Officials in San Bernardino County, California, believe they have figured out a clever way to solve the county’s, and possibly the nation’s, housing problems.
Detailed by a Cornell University professor, and pitched by influential San Francisco investors who stand to make a fortune from it, this new idea is based on one of the oldest concepts: the taking of other people’s property.
County officials, joined by the cities of Ontario and Fontana, are considering using an expansive interpretation of eminent domain — typically used to acquire real property to build public works — to seize the mortgages, not the real property, of those homeowners who owe more than their homes are worth.
The funds would be provided by private investors, who would pay the holders of the mortgages “fair market value” and then write new ones for the homeowners based on much lower principal amounts, reflecting the new depressed values of the homes. The firm behind this complex plan, Mortgage Resolution Partners, may be in the running to acquire vast numbers of mortgages at discounted rates. Local officials would have, theoretically, solved their local housing problems. Homeowners would stay in their homes and have much lower mortgages.
Advocates tout it as a win-win solution, but the holders of the mortgages must give up their assets and accept whatever value the governmental authority assigns to their notes.
The “fair market value” probably wouldn’t be based on an expected sales price of the home, but on a wholesale value that would be at least 20 percent lower than that, said Mark Dowling, the chief executive officer of the Inland Valleys Association of Realtors. (The value would probably be based on the fair market value of the mortgage — the home price minus many transaction costs — and thus far lower than the fair market value of the home itself.)
There would surely be unintended consequences. Grabbing private mortgages could lead to a widespread reluctance by private firms to lend money in the county — or at least an increase in the cost of lending in that area. That would be a particular problem given that an obstacle to a revived housing market, especially in low-income, high-unemployment areas, is the inability of homebuyers to qualify for mortgages.
As Gideon Kanner, professor emeritus at Loyola Law School, argues, “If you make a reduction in loan balance available, whether by eminent domain or otherwise, these people will be provided with a powerful incentive to stop making payments on their mortgages, hoping to get bailed out by the government.”
However it shakes out, the plan would create perverse incentives. Mainly, it seems like a way for big players to muscle out the smaller investors who now are competing for short sales and foreclosures.