Plan to Use Eminent Domain for Underwater Homes Abandoned

by devteam January 25th, 2013 | Share

Eminent Domain</bis no longer under consideration as a mortgage modification tool in SanrnBernardino County California.  The Countyrnand two of its cities, Ontario and Fontana have announced they are abandoning arnproposed plan to use that power to assist local homeowners with underwaterrnmortgages. </p

Under thernproposal the local governments would use their eminent domain authority tornpurchase loans from investor pools at less than face value.  They would then restructure them to reflectrnthe actual value of the underlying collateral, repackage the new loans, andrnsell them to other investors.  SanrnBernardino County, located in southeast California’s Inland Empire had arnpopulation explosion during the housing boom and then was hard hit especiallyrnhard by foreclosures and price declines. rnThe City of San Bernardino is currently seeking bankruptcy protection.   </p

The threernentities formed a Joint Powers Authority (JPA) last summer to study the eminentrndomain idea proposed to them by Mortgage Resolution Partners, a San Franciscorninvestment firm also established last summer by Phil Angelides apparently forrnthe sole purpose of facilitating such mortgage purchases.  Angelides is the former chair of the FinancialrnCrisis Inquiry Commission which investigated and issued a lengthy report on therncauses of the U.S. housing market collapse. rnAccording to a report earlier this month from Reuters, Angelides wasrnseeking financial backers for his company, telling potential investors theyrnmight realize a 20 percent annual return.</p

The JPA votedrnunanimously on Thursday to table the proposal due, its chairman said, to a lackrnof public support but that it was looking into other alternatives to helprnhomeowners in the three jurisdictions.    After the JPA had first announced its intentionrnto study the idea it was picked up by other cities including Chicago andrnBrockton, Massachusetts.  </p

The proposalrnalso gathered a lot of negative attention from interested parties whornmaintained that use of eminent domain for such a purpose would be an overreach,rnconstitute an unconstitutional use of the eminent domain power and anrnunwarranted abridgement of investors’ property rights.  The Acting Director of the Federal HousingrnFinance Agency (FHFA) Edward J. DeMarco opened a period of public comment onrnthe proposal which had the potential of impacting loans owned or guaranteed by FanniernMae and Freddie Mac which are in FHFA conservatorship.  California representative John Campbellrnintroduced a bill, The DefendingrnAmerican Taxpayers from Abusive Government Takings Act which wouldrnhave prohibited the Fannie, Freddie, FHA and the VA from buying loans in anyrncommunity adopting such a plan.   </p

The most vocalrnopponent was the Securities Industry and FinancialrnMarkets Association (SIFMA) which represents the securities industry.  They issued a number of press releasesrnindicating that any such action by a local government would result in a virtualrnshutdown of mortgage credit in that community. rnFollowing the announcement that eminent domain was off the table SIFMArnissued a statement which said in part, “We are encouraged to hear that therncounty has decided it will not pursue use of eminent domain to restructurernmortgages. As SIFMA has said, the unprecedented, potential use of eminentrndomain would cause severe damage to struggling housing markets and is likelyrnunconstitutional on its face. We are pleased that the County as recognizedrnthese risks and decided to move in other directions.”</p

The statementrnalso gave some indication SIFMA may have been negating with the JPA about therndecision.  “The industry has remainedrncommitted to helping homeowners stay in their homes, and today we affirm to bernmore actively engaged with San Bernardino County. A number of existing programsrncan be better utilized and SIFMA, along with the JPA, are committed to workingrnwith servicers and local elected officials to assist homeowners.” </p

Accordingrnto the Los Angeles Times, StevenrnGluckstern, chairman of Mortgage Resolution Partners, said that while he wasrndisappointed by JPAs decision, his group is in discussions with more than 30rnother jurisdictions across the country and “he was confident that one of themrnwould probably enact the plan during the first three months of this year.”

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About the Author


Steven A Feinberg (@CPAsteve) of Appletree Business Services LLC, is a PASBA member accountant located in Londonderry, New Hampshire.

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