Investment schemes to use eminent domain to take mortgages from banks
"Sooner or later," said Mayor Acquanetta Warren of Fontana, who has seen the value of her own home cut in half, "all these people who are upside down on their homes are just going to leave the keys out on the door and say forget it. This was supposed to be the promised land, and now we have people waiting in some kind of hellish purgatory. The people who were so eager to give us money before now won't even talk to us."
The idea to use eminent domain to seize mortgages first came from a group of venture capitalists in San Francisco, Mortgage Resolution Partners, who would collect a fee for each of the restructured loans. The firm is also trying to persuade officials in Nevada and Florida to try the idea. San Bernardino County officials were immediately intrigued, given that roughly half the homes in the area are underwater and the unemployment rate remains at nearly 12 percent. (Last week, the City of San Bernardino voted to file for bankruptcy, saying it would not be able to cover payroll costs through the summer.)
Officials in Suffolk County, N.Y., where about 10 percent of the homes are valued at less than their loans, are also considering the mortgage plan.
"Nobody else is addressing this adequately, and we're still stuck," said Regina Calcaterra, the chief deputy county executive in Suffolk County. "If Washington or the private sector was able to address this, there wouldn't be a need and we wouldn't even have this conversation."
More than 20,000 homeowners in the county could ultimately be eligible for the program, which would first focus on Fontana and Ontario, two of the largest cities in the county. The county is just beginning to consider how it could move forward with the proposal and officials say they will consider alternatives, but many banking and mortgage groups have already voiced skepticism or hostility about the plan.
Ken Bentsen, the executive vice president of the Securities Industry and Financial Markets Association, said the idea would almost certainly be challenged in court and would have a major impact on the local market.
"If the government has the ability to abrogate the contract at will and at the expense of the bond holder, the investor is going to do one of two things: require a tremendous premium for the risk they are incurring, or just not invest at all," Mr. Bentsen said. "It would be a risk factor that would be impossible to underwrite."