Can Eminent Domain Solve the Mortgage Crisis?

San Bernardino County has been fighting high unemployment.  Around half the homes there are underwater and the county has a backlog of foreclosed homes.  The San Bernardino is hurting like many areas of the US.  They have set up and public forum and call out for detail proposals to solve this problem for August 16th.

One proposal is expected from Mortgage Resolution Partners a community advisory firm.  The have been in contact with San Bernardino County, the city of Chicago, and other municipalities about a strategy to get homes above water.  To force private mortgage trusts to sell underwater mortgages to the municipality at market value using eminent domain and then mortgaging them back to the home owners. 

Eminent domain is the practice of a government entity taking privately owned land, usually paying fair market value, to be reused either publicly or privately in order to improve the community, economicly or otherwise.  When a new ballpark or highway is built the land is taken threw eminent domain.  It has always been contentious process but has been held up in courts across the US.

The basic process begins with a home that is underwater meaning the value of the house is below what is owed on the mortgage.  Banks and private mortgage trusts (the actual controllers of the mortgage backed securities) would get paid what the house is currently worth.  Now owned by the city or county, the home owners would be able to get a new mortgage based of the actual value.

Mortgage Resolution Partners (MRP) is offering to facilitate this process.  For a flat fee of $4,500 per home, they would back the buyout financially.  They state that the local municipality would set the policy controlling the type of loans and what would qualify.  It is voluntary to the homeowner they could choose to do it or not.

This plan would reduce underwater homes elevating one of the biggest problems in the housing crisis.  It would keep more people in homes.  Reduce future foreclosures by making the loans more affordable and valuable.  Many economists believe that reducing principle on loans is the only reasonable solution to the mortgage crisis.

People, not unexpectedly, have expressed reservations about such a plan.  When you have the Acting Federal Housing Finance Agency Director Edward Demarco, Cato Institute’s Mark Calabria, and investment trade groups like The Securities Industry and Financial Markets Association (SIFMA) all against this measure; you either have a bad idea or a brilliant one.  

It has gotten heated to the point where California’s Lieutenant Governor Gavin Newsom sent out a press release condemning the threats SIFMA has made against communities like San Bernardino County.  “The true injustice of the last few years is that as banks were bailed out and government claimed it has done all it can, the homeowner, the backbone of our communities, has received nothing but eviction notices,” said Newsom. “We need to help the people that government bailout programs have left behind – ordinary folks that have worked hard to keep their homes even as values plummeted.”

This is a plan that seems sound in principle but has some legal hurtles to tackle.  Should it be done with Mortgage Resolution Partners whose CEO Graham Williams was Director of Residential Lending at Bank of America in the 1990’s and was also Sr.VP of Risk Management at GE Capital before this latest venture?  

Any way you look at it, something needs to be done about this 6 year old housing crisis.  This plan is as good as any localized plan I have seen.  


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