A Controversial Solution to End the Underwater Mortgage Problem

by 15 Jul 2012

(TheNicheReport) -- An intriguing plan by Mortgage Resolution Partners, a California private investment and finance firm, seeks to reduce the massive amount of residential mortgage that has become a major obstacle to the American economic. The plan involves eminent domain, a doctrine that would empower county government officials to take private property for the public good. This means that borrowers who are underwater on their mortgages could see county officials taking forceful, yet legal, possession of their properties and mortgages before giving them back with reduced mortgage principals.

The radical idea described above is actually being considered by officials San Bernardino County in California, as well as by the municipalities of Fontana and Ontario. San Bernardino is the largest county of California's Inland Empire, an important economic region of the Golden State that has seen better times. Some of the cheapest real estate in California is located in the Inland Empire, and a lot of it currently consists of homes distressed by defaults, foreclosures and upside-down mortgages.

What Mortgage Resolution Partners intends to do is first raise enough capital to be able to purchase underwater home loans at fair prices. Since mortgage lenders are not likely to accept offers that are lower than the principal amounts owed, the California investment firm would need a court order issued on the basis of eminent domain. This means that the city, county or state would file a lawsuit to take the property from the lender at reasonable value.

A Far-Fetched Plan

This controversial proposal has elicited polarizing opinions in the media. Some financial analysts claim that the idea seems far-fetched and unfair to investors who purchased mortgage-backed securities, but the firm is pushing forward and speaking to public officials in other states as well. In the State of New York, Suffolk County is considering the plan.

Ever since the American real estate market began its dramatic downturn back in 2007, stakeholders from public officials to mortgage investors, and from lenders to homeowners, have been trying to figure out a way to ameliorate the nettlesome backlog of distressed mortgages that does not seem to go away. The solutions attempted so far include government initiatives like the Home Affordable Refinance Program (HARP), short sales, mortgage principal write downs, and even speeding up foreclosures. The proposed eminent domain solution is the most radical thus far.

Mortgage Resolution Partners seeks to profit from every underwater mortgage bought and sold through eminent domain. Should they succeed with this endeavor, they will have plenty of opportunities for profit: It is estimated that more than 20 percent of all mortgages in the U.S. are underwater.


  • by William Matz | 7/16/2012 5:54:38 PM

    How is this so radical? Investors lose 30-40% of current FMV in a foreclosure or 15-20% in a short sale. Remember Hope for Homeowners? That 2008 Federal program was supposed to help 400,000 owners via short refis. Anyone know anyone who got an H4H short refi.

    What is maddening is that investors lose less money via everything over foreclosure (absent insurance or indeminification). So this proposal should net lenders/investors more than foreclosure also.


Is TILA-RESPA a good or bad thing long term?