San Bernardino Rejects Eminent Domain Plan

San Bernardino County decided against a controversial proposal that would have allowed the county to seize underwater loans held in private-label MBS trusts using its power of eminent domain.

The plan proposed seizing mortgages from private-label securitizations in which homeowners are current on their payments but owe more on their mortgages than their homes are worth.  The principal on the loan would be written down and refinanced into a Federal Housing Authority (FHA) loan with a lower mortgage rate.

Yesterday the Homeownership Protection Program Joint Powers Authority board voted unanimously against the proposal that was initially proposed last year by San Francisco venture capital firm Mortgage Resolution Partners (MRP).  

According to a County press release, the board considered warnings from many experts, that the use of eminent domain would destabilize the local housing market and even worsen the mortgage crisis.

At the same time, very few local homeowners and other stakeholders expressed support for the use of eminent domain. Many, in fact, opposed such the strategy.

The measure was seen as controversial in the securitization industry because seizing these mortgages out of private-label securities would diminish the value of the overall pool of securitized loans.   

The American Securitization Forum’s executive director Tom Deutsch issued a statement in reaction to the development yesterday, saying members of the securitization group “hope it is a strong signal to other jurisdictions that the question of whether eminent domain to seize mortgage loans is a prudent and legal policy has been asked and answered.”