Including Eminent Domain Power As Part Of Foreclosure-Quashing JPA Draws Fire

Powerful opposition is forming to the inclusion of eminent domain as a key component of the foreclosure fighting arsenal a newly-formed homeowner assistance joint powers authority is seeking to acquire.
The county of San Bernardino and the cities of Fontana and Ontario have banded together to form the Homeowner Protection Joint Powers Authority, which is charted to assist “underwater” homeowners and stave off pending foreclosures.
Throughout the county, 264,122 of the 488,422 single family homes in its constituent 24 incorporated cities and towns and unincorporated areas have at some point in the last four years been underwater. Of those 264,122 homeowners whose homes cost more than their current assessed value, 63.7 percent or 168,246 had received notices of default. Unemployment in the county is roughly 12.6 percent.
At the prompting of county chief executive officer Greg Devereaux, the joint powers authority was formed and a  variety of approaches to the problem have been contemplated, including bringing in private broker negotiators to change the terms of loans or coordinating relief for beleaguered  homeowners through the federal Home Affordable Refinance Program, along with an innovative strategy that calls for using government’s power of condemnation to seize the mortgages on those upside down homes to allow those homeowners on the brink of being thrown out on the street to renegotiate downward the terms of their loans.
Historically, the power of eminent domain has been used by governments to force private landowners to sell property, i.e., real estate, needed for public improvement projects. Under that process, a legislative body or local governing board condemns the property and takes the property in exchange for what is determined to be fair market value. Previously, eminent domain had been utilized for public works projects such as roads, bridges, water treatment facilities and the like. In 2005, the U.S. Supreme Court, in the case of Kelo v. New London, widened the government’s eminent domain authority to allow the city of New London, Connecticut to seize from Suzette Kelo her home so the property could be in turn provided to a private developer for development in conjunction with a redevelopment plan.  The court, in a 5-4 decision, ruled the 3,169 new jobs and $1.2 million a year in tax revenues to be realized as a consequence of the development justified the seizure from Kelo, since the project could be construed as a benefit to the community and as such was a permissible “public use” under the Takings Clause of the Fifth Amendment.
Some see in Kelo v. New London an opening that will allow eminent domain to be used in other circumstances where community benefit can be cited as justification.  One of those at the forefront of that movement is the San Francisco-based investment group, Mortgage Resolution Partners. Mortgage Resolution Partners is seeking to create a niche for itself by working to counteract the proliferation of so-called securitized mortgages, i.e., the practice of bundling mortgages which are then sold to massive numbers of investors. That practice has been seen as a contributory factor to the mortgage crisis because it has created a situation in which a single lender no longer holds the mortgages, preventing homeowners from renegotiating their loans when the value of their property has plummeted.
Mortgage Security Partners has offered to work with the Homeowner Protection Joint Powers Authority toward its goal by applying eminent domain against mortgage holders.  Mortgage Resolution Partners has already secured the backing of investors representing over a billion dollars in ready capital to fund the effort and take possession of the mortgage notes in line with the current market value of San Bernardino County homes they are tied into. The homeowners would get renegotiated loans that reflect the actual value of the property. Mortgage Resolution Partners would earn a fee on each transaction.
Eminent domain long has been derided as a potentially onerous and overreaching power of government. The contemplated expansion of that power triggered the objections of eighteen real estate and banking business and trade entities, who last week collectively sent a letter to San Bernardino County, Ontario and Fontana bemoaning any approach that would involve the use of condemnation proceedings to acquire mortgage notes.
The trade groups maintain the plan to use eminent domain constitutes “very serious legal and constitutional issues,” that would prove “immensely destructive to U.S. mortgage markets by undermining the sanctity of the contractual relationship between a borrower and creditor.”
In the letter dated June 28 to the San Bernardino County Board of Supervisors and Fontana and Ontario city councils, the organizations, including the Inland Valleys Association of Realtors, American Bankers Association, National Association of Homebuilders, the Securities Industry and Financial Markets Association, and the Association of Mortgage Investors  maintain that contrary to alleviating the foreclosure crisis, the use of eminent domain could worsen an already bleak real estate market by creating reluctance on the part of banks and lending institutions to make loans. “This program could actually serve to further depress housing values in the county by restricting the flow of credit to home buyers,” the letter states.

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