(NEW YORK) MintPress – Desperate times require desperate measures, and things couldn’t get much worse for San Bernardino County California.
About 150,000 homeowners, or half of all houses with a mortgage, are underwater on their loans, meaning they owe more than their houses are worth, and the area’s economic struggles last week pushed the city of San Bernardino, the county seat, to file for bankruptcy protection.
Now, San Bernardino officials are considering a plan that would use the local government’s eminent domain authority to confiscate mortgages and restructure them for underwater borrowers. They recently approved an agreement that allows the county and the cities of Fontana and Ontario to create the program.
David Wert, a spokesman for the county, the largest in the country, said it was still in its initial stages and details are not yet firm.
“Under this particular proposal, the county would use its eminent domain authority to condemn the mortgages on negative equity properties and that way the county would take possession — would be the owner of the mortgages,” Wert said. “The mortgages could then be renegotiated at a lower amount.”
“The inland economy is based on the building and selling of homes, and this is one way to stimulate that again,” he explained.
Governments across the U.S. and countries such as Great Britain and Canada have used the powers of eminent domain for centuries to condemn and seize property and compensate owners for their losses. In the latest ruling, the 5 to 4 Kelo v. City of New London decision of 2005, the Supreme Court held that a local government could lawfully use eminent domain to condemn a property and convey it to a private developer.
Officials in Suffolk County, N.Y., where about 10 percent of the homes are valued at less than their loans, are also considering the mortgage plan.
“Nobody else is addressing this adequately, and we’re still stuck,” said Regina Calcaterra, the chief deputy county executive in Suffolk County. “If Washington or the private sector was able to address this, there wouldn’t be a need and we wouldn’t even have this conversation.”
Helpful solution
The plan, which was first proposed to the county by San Francisco-based Mortgage Resolution Partners LLC, targets only borrowers who have been making on-time payments and have loans held in mortgage bonds without government backing.
“In our view, this is helpful, not harmful,” said the firm’s chairman, Steven Gluckstern, an initial member of the national finance committee for President Obama’s 2008 election and a former general manager of reinsurance operations at Warren Buffett’s Berkshire Hathaway Inc. “There haven’t been very many good solutions to this in six years.”
Confiscating the mortgages to reduce the principal for borrowers, while paying investors “fair value” for the loans, will stabilize home prices and fuel the issuance of private securities, he asserted.
Endorsement from economists
Gluckstern’s plan has gained support from Yale University professor Robert Shiller, the co-creator of the S&P/Case-Schiller Index who warned of the housing bubble before its collapse. He argued in a New York Times op-ed piece that “we have to stop the wishful thinking that the problem will solve itself through a spontaneous rally in home prices.”
L. Randall Wray, professor of economics at the University of Missouri-Kansas City, said it at least bears consideration. “There cannot be any recovery until we turn around housing,” he maintained, “Eminent domain may be the only way local governments can try to resolve the crisis.”
His view is backed by Paul McCulley, a former portfolio manager and Federal Reserve watcher for top bond fund operator Pacific Investment Management Company (PIMCO) and now a senior fellow with the Global Interdependence Center think tank. “This is a very intriguing idea,” he said. “A legal system mid-wifed, modern-day jubilee.”
Mounting opposition
Still, and not surprisingly, there is a growing chorus of criticism from banking and mortgage lenders.
The Inland Valley Association of Realtors, which is one of California’s biggest realtor associations, was among the 18 groups, including the California Bankers Association, the Association of Mortgage Investors and the American Bankers Association, that sent a letter to San Bernardino County opposing the use of eminent domain.
The American Securitization Forum trade group told the San Bernardino County Board of Supervisors in a separate letter that the idea will be “short-sighted and ultimately be counterproductive for the residents of San Bernardino County. Moreover, it would violate both the United States and California Constitutions.”
Tim Cameron of the Securities Industry and Financial Markets Association, whose members include asset managers overseeing more than $20 trillion, said that officials should remember pension plans and individual investors may be harmed. In addition, he argued that county residents will find it “harder or impossible to obtain credit” and need to bear the costs of “lengthy and expensive litigation” with the holders of mortgage loans.
All of which infuriates San Bernardino’s chief executive, Greg Deveraux. “There is no doubt that we have a major problem that we have to do something about, or it will probably be a decade, if not two, for our economy to recover. he said. “It’s as if this can’t even be a discussion. If they want to come and talk and propose other solutions, great, but that’s not what is happening. Instead, they are just trying to kill it because they have nothing but their own interest in mind.”
“We’re seven years into things supposedly getting better and we have thousands more foreclosures.”