Area mortgage bankers question the legitimacy of private players who are urging cities to use eminent domain law to rescue underwater homeowners.
The Illinois Mortgage Bankers Association and 25 others are opposing an initiative by Mortgage Resolution Partners LLC. The San Francisco-based firm, which incorporated in January 2012, has been courting municipalities (largely in California) over the past year, seeking to match private investor groups with struggling cities willing to consider a broader, less tangible interpretation of eminent domain law.
Mortgage Resolution Partners’ objective, according to its own website, is seeking private investors willing to purchase troubled mortgages at market rate and then sell them back to the same homeowners at a lower price.
Graham Williams, partner and chief executive officer at Mortgage Resolution Partners, says using eminent domain to help families remain in their homes “is appropriate and may be the only way to stop the underwater mortgage crisis from continuing to devastate local communities.”
Williams says there’s no public purpose to acquire and refinance current, deeply underwater, securitized loans; that’s where his company fits the bill. “The purpose of acquiring and resolving underwater loans is to protect neighbors and the broader community from defaults, foreclosures and the losses that they cause,” said Williams. “The Federal Housing Finance Agency has concluded that the single-best way to reduce losses is to proactively fix loans that are current, deeply underwater and securitized. Once a borrower stops paying, the ability to mitigate loss falls dramatically. Each local government has the power to determine whether to acquire loans, and if so, which loans. It chooses the public goals and methods that it wants to pursue...not private financial interests who want taxpayers to bail them out of their holdings of defaulted loans.”
At press time, cities like Richmond, Calif. were legally battling with mortgage banks over the right to exert their eminent domain powers. According to The Associated Press, Richmond’s mayor and a team of activists confronted the Wells Fargo headquarters in San Francisco in late August, urging the bank to drop its lawsuit aimed at stopping Richmond’s plan to use eminent domain to seize hundreds of mortgages from Wells Fargo and other banks. If successful, Richmond would be MRP’s first success story.
While this sounds like an entrepreneurial concept that’s being touted on the West Coast, mortgage bankers in Illinois warn that it’s one to keep on the radar here and elsewhere.
“Both the Illinois Mortgage Bankers Association and the national MBA are among the signers of a letter to Congress opposing this practice,” said Nick Parisi, president of the Illinois Mortgage Bankers Association. “How this economically impacts the holders of the original mortgage, let alone the investors in the mortgage-backed securities, is obviously not good,” he added.
Chris Brown, vice president and senior loan officer at Mortgage Makers in Edwardsville, says he can understand where - on the surface - a city would be tempted to jump on board after hearing the summary of MRP’s business plan. But Brown, in tandem with the mortgage bankers associations, sends up a red flag.
“On the face of it, I can understand cities who are desperate for a housing recovery - particularly those hard hit on the West Coast that are still waiting for relief,” Brown said. “But this doesn’t help anybody except for the few who are able to successfully participate. It has already made that market a pariah,” he added.
Brown explains MRP’s business model using a completely hypothetical Southwestern Illinois-based example: Suppose a local mortgage lender knew that the city of Edwardsville was planning to force it to write down the balances of dozens of its mortgages via eminent domain law, as the city of Richmond is seeking to do. “When the local lender here initially made that loan, he didn’t tell investors in the mortgage-backed security market, ‘If the market fails in our area, you will be forced to credit our borrowers the difference between current market value and what they owe you,’ said Brown. “Would you invest in that? Would anyone, if you as an investor knew that your investment could unilaterally be discounted? As far as Mortgage Resolutions’ partners go, it is a no-lose situation. They’re going to turn around immediately and sell off those mortgages. It would be an avalanche waiting to happen,” he added.
In the California banks’ lawsuits over what the city of Richmond is attempting with MRP, they allege that the plan is an illegal abuse of eminent domain, which allows governments to seize private property for public use. The banks argue the plan would “severely disrupt the United States mortgage industry” because many other cities would likely adopt the same program to help homeowners who owe more on their mortgages than their houses are worth.
So far, Richmond has sent out more than 600 offers, but has not yet begun any eminent domain proceedings. According to The Associated Press, while the housing industry is recovering slowly, Richmond - a city of roughly 100,000 people - is in the middle of a housing crisis, as plummeting home values and rising crime has left many worried that an era of urban blight is upon them.
The city of Richmond, working with MRP, is offering $150,000 to buy a $300,000 bank loan on a house that is now worth $200,000 and is in danger of foreclosure.
If the bank would agree, the city and the company then obtain the loan at $150,000. Richmond and the company then offer the homeowner a new loan of $190,000, which, if accepted, lowers the monthly payments and improves the owners’ chances of staying.
In such transactions, MRP receives $4,500 for each completed sale and splits any additional profits with the city.
If the bank refuses to sell the loan to Richmond - which is what is currently transpiring - then the city invokes its power of eminent domain and seizes the mortgage. It would then offer the bank a fair market value for the home.
Contrary to Williams’ comments, federal regulators say eminent domain isn’t the answer. According to a prepared statement from the Federal Housing Finance Agency, plans to seize loans “present a clear threat to the safe and sound operations Fannie Mae, Freddie Mac and the Federal Home Loan Banks.”
David H. Stevens, president and chief executive officer of the Mortgage Bankers Association in Washington D.C., agrees.
“The program is ill-advised and likely unconstitutional, and will add to Richmond’s problems rather than solve them,” Stevens said. “It is a short-term solution for a few underwater borrowers that will have severe, negative, long-term costs for every homeowner in the city. Mortgages in Richmond will become more expensive, making neighboring cities more desirable for prospective homebuyers, which will hold down home values for everyone in Richmond.”