan Elrakabawy
The Wolf Firm
USFN Member (California)

The controversial proposal, first floated in San Bernardino County to seize and restructure the mortgages of homeowners who are current but underwater, appears to have retreated in the past few months in the face of vocal, organized opposition, but the proposed program could still go forward in 2013.

The concept, hatched early in 2012 by Mortgage Resolution Partners (MRP), a San Francisco firm, has attracted attention from several municipalities across the country — including Wayne County, Michigan; Chicago, Illinois; and, of course, several towns in California. It would allow local governments to use their power of eminent domain to seize mortgages, permitting private investors to purchase the mortgages at a discount, write them down to fair market value, and then create modified payments for borrowers based on the reduced principal balance due. The loans would then be sold to hedge funds, pension funds, or other investors, with the proceeds being used to pay off outside investors, obtained by MRP, who are funding the eminent domain process. MRP would take a fee for each loan seized and modified, and the original bondholder would be out the difference between what was owed on the original mortgage and the renegotiated loan at current market value. The county would retain the mortgage notes.

Several industry groups including, among others, the American Bankers Association, the American Securitization Forum, the Association of Mortgage Investors, the California Bankers Association, the Community Mortgage Banking Project, the Mortgage Bankers Association, Sifma, and the Financial Services Roundtable have banded together to oppose the proposal. Some federal agencies have even issued statements warning that it could make it harder for borrowers to get loans and force lenders to levy additional fees as a safeguard against government mortgage seizures.

In September 2012, U.S. Rep. John Campbell (R-Irvine, CA) introduced federal legislation to prohibit the nation’s top four mortgage lenders — Fannie Mae, Freddie Mac, the Federal Housing Administration, and the Veterans Administration — from purchasing or guaranteeing loans in counties or cities that use eminent domain to seize underwater mortgages. That bill has since died in session, but it or something similar could very well be introduced or reintroduced. On the other side of the issue, U.S. Attorney General Eric Holder and California Lieutenant Governor Gavin Newsom have recently requested that federal prosecutors investigate any attempts by Wall Street investors and government agencies to “boycott” California communities that are considering such moves.

It remains to be seen what the next steps will be. San Bernardino County has formed a joint-powers authority (JPA) with the cities of Ontario and Fontana to consider MRP’s proposal. The JPA met in late January and decided against considering proposals that would utilize eminent domain to “fix” the mortgage crisis in that California county. Other towns and communities around the nation facing depressed housing values will surely be watching for any further developments early in the New Year on this issue. If nothing gets accomplished in the first half of the year, many observers predict MRP will give up on the concept.

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Winter 2013 USFN Report

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