San Bernardino County moved a step forward Thursday with its plans to restructure underwater mortgages through the use of eminent domain.
The county unanimously passed a resolution authorizing its staff to create a request for proposal, a formal mechanism for considering plans to address the glut of underwater borrowers.
During an hour-long meeting, the county's board of supervisors listened as 18 citizens, local activists and mortgage lenders all objected to a plan initially proposed by a San Francisco venture capital firm Mortgage Resolution Partners to use eminent domain to purchase and refinance loans.
Some homeowners voiced their mistrust of the venture capital firm and questioned its relationship with county officials. A few Realtors and lenders who also are homeowners in the county are also concerned that if the county uses eminent domain to seize loans, lenders would pull out of the market, reducing accessing to credit for future borrowers and potentially dragging down home prices.
Despite the objections, the county is moving forward. While passing the resolution was a procedural step, it demonstrates that the county "is not backing down" from the considerable amount of pressure from mortgage-backed securities investors and government agencies to scrap the plan altogether, says Isaac Boltansky, an analyst with Compass Point Research & Trading.
"The procedural wheels continue to spin in San Bernardino," Boltansky wrote in a report Thursday. "The one guarantee from today's hearing is that the debate is likely to continue for the foreseeable future as the procedural process to assess plans such as eminent domain is just now officially beginning."
Last week the Federal Housing Finance Agency threatened it would take action to stop local governments from seizing mortgages.
The plan initially proposed by Mortgage Resolution Partners calls only for the seizure of loans in which borrowers are current but owe more on their mortgages than their homes are worth. Since the loans are performing and have higher-than-market interest rates, Rayl says banks will fight any attempt to seize the loans for less-than-market value.
"It would be nice to find some relief for homeowners but this proposal won't do that," he says.
The American Securitization Forum's Executive Director Tom Deutsch said earlier this week in a statement, that "the proposal to use eminent domain to seize underwater mortgages is both bad public policy and unconstitutional."
In his testimony, Deutsch used the example of San Bernardino County's plan to acquire underwater residential properties. He said that the two components of the the county's plan to hand select the best borrowers and paying considerably less than the property's price seem critical to MRP's plan, resulting in "MRP reaping substantial profits for itself and its investors."