In the foreclosure-battered inland stretches of California, local government officials desperate for change are weighing a controversial but inventive way to fix troubled mortgages: Condemn them.
Officials from San Bernardino County and two of its cities have formed a local agency to consider the plan. But investors who stand to lose money on their mortgage investments have been quick to register their displeasure.
Discussion of the idea is taking place in one of the epicenters of the housing crisis, a working-class region east of Los Angeles where housing prices have plummeted. Last week brought another sharp reminder of the crisis when the 210,000-strong city of San Bernardino, struggling after shrunken home prices walloped local tax revenues, announced it would seek bankruptcy protection.
Now â€" and amid skepticism on many fronts â€" officials from the surrounding county of San Bernardino and cities of Fontana and Ontario have created a joint powers authority to consider what role local governments could take to stem the crisis. The goal is to keep homeowners saddled by large mortgage payments from losing their homes â€" which are now valued at a fraction of what they were once worth.
"We just have too much pain and misery in this county to call off a public discussion like this," said David Wert, a county spokesman.
The idea was broached by a group of West Coast financiers who suggest using the power of eminent domain, which lets the government seize private property for public use. In this case, they would condemn troubled mortgages so they could seize them from the investors who own them. Then the mortgages would be rewritten so the borrowers would have significantly lower monthly payments.
Steven Gluckstern, chairman of the newly formed San Francisco-based Mortgage Resolution Partners, says his main concern is to help the economy, which is being held back by the mortgage crisis.
"This is not a bunch of Wall Street guys sitting around saying, 'How do we make money?'" he said. "This was a bunch of Wall Street guys sitting around saying, 'How do you solve this problem?'"
Typically, eminent domain has been used to clear property for infrastructure projects like highways, schools and sewage plants. But supporters say that giving help to struggling borrowers is also a legitimate use of eminent domain, because it's in the public interest.
Under the proposal, a city or county would sign on as a client of Mortgage Resolution Partners, then condemn certain mortgages. The mortgages are typically owned by private investors like hedge funds and pension funds.
Under eminent domain, the city or county would be required to pay those investors "fair value" for the seized mortgages. So Mortgage Resolution Partners would find private investors to fund that.
Mortgage Resolution Partners will focus on mortgages where the borrowers are current on their payments but are "under water," meaning their mortgage costs more than the home is worth. After being condemned and seized, the mortgages would be rewritten based on the homes' current values. The borrowers would get to stay, but with cheaper monthly payments. The city or county would resell the loans to other private investors, so it could pay back the investors who funded the seizure and pay a flat fee to Mortgage Resolution Partners.
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