A controversial new proposal for cities to seize underwater mortgages through eminent domain is unfolding into sharp clashes between mortgage investors and would-be rescuers of depressed housing markets.
At issue are hearings held by a so-called “Homeowners Protection Program Joint Powers Authority” established by California’s San Bernandino County and two of the county’s cities, Fontana and Ontario, which are weighing plans to ease a persistently deep housing crisis in the region, known as the Inland Empire.
Most of the attention, and controversy, surrounds a proposal by the San Francisco-based venture capital group Mortgage Resolution Partners (MRP), which purports to be a private-sector solution to the housing crisis.
MRP’s plan, called CARES (“Community Action to Restore Equity and Stability”), entails the acquisition of “deeply underwater” mortgages at valuations determined by a court. MRP boasts the privately funded initiative means it would come at no cost to cities in San Bernardino or elsewhere; similarly, homeowners pay no fees or higher taxes for the CARES program. Also, by working only with current mortgages, MRP says its program avoids the moral hazard of inducing default in contrast to other loan modification programs.
To some officials in distressed housing markets like San Bernardino’s Inland Empire, MRP’s plan seems to offer a no-cost way to help residents weighed down by mortgage debt, thereby freeing up consumer spending that could lift the region’s economy.
But SIFMA, the Securities Industry and Financial Markets Association, representing investors in mortgage-backed securities, is having none of it. The industry association is warning that eminent domain is not a genuine solution to the Inland Empire’s housing problems.
In a letter submitted Friday to San Bernardino’s Joint Powers Authority (JPA), SIFMA says the MRP plan, if adopted, will drive lenders and mortgage investors away from the region, thus making it harder and costlier for residents to obtain credit.
“If performing mortgage loans are taken from their holders, this will cause significant losses to those holders, and cause those who fund mortgage loans to act very cautiously,” SIFMA said.
SIFMA also cited “legal and constitutional concerns,” and unsubtly suggested the county and JPA can expect to “become entangled in lengthy and expensive litigation with the holders of mortgage loans” –i.e. SIFMA.
Finally, SIFMA frontally attacked MRP, saying: “If San Bernardino were to adopt MRP’s plan … it would position itself as a facilitator of a group of opportunistic investors’ unjust, and likely unconstitutional, efforts to extract profits from a different group of investors.”