A new proposal from local lawmakers in San Bernardino, California, would implement eminent domain to seize severely underwater mortgages in an effort to curb the market's foreclosure crisis, but this has some investors crying foul.
Through eminent domain, the government is allowed to seize private property and put it to public use while financially compensating the lender or investor that owns the mortgage. Under this initiative in San Bernardino, local legislator plan to seize the home loans of families currently saddled with negative equity and allow them to restructure their mortgages into more favorable terms, according to a report from HousingWire.
This initiative was originally formulated by San Francisco investment group Mortgage Resolutions late last year. Mortgage records show that currently more than 50 percent of home loans in San Bernardino are underwater. Add this to an unemployment rate of 11.8 percent, and this has been a point of much stress for the local economy and housing market.
These distressed households have a high chance of defaulting and could further add to the area's foreclosure inventory. Restructuring their debt could help to eliminate this threat.
"I don't see this as interruptive to the financial system," Mortgage Resolutions chairman Steven Gluckstern told HousingWire. "I think it begins to recognize losses that have already been taken through the private-label security system. And more importantly, it begins to restore consumer confidence because this is a drag on the whole economy."
Critics oppose eminent domain
However, rather than paying investors holding the mortgage purchased up front, the payments made after a household is granted a refinance will be used as part of a repayment plan. But some companies feel this could leave some investors shortchanged.
Specifically, Amherst Securities Group fears that through eminent domain, many mortgages will be purchased for less than their actual worth, and investors will be forced to take a loss.
"Eminent domain could conceivably be used to do what the pooling and servicing agreements do not allow for - restructuring of performing loans under tightly guarded parameters," analysts from the company said.
Amherst Securities Group recognized that this initiative could help numerous household in the area, but feels that the cost significantly outweigh the benefits.
Since this idea was formulated, three other nonprofit groups have approached lawmakers in San Bernardino with different plans to help resolve the underwater mortgage crisis in the area. Two of these ideas still involve the use of eminent domain.