Have a solution to the housing crisis? A California county that touched off a fierce debate over whether local governments should condemn underwater mortgages wants to see your plan -- in writing, please.
On Aug. 16, officials in San Bernardino County will "formally call for detailed proposals in a public setting," said David Wert, a spokesman for the county. Wert said the county will open the suggestion box to anyone with a detailed remedy for as many as 150,000 residents who owe more on their mortgage than their home is worth
"We are open to any ideas that anyone has for how local government can address this crisis," he said.
San Bernardino's request comes as the mortgage industry ties itself in knots over a controversial proposal by a venture capital fund that would allow local governments to use eminent domain to take control of performing underwater home loans from private mortgage trusts. San Bernardino isn't alone. More than a dozen local governments, including those in Suffolk County, N.Y., in Berkeley, Calif., and in Chicago are considering the proposal. Chicago is also planning a public hearing in mid-August.
Under the proposal, the Mortgage Resolution Partners fund would front money to allow local governments to purchase underwater mortgages at market value in exchange for a fixed fee of $4,500 per loan. Homeowners could then refinance at the lower value, potentially saving hundreds of thousands of dollars each month in mortgage payments -- while also injecting a shot of adrenaline into moribund local economies.
"Unnecessary foreclosures are crushing the revenue of these local communities," said John Vlahoplus, chief strategy officer at the venture fund. "It is important to realize how frustrated and hurt economically they are."
Though the refinancing plan would apply only to the 10 percent or so of loans held by private security trusts, those loans statistically are most likely to be deeply underwater, and thus are in the most danger of failing, Vlahoplus said. Privately owned loans are three times as likely as Fannie Mae or Freddie Mac loans to be underwater, for example.
San Bernardino, along with two cities in the county -- Ontario and Fontana -- was the first to seriously consider the Mortgage Resolution Partners plan. Located east of Los Angeles, the county and many of its municipalities are on the brink of financial ruin. As many as half of all homeowners countywide are underwater on their mortgages.
That's why using eminent domain to right some of these loans is so appealing to local officials -- somewhere between 20,000 and 30,000 residents could benefit from a principal reduction plan, officials there said.
But it won't happen without a fight.
Opponents, led by the finance industry, have cast the plan as an illegal assault on capitalism that will basically dissolve the underpinnings of the entire mortgage industry and make it impossible to obtain a home loan.
"We believe that this inappropriate and unconstitutional use of eminent domain would result in an unfair takings from every-day investors and pensioners, and be immensely destructive to the U.S. mortgage markets," said Kenneth E. Bentsen Jr., executive vice president for public policy and advocacy at SIFMA, an industry trade group, according to Reuters.
It is not just the finance industry questioning the wisdom of the plan.
"I appreciate the creativity, but I think implementation is going to be a challenge. There is not a clear public benefit in buying performing loans," said Jorge Newbery, an executive at American Homeowner Preservation, a small fund that buys up seriously delinquent loans at a steep discount, then offers borrowers a chance to write off almost all of their debt.
Diane Thompson, an attorney at the National Consumer Law Center, said that the debate reflects the widespread frustration that municipalities are feeling in the wake of the failure by banks and the federal government to address the need for deep principal reduction.
Just last week, for example, the regulator that oversees Fannie Mae and Freddie Mac reaffirmed his opposition to principal reduction, which could provide relief to as many as 500,000 homeowners.
"I don't think eminent domain will be the answer to our problems, however," Thompson said. "There are likely large practical and legal hurdles to implementing it, and using eminent domain is a clumsy, slow tool, of necessity of limited application and reach."
Vlahoplus said he is excited his company is sparking a broader conversation about what to do with the country's unsustainable negative-debt load. He said municipalities would be free to craft their own plans, though the wisdom of seizing performing mortgages is clear.
The Federal Housing Finance Agency has found that the single best loan you can fix is the one that is current, deeply underwater and securitized, he said. "If you wait until the borrower has stopped paying, the ability to mitigate losses drops dramatically and immediately," he said.
This, he said, is the folly of the government home loan modification programs, which only help delinquent borrowers. "Talk about moral hazard," he said.
Writing in American Banker, Rep. Brad Miller (D-N.C.) said he agrees that eminent domain is a valid tool to clean up blighted neighborhoods and alleviate a pressing crisis -- though he would prefer a proposal by a government agency not motivated by the pursuit of profit.
For now, officials in San Bernardino say they are still weighing their options.
In recent weeks, several other entities offered rival proposals, including one suggestion that the county fund the purchase of the loans through a bond sale, Wert said.
The call for written proposals is aimed at giving groups the chance to submit plans in a public forum, Wert said. Mortgage Resolution Partners hasn't submitted a written plan yet, either, he said.