California, struggling with high foreclosure rates and several cities filing bankruptcy have come up with a new plan. Officials are considering a novel way to seize underwater home mortgages by condemning them and calling them a public blight.
California officials aim to invoke eminent domain to fight a housing blight. They believe they can help some homeowners restructure underwater mortgages by seizing their home by condemning the property, then sell the property to investors who rewrite a new mortgage for the homeowners.
Opponents are scratching their heads saying this latest scheme is appalling and will backfire, making the situation worse.
Eminent domain allows the government (state or federal) to use force to acquire property they want to reuse. Typically, officials use eminent domain when building bridges, roadways or shopping malls and need an individual’s property to complete their task. Property owners are entitled to a compensation the court normally approves. After seizing the property, private investors would provide the funds to pay the holders of the mortgages market value for their holdings and write new mortgages to new investors.
One of the hidden consequences is many of the mortgages are tied to investor’s 401(K) accounts. This could very well jeopardize those accounts putting retirement or life
savings at risk.
Two cities in San Bernardino County, Ontario and Fontana want to invoke eminent domain in a very unorthodox manner. This eminent domain idea is the brainchild of a San Francisco-based, venture-capital firm Mortgage Resolutions Partners (MRP) whose chairman Steven Gluckstern, is the founding chairman of the Democracy Alliance. San Bernardino County, the nation’s 12th most populous county tops 30% unemployment in some parts – one of the highest in the nation.
MRP wants to ‘partner’ with local government, to take money from one mortgage company and give to another under full sanction of the government. MRP would receive a handsome fee for each seizure, very similar to the fee paid by the government to banks that modify mortgages under federal programs. MRP would start in California with a $5 billion dollar effort and grow to a $500 billion multi-state aim.
MRP argues the homeowner must be current with their mortgage and show hardship in order to participate. You cannot have a mortgage with either Freddie Mac or Fannie Mae.
California officials think this is a great idea to solve their local housing problems.
Opponents say this is a hair-brained scheme that will kill a struggling real estate and say the only people making a ‘killing’ will be MRP grabbing high fees for each seizure.
The biggest problem is lenders will stop loaning mortgage money. Why would any lender want to loan money at a price that could be changed at the government’s whim? Experts say this is like buying a new car, driving it off the lot and the following week saying the car is used, lost half its value so the government tells the lender to rewrite your loan at the used half-price value.
No doubt, if this latest California scheme is enacted, it is most likely to be tied up in courts for years, not to mention the millions of taxpayer money that would be needed to implement the program.
Real estate analysts are adamant the government has to stay out of the real estate business and let the market find its bottom and adjust. Looking at past history of all the ups and downs of real estate prices, the market has managed to right itself without government interference. Enacting a program by seizing properties as eminent domain will certainly depress property values for many years to come.
Is this just a desperate measure so more cities won’t file bankruptcy?
I think that this idea is a novel and innovative way to address the wave of foreclosures and push back against the slow -to- act lenders. This type of innovative thinking is exactly what is necessary to fight against the lenders that are to slow and unwilling to fix the system on their own. However, I do not see this type of action actually succeeding. It may be improper for a city to use such condemnation powers in this matter. I believe this idea is unlikely to come to Colorado anytime soon.
Keith A. Gantenbein, Jr. is a Colorado foreclosure defense attorney located in Denver and servicing all of Colorado. He also handles bankruptcies, mortgage negotiations, lender liability, real estate, civil litigation, contracts and landlord/tenant. If you think you will be facing foreclosure, or are in the foreclosure process, or have had a wrongful foreclosure, contact Keith Gantenbein at (303) 618-2122 for a one-hour consultation where he will discuss your situation and go over all your options with you.