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Melissa Griffin: Could California Use Eminent Domain To Save Troubled Mortgages?

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house mortgage rate, foreclosure

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SAN FRANCISCO (KCBS) – On Friday July 27 Lieutenant Governor Gavin Newsom came out in support of a controversial plan to allow local governments to seize underwater properties and restructure the debts.

The plan was first backed by a San Francisco-based investment group called Mortgage Resolution Partners and here’s how it would work:

A. Local government identifies a bundle of eligible mortgages and gives the list to investors who decide which properties to back

B. The local government seizes the loan (not the property) and now owns the loan

C. The original loan holder(s) and government establish a number that represents fair market value – with or without the need for a judge

D. The local government, with the new investor, facilitates refinancing of the home at a reduced rate that reflects the actual value of the home and the investor pays the new rate to the original holder of the loan. The homeowner now pays a mortgage based on the lower value.

E. Investors can now sell the loans to hedge funds, pension funds, etc., with the proceeds going to refinancing investors

To be eligible for this eminent domain process, a house has to be both underwater and the owner (who must also live in the house) has to be current on his or her payments.

So far, San Bernardino County officials, along with two of its bigger cities (Fontana and Ontario) have set up the framework to do this, called a Joint Powers Authority (JPA). San Bernardino county is the largest in the United States (outside of Alaska) with a poverty rate second only to Detroit. County officials estimate that around 20,000 homeowners would be eligible for the program.

Needless to say, members of the mortgage industry are not at all pleased at the prospect of having their loans seized and have come out swinging. The Securities Industry and Financial Markets Association (SIFMA) has commissioned a lengthy legal opinion outlining just why and how every part of this is going to be challenged in court. They also issued a statement on July 19 basically saying they, in any community that participates in this program, getting private mortgage financing in the future is going to be very, very difficult. It was in response to that July 19 statement that Newsom spoke out to say to the association: stop making threats to the local officials of San Bernardino County.

Representatives from MRP are courting officials in other places where real estate has been hardest hit, like Nevada and Florida. The Chicago City Council voted on July 25 to hold a hearing on implications of using the plan in their city.

The Obama administration so far has been skeptical about this proposed eminent domain plan.

In other news, this past weekend, leaders in the California Democratic Party voted on whether to endorse ballot propositions in November.

Most of the endorsements are predictable, with the party endorsing Gov. Jerry Brown’s tax initiative. What is notable is that the party will oppose Molly Munger’s proposal, Proposition 38, which would raise income taxes and give the proceeds to local school boards (bypassing Sacramento) and early childhood programs.

The party could have taken a “neutral” stance on the proposition; that it is actively opposing the proposition is notable. It shows that the party believes that only one tax measure can win in November. It also shows that, while Brown himself hasn’t been publicly campaigning against Proposition 38, he is certainly happy to let his foot soldiers do it for him.

Below is the full list of endorsements of the California Democratic Party 2012 ballot measure endorsements:

Proposition 30: (Brown’s tax measure) YES

Proposition 31: (Budget and legislative process changes): NO

Proposition 32: (No more paycheck deductions for spending on political purposes): NO

Proposition 33: (Auto insurance rates) NO

Proposition 34: (Repeal of the death penalty) YES

Proposition 35: (Human trafficking penalties) YES

Proposition 36: (Changes to “Three Strikes” sentencing laws) YES

Proposition 37: (Labeling genetically-engineered foods) YES

Proposition 38: (Munger’s tax measure) NO

Proposition 39: (Changes taxes for out-of-state corporations) NEUTRAL

Proposition 40: (Redistricting referendum) YES

(Copyright 2012 by CBS San Francisco. All Rights Reserved. This material may not be published, broadcast, rewritten, or redistributed.)

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