California Cities Seek Radical Foreclosure Prevention Measures

(TheNicheReport) -- The deliberate and seemingly forceful use of eminent domain by county and city governments to take over underwater mortgages is gaining interest in California, one of the states most deeply affected by the erosion of home values over the last five years. 

Members of city councils across California's numerous municipalities are considering this radical approach due to two major reasons:

  • 1 - Eminent domain is a constitutional remedy that the Supreme Court holds as being in the public interest. For many California municipalities, taking over a negative equity mortgage at fair value and giving it back to the borrowers has the effect of providing hope for families, thus reducing blight created by homes abandoned to foreclosure and providing a modicum of economic balance to their communities.
  • 2 – The venture capital fund that is advising city councils and county commissions on this maverick approach, Mortgage Resolution Partners (MRP), boasts powerful political connections. Former Mayor of San Francisco and Speaker of the California State Assembly Willie Brown is an investor in MRP.

California is an excellent candidate for this controversial measure. A recent article in the Huffington Post explained how 70 percent of mortgaged households in one Sacramento neighborhood are in a negative equity situation. Some homeowners have lost as much as 50 percent of their purchase value, and half of these underwater mortgages are at a serious risk of foreclosure.

It would not be difficult for MRP to sell members of city councils and county commissions who live in such neighborhoods on the idea of using eminent domain as a remedy against these foreclosures waiting to happen. If they are successful, only those private mortgages that are not in default or guaranteed by the FHA, Fannie Mae or Freddie Mac would qualify for this forceful rescue. 

Under the MRP proposal, the municipalities would employ their legal staff to enact eminent domain at fair value; in essence, it would be similar to a forced short sale. MRP would fund the transaction and create a new mortgage with a reduced principal balance and lower interest rate. The holder of the mortgages would be MRP as the investor, which would be able to profit from the interest payments and securitization of the home loans. 

The local governments of Sacramento, San Bernardino, Chicago, Detroit, and Suffolk County in New York are weighing their options with regard to MRP's proposal, and they know that they will become unpopular among major lenders and investment banking firms that deal in mortgage-backed securities. 

Even the unconventional plan from MRP would not completely alleviate the situation. Many homeowners will not be able to escape foreclosure, and those whose mortgages are guaranteed by Fannie and Freddie are hoping for a miracle modification or a rapid recovery of the housing market so they can sell their properties. The problem is that other adverse economic conditions, such as unemployment and reduced salaries, are weighing down on many communities. If the trend of underwater mortgages and foreclosures continues, those neighborhoods will fall deeper into blight.