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Local California Officials Consider Using Eminent Domain to Restructure Underwater Mortgages

Posted Jul 5, 2012 7:10 AM CDT
By Debra Cassens Weiss

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Three jurisdictions in California are considering a plan to use eminent domain to acquire underwater mortgages and keep people in their homes.

The unusual idea is being considered by California's San Bernardino County and two of its largest cities, Ontario and Fontana, the Wall Street Journal (sub. req.) reports. A court fight over eminent domain powers is expected if any jurisdiction goes ahead with the plan.

Venture-capital firm Mortgage Resolution Partners is touting the idea. The firm would finance the mortgage seizures with the help of investment banks raising funds from private investors. The underwater loans would be purchased at a low price based on current property values and then refinanced at a slightly higher amount, earning a profit for Mortgage Resolution Partners, its investors and the participating jurisdiction. Borrowers would be eligible to participate in the program if they are current on their mortgage payments.

The Wall Street Journal gives this example: “For a home with an existing $300,000 mortgage that now has a market value of $150,000, Mortgage Resolution Partners might argue the loan is worth only $120,000. If a judge agreed, the program's private financiers would fund the city's seizure of the loan, paying the current loan investors that reduced amount. Then, they could offer to help the homeowner refinance into a new $145,000 30-year mortgage backed by the Federal Housing Administration, which has a program allowing borrowers to have as little as 2.25 percent in equity. That would leave $25,000 in profit, minus the origination costs.”

Investors in the current mortgages say the plan is a bad idea. In the future, banks would be less willing to lend to homeowners and housing values would drop further, they argue.

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