Calling it a classic case of innocent victims versus innocent victims, a Superior Court judge Thursday told residents in one area of the massive Monterey Hills redevelopment area that they cannot continue a mortgage strike against bondholders who had invested in the now-crumbling project.
Residents in the Eaton Crest section of the redevelopment area had asked Judge Eli Chernow to bar several lending institutions from foreclosing on as many as 70 homeowners who began withholding their mortgage payments last August. The institutions collect the money on behalf of the bondholders.
Saying that they are unable to sell or, in many cases, rent their damaged condominiums, the residents asked Chernow for permission to make payments into a trust account that eventually could be used to help them recoup their losses.
'Open a Floodgate'
Had the 70 residents been successful, some among them predicted, it "could open a floodgate" of mortgage strikes by homeowners in other sections of the 1,600-unit town house and condominium development northeast of downtown Los Angeles.
"Now, they will continue to pay mortgages or foreclosures can occur," Eaton Crest attorney Joel Castro said after the court hearing. "I think this is going to dissuade owners from engaging in a mortgage strike."
Built atop canyons that are settling more each day, many of the Monterey Hills condominiums, including the 198 Eaton Crest units, are tilting and cracking apart. The settling is so severe in spots that city inspectors last month ordered residents in one 36-unit building to vacate because of fear that the units could collapse.
To recover their losses, at least four of the hillside's more than two dozen homeowners associations and scores of individuals have sued the city's Community Redevelopment Agency and others involved in the housing venture. Many of the homeowners want the agency to buy back their units, which originally sold at prices from about $80,000 to the low $100,000s and at interest levels well below prevailing rates.
A Legal Morass
Arguing that its funds are limited and the buildings repairable, the CRA has refused to buy back the units. In addition, the agency and others have filed suits of their own, creating a legal morass of Gargantuan proportions.
But while Chernow said he believes that the homeowners have good cases pending against the CRA and others involved in the troubled project, he said he could not penalize innocent bondholders for mistakes they were not responsible for.
"We have a situation where the (Eaton Crest homeowners) plainly have shown, through no fault of their own, they are in a truly unfortunate position," Chernow said. "But we also have the interests of a number of other innocent parties . . . who made investments in bonds."
The judge, however, agreed with a request by Eaton Crest's attorneys to bar the CRA from collecting on its portion of the monthly mortgage payments, described by CRA attorney Laurie Zelon as a "very small" segment of the homeowners' notes. She would not be more specific.
"It seems to me to be a solution to protect the bondholders," Zelon said of the judge's ruling. "The CRA is content to leave that money."
Payments Could Be Forgiven
Chernow also said he believes that future mortgage payments could be forgiven if homeowners win in their various actions against the CRA.
Under the complex mortgage program established for much of Monterey Hills, homeowners make their mortgage payments to banks, which in turn pass the money on to a bond administrator hired by the CRA. The bond administrator forwards the bulk of the money to the actual bondholders, which include both individuals and institutions. Fees, interest payments and a reserve account are financed out of the remainder. The CRA is one of those entitled to interest payments.
In arguing that a mortgage strike was justified, Castro said mortgage insurance or funds held in reserve could be used to cover any bondholders' losses.
"As it currently stands," Castro said, "all the homeowners at Eaton Crest are locked, are held hostage to their homes." Castro said he does not believe that the CRA has enough money to repair the buildings, much less buy out the homeowners if the courts ultimately order that.
Balk at Paying Claims
So far, many of the companies that insured participants in the project have balked at paying claims, and the Los Angeles City Council recently turned down a CRA request to issue $10 million in bonds to finance repair work.
Putting the mortgage money in a trust account, Castro said, "will guarantee some funds exist when it comes time to pay off the owners."
But CRA counsel Zelon argued that while the situation at Monterey Hills may not be "what everyone hoped it would be . . , no one forced (homeowners) to take those mortgages. . . . They were merely made available."
Moreover, Zelon said, the Eaton Crest units remain livable. "Part of the purpose of buying homes is having a place to live," she said. "What they have is habitable units. They (the bondholders) are the innocent parties."