Eminent domain shelved in San Bernardino

The proposal set up by San Bernardino County that would use eminent domain to seize mortgages to help reduce the area’s massive negative equity was declined by the Homeownership Protection Program Joint Powers Authority Thursday. 

However, the JPA voted unanimously to issue a Request for Qualifiactiosn seeking plans to address the mortgage crisis.

The office of Gregory C. Devereaux, Chief Executive Officer of San Bernardino County said that mortgage analysts warned their team of unintended consequences.

“It’s wrong to impose that risk on the community without support from the community, and that level of support has not materialized,” Devereaux said. “We don’t want to do more harm than good in what we choose to do.”

The JPA decided to explore other options once homeowners also began to express dissatisfaction with the concept. 

There were additional concerns that the ability of the JPA to come up with more workable solutions was clouded by the chance of eminent domain passage. Thus, a more diplomatic atmosphere would emerge in the wake of its abandonment. 

The continued consideration of the possible eminent domain would interfere with efforts to work with the banking, mortgage, real estate and investment communities in making various forms of assistance available to local homeowners, Deveraux noted. 

American Securitization Forum executive director Tom Deutsch approves of Devereaux and other JPA members decision to not consider use of eminent domain to seize mortgages. 

“We hope that today’s expressed views after San Bernardino County’s due diligence on the issue is a strong signal to other jurisdictions that the question of whether eminent domain to seize mortgage loans is a prudent and legal public policy has been asked and answered,” Deutsch said.

He added, “Use of eminent domain would ultimately be counterproductive to the housing market and the return of private capital to the mortgage finance system.”

Similarly, the Securities Industry and Financial Markets Association stated its opposition earlier this year to the use of eminent domain including the impact the plans would have on mortgage lending, mortgage finance markets and mortgage investors.

“The use of eminent domain confronts lenders and investors with an unquantifiable new risk, which will reduce the amount of credit available to potential homeowners and causing irreparable damage to the recovering national housing market,” said Randy Snook, SIFMA executive vice president.

He added, “These negative outcomes will vastly outweigh any small benefits that jurisdictions might hope to achieve using these proposals.”

The rejection of the eminent domain proposal spells good news for investors because the plan would not protect investors against purchases at less than fair value.

Since it appears that neither servicer nor trustee have the fiduciary obligation to fight for fair value in eminent domain takings, investors would have very little representation.

The decision to not move forward with eminent domain is also a positive for homeowners who back in August pushed against the idea.

Residents in the area were suspicious of the eminent domain proposal and the investor group pitching it.

The proposal first surfaced in the California county in the summer of 2012. 

The government there would use private capital raised by Mortgage Resolution Partners to acquire current but underwater home loans, write down the principal and refinance them into new Federal Housing Administration mortgages. 

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