Local residents and mortgage finance experts lined up at a San Bernardino County hearing Thursday to push back against the idea of seizing underwater mortgages through eminent domain.
The county set up a special authority committee to consider ideas for addressing the severe negative equity problem in the area. County officials did approve during the hearing Thursday the drafting of a formal request for proposals, which will be released at a future hearing.
The local government is considering using private capital led by Mortgage Resolution Partners to acquire current and underwater mortgages for less than fair market value, write down principal and refinance them into a Federal Housing Administration loan.
County CEO Greg Devereaux said they would consider many options, and signaled how unlikely the of use of eminent domain could be.
“I am certain this board would not approve a proposal that singles out eminent domain as an approach,” Devereaux said. “We are not here to look for any one approach. We are here to look for ideas.”
Residents in the area are suspicious of the eminent domain proposal and the investor group pitching it.
“I object to government sharing the immense power of eminent domain with private companies,” said Margaret Michaels, who lives in the area. “We give this power to our elected officials so we can vote them out if we want. This could be a loss of defenses for the homeowners.”
Sandra McCall said she moved into the area two and half years ago and wants to see a plan for more job growth that would involve local residents, not just private investors.
“It’s not right for the people who invested in this community for so long to see everything wiped out from under them because someone somewhere is making a lot of money,” McCall said.
Brenda Mayer of the local Cozy Cabins Realty firm said she was underwater and, like many at the hearing, wanted to see federal programs made more available. She supported the idea from Sen. Jeff Merkley, D-Ore., which would use unspent TARP funds Congress already approved to buy the underwater loans and refinance them into FHA mortgages.
“We should be supporting our federal programs instead of local programs that can do more harm than good,” Mayar said.
Some from Wall Street spoke out against the eminent domain idea at the hearing as well. Edwin Groshans, with Height Analytics, said if the idea is put forth, Fannie Mae and Freddie Mac would likely not guarantee loans in the area. And private mortgage bond investors and lenders would price in the risk, which would push mortgage rates in the area to between 8% and 10%, according to his estimates.
“If private capital would come in, they would view the loans as only partially secured,” Groshans said.
Mark Dowling, CEO with Inland Valleys Association of Realtors, jabbed at the data the county was using, which is largely based on Zillow (Z) statistics. It showed more than half of borrowers in the general metro areas were underwater, but doesn’t drill down to just the county level, he said.
“The only research you’ve presented is a meager half page of info attributed to Zillow,” Dowling said. “How can you fix a problem if you can’t understand the problem?”
Other areas of the country are also considering the option, most notably in Chicago. Mayor Rahm Emanuel came out against the idea after a hearing last week. But the idea still has support from some.
Alderman Joe Moreno went on Fox Business last week almost desperate for a solution and blamed banks for forcing governments to take such drastic actions.
“We haven’t gotten any other answers from the banking industry and Wall Street folks. We’ve gotten nothing. I’m intrigued because the lack of effort on that end forces government to look at other solutions,” Moreno said.
Not one person who spoke at the San Bernardino hearing Thursday supported the eminent domain idea.
Chris Katopis, who leads the Association of American Mortgage Investors, also criticized the lack of data and said his own studies show nearly three-fourths of borrowers in the San Bernardino area are underwater either because they took cash-out refinancings or put no money down on the original mortgage during the bubble.
“The math around eminent domain does not work under any circumstances,” Katopis said. “As you develop solutions and target help, it should be for those people who need it most and did not use their homes as ATMs.”