In San Bernardino County, an idea is being explored that would apply the concept of eminent domain to solve the problem of underwater homes in the area. Through eminent domain, the government can take private property from an owner if it can be argued that a greater public interest would be served by doing so. The property owner does receive “just compensation” for the seizure, but the owner does not get to negotiate the amount. Instances of this have been more commonly seen in cases where highways or public facilities needed to be built. Do learn more about eminent domain, click here.
The use of eminent domain proposed in San Bernardino County and supported by the cities of Ontario and Fontana differs from more familiar applications in that it involves the forced purchase of homes from underwater borrowers at “fair” market value. This use of eminent domain was first presented by Robert C. Hockett, a Cornell University law professor. Dubbed the Homeownership Protection Program (HPP), the solution considered proposes to have the local government purchase private label loans from current, underwater borrowers by using financing from Mortgage Resolution Partners. The program would have the original homeowner stay in his or her home, but with a new mortgage and a lower principal balance.
Mortgage Resolution Partners first approached San Bernardino County with the idea. In order to further consider the program, the Board of Supervisors in San Bernardino County approved a resolution to establish a Joint Powers Agreement (JPA) with Ontario and Fontana and other cities that decide to join. Amherst Securities explained in a report that when the loans are refinanced, proceeds would be used to pay back investors who helped finance the program.
Even though many argue that something needs to be done to help underwater homeowners, Amherst Securities disagrees with the approach the JPA is considering. “We believe this use of eminent domain sets a troubling precedent by targeting performing loans in private label securities,” the report stated. The program’s lack of a mechanism to protect homeowners against a less than fair price was also noted as a concern in the report.
Between the two cities that approved the resolution, Amherst found that 3,165 loans meet the program’s criteria. In the report, Amherst stated it believes that the intent of the program is to buy the targeted loans out of the trusts at 75-80 percent of automated valuation model (AVM) on the property.
A joint letter issued by 18 organizations, including Securities Industry and Financial Markets Association, Association of Mortgage Investors, and National Association of Home Builders, expressed strong opposition towards JPA’s consideration of the program. “If eminent domain were used to seize loans, investors in these loans through mortgage-backed securities or their investment portfolio would suffer immediate losses and likely be reluctant to provide future funding to borrowers in these areas. It is essential to remember that investors in mortgage-backed securities channel the retirement and other savings of everyday citizens through their investment funds,” the letter stated.
The letter also stated that program could “further depress housing values in the county by restricting the flow of credit to home buyers.” In an opinion piece published in the New York Times, Robert Shiller, professor of economics and finance at Yale, expressed support for the program’s use of eminent domain to address underwater mortgages.
“The original mortgage holders, the investors in the new mortgages, the homeowners and the nation as a whole will generally be better off. There will surely be some who may not agree, like the holdout farmer opposing the highway, but eminent domain ought to be able to push ahead anyway,” wrote Shiller. He also contended that the “true fair market value for these mortgages is arguably far below their face value, given the likelihood of default, with its attendant costs.”