The Amazing Take-Over Proposal


One can only wonder what limits some believe government actually has.  WSJ reports on a proposal for eminent domain being used to capture mortgages and turn them into lower priced assets, leaving the investors without fair compensation.


Tapping the power of eminent domain to repair underwater mortgages could generate investor returns of up to 30% and billions of dollars in fees for bankers behind the proposal, according to people with knowledge of the plan.


The use of eminent domain to seize and restructure mortgages is an idea that has enraged bondholders who worry they will be forced to sell mortgages from their securities to municipal governments at a steep discount. But the proposal, being pitched to municipalities by advisory firm Mortgage Resolution Partners, has piqued the interest of San Bernardino County and two other California municipalities where home-value declines of 50% or more have crippled local economies.



"The U.S. Constitution's eminent domain powers were not intended for the cherry-picking of performing loans to create exorbitant profits for private investment funds like MRP," said Tom Deutsch, executive director of the American Securitization Forum, one of 18 trade groups warning that use of eminent domain would restrict credit and worsen the housing crisis.


Mortgage Resolution is targeting loans contained in so-called private-label bonds. Laurie Goodman, senior managing director at Amherst Securities Group, estimates that about 532,000 loans in those securities would qualify. Of those, 3,165 are in two San Bernardino cities that in June voted to consider eminent domain, Ms. Goodman said in a report.



The idea is a "double-edged sword" that may have unintended consequences, such as more expensive credit, Mr. Capasse said. "On the flip side, we've been involved in working with these distressed borrowers since 2008, and we think there has to be a public policy solution."


He speculated the opportunity could produce more modest "midteens" returns because some borrowers won't meet refinancing requirements. But it could be a draw for state pension funds in areas where the underwater mortgage problem is most acute, he said. Waterfall counts state pension funds, including some in California, among its accounts.



As a manager, Mortgage Resolution would work with governments to identify and buy loans at 75% to 85% of current property values, said people in investor meetings. For a home worth $100,000, the program may pay $75,000 despite a principal balance that might be tens of thousands of dollars more.

There is also a move to require cities in Calif to have low income housing.

From Bay Area Liberty Blog:  Link.    There is also a list by city in draft form:   PDF

Mandate to have housing in middle class neighborhoods:   Video

Cities are already being told to reach some number.  Some have sued and won refusing to do so.


The Background


So what do you think about the question of this policy?