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Investors attack San Bernardino County's plan to seize mortgages

The benefits of the idea — which would use eminent domain and private funds to acquire and restructure underwater mortgages — are called into question.

July 14, 2012|By Alejandro Lazo, Los Angeles Times
  • A Moreno Valley home was one of many in the Inland Empire to enter foreclosure in recent years.
A Moreno Valley home was one of many in the Inland Empire to enter foreclosure… (Francis Specker / Bloomberg…)

A plan to seize and restructure troubled mortgages using eminent domain in San Bernardino County is under assault by investor groups, which call it unconstitutional and potentially costly to homeowners.

The cities of Ontario and Fontana, in partnership with the county, are exploring using private funds to acquire mortgages that are "underwater," where the homes wouldn't sell for enough money to pay off the loans. Under the Homeownership Protection Program, the loans acquired by government authority would be restructured, lowering the amount owed, with the intent of helping the owner keep the home.

Seizing mortgages in this way would result in losses for public pension plans, 401(k) plans and individual investors who bought the individual loans as part of a packaged group of securities, said Timothy W. Cameron, managing director of the Securities Industry and Financial Markets Assn.'s asset management group.

Cameron was one of several investor representatives who traveled to San Bernardino from as far as New York and Washington to speak Friday in opposition to the idea at the first meeting of a so-called Joint Powers Authority. That authority was created by the county and cities last month to explore the eminent domain plan, proposed to the county by a San Francisco firm named Mortgage Resolution Partners.

"When loans are taken from securitized pools, the losses will be borne by the pension plans and individual citizens who are invested in the securities," Cameron said. "We need mortgage investors and lenders to come back to these fragile markets — but this plan will force both groups to avoid them."

Paul Herrera, government affairs director of the Inland Valleys Assn. of Realtors, said that the process of exploring the eminent domain plan had not been transparent and could lead to higher borrowing costs for potential buyers in the midst of a tentative housing recovery.

"We're here because entire communities could be caught in the blast radius of this eminent domain detonation," he said. "It stands to make every purchase more expensive and every home just a little further out of reach of average citizens."

Leland Chan, general counsel for the California Bankers Assn., told members of the authority that the plan to take over only loans that were performing, and therefore making still making money for existing investors, was a practice of "cherry picking" the best loans so the plan's investors could profit.

"This raises an important legal question: Does this eminent domain scheme even advance a public purpose?'" Chan said. "The main effect seems to be to transfer ownership of performing loans from one private party to another."

Steven Gluckstern, chairman of Mortgage Resolution Partners, said the plan would principally benefit homeowners and not investors or his firm. But because the plan relies on private capital, it needs to be profitable for people willing to invest money in it, he said.

"It serves principally to benefit homeowners," Gluckstern said in a telephone interview after the meeting. He added that the plan would benefit the community because homeowners freed from troubled mortgages would be able to spend money locally and pay taxes.

Mortgage Resolution Partners would earn a flat fee of $4,500 for each mortgage restructured. The firm has employed investment banks Evercore Partners and Westwood Capital to raise money for the initiative from private investors to fund the plan.

Cornell Law Professor Robert C. Hockett, who advised Mortgage Resolution Partners on the design of the proposal, has argued that the initiative should pass muster in courts because they have had a long tradition of upholding cities' eminent domain powers as long as the valuation methods used to acquire properties are sound.

Hockett has said that using eminent domain to seize underwater mortgages that have been securitized makes sense because often those mortgages can't be sold at market value for legal reasons. Often, those loans must be sold at face value — a higher price — because of the contracts governing them, he previously told The Times.

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