CA Cities Consider Seizing Mortgages

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In a move best described as an unholy alliance between over-reaching government and crony capitalism, some local government officials in California are exploring ways to invoke eminent domain in order to restructure mortgages for underwater homeowners. California’s San Bernardino County and two of its largest cities, Ontario and Fontana, would seize mortgages from the private investors who currently own them, cut the loan and principle to the current property value, and resell them to new investors. The deal would be run by a venture capital firm called Mortgage Resolution Partners, that in turn has hired investment banks Evercore Partners and Westwood Capital to raise funds from private investors.  Evercore’s founder and leader is Roger Altman. Altman was Deputy Treasury Secretary under President Clinton, and is a current fundraiser for Barack Obama’s re-election campaign.

Eminent domain allows a government to forcibly seize property and then re-use it, under the auspices that such re-use ostensibly constitutes a public benefit. A typical example might be taking a piece of private property and re-using it to help facilitate a road-building project, or new housing. When such property is seized, the former owners are entitled to compensation, the amount of which is usually determined by a court.

The word “ostensibly” is critical here because the Supreme Court, in what many consider one of the worst rulings of the modern era, vastly expanded the definition of eminent domain in 2005. In 1998, the drug company Pfizer constructed a new facility in the city of New London, Connecticut. New London officials, anticipating the additional business the new plant would bring into the community, attempted to purchase 115 homes nearby so they could sell the land to commercial developers. 15 homeowners resisted. The city cited eminent domain and seized the land.

In the case known as Kelo v. New London, the Supreme Court ruled in favor of the city. The Court’s majority reasoned that a city may claim private property under the Fifth Amendment, so long as it does so as part of a clear economic development plan intended to benefit the community as a whole. Sandra Day O’Connor’s dissent illuminated the implications. “Any property may now be taken for the benefit of another private party, but the fallout from this decision will not be random. The beneficiaries are likely to be those citizens with disproportionate influence and power in the political process, including large corporations and development firms.”

Enter Evercore Partners and its well-connected founder and co-chairman, Roger Altman. As the Wall Street Journal explains, the “highly unorthodox” use of eminent domain, as it has been characterized, goes something like this:

For a home with an existing $300,000 mortgage that now has a market value of $150,000, Mortgage Resolution Partners might argue the loan is worth only $120,000. If a judge agreed, the program’s private financiers would fund the city’s seizure of the loan, paying the current loan investors that reduced amount. Then, they could offer to help the homeowner refinance into a new $145,000 30-year mortgage backed by the Federal Housing Administration, which has a program allowing borrowers to have as little as 2.25% in equity. That would leave $25,000 in profit, minus the origination costs, to be divided between the city, Mortgage Resolution Partners and its investors.

In other words, a group of new investors, hiding behind the combined power of government and crony capitalists, aim to bludgeon the current owners of the existing loans. Their rationale is the idea that homeowners who owe more than their houses are currently worth constitute a “blight” on their respective communities, thus triggering eminent domain. They further argue that such seizures would help homeowners shed debt loads that depress economic activity in their respective communities, and prevent foreclosures that reduce tax revenues for local governments.

That such homeowners freely entered into a contract to acquire such debt? That many local governments, especially in California, have made over-spending an integral part of their agenda for years? In the age where self-entitlement and moral hazard are now openly encouraged — and often underwritten by government — such considerations are apparently anachronistic.

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  • well now

    This articles explains the essence of communism, which is freely practiced in CA. Taking private property from one and giving it to another who is connected to the "Party"

    • UCSPanther

      Get lost, spammer.

  • Barbara

    The one owner was debt free. She lost her property because she had a great view of the river. They did move her house down the road but she had her lot stolen.

  • cynthia curran

    Well, you republicans in Ca bitch and whine but the Dems got a big hold on the state because of Ronnie Reagan legalizing a lot of hispanics that where in the state illegality back in 1986 and these houses are own by those that were legalized or there children or grandchildren. Also, George H Bush cut the defense budget that destroy thousands or jobs of people that voted Republican that moved out in the 1990's. In fact the Gop use to have big majorities in Orange and San Diego and were not that far behind in La which mean't that they were able to get things like prop 187 and so forth in the old days.

    • stevefraser

      Moonbeam will be the last Gringo gov.

  • Oleg

    I can see this scheme going upside down in no time flat, even if it does survive a court challenge. For one thing every lending institution that would take a bath with such a scheme will close down shop state of California except for the outfit behind this racket. Speaking of rackets the organizations behind this back door expropriation scheme maybe contarvening RICO statutes depending on what properties are expropriated, how, when, and why. Lets say that Mortgage Resolution Partners made campaign donations and or gave out some sort of gift or benefit to local government officials to invoke imminent domain (expropriation) on a property, then M.R.P would constitute a racketeering influenced corrupt organization would it not?
    The stupidity of this is that if they wanted to get ahold of properties on the cheap and resell them there is already a legal process called forclosure. If someone wanted to reform the forclosure laws to speed up the process, or allow banks to rent out forclosed houses on a temporary basis rther then leave them vacant, or even offer rent to own deals to those same tenants, then that would be a much better way to go. Such things are done in Canada all the time, but in Canada the minimum down payment is now 5% down on a maximum 25 year mortgage, 25% down on an investment property like a condo. But seizing properties from a lender and then reselling the property and offering a 30 year mortgage at 2.5% down is a formula for the real estate market ending up right back where you started 5 to 10 years from now, that is if it even gets off the ground.

  • HPD

    When eminent domain is use to forcibly "take' private property from one private citizen and give it to another private citizen, whether it be an individual or a corporation, then that is simply theft…
    This was another bad decision from the Supreme Court in a, now, long line of bad decisions..

    • stevefraser

      Kelo, care of Judge Souter.

  • WilliamJamesWard

    What is America coming to that such swindeling goes on and by government and is
    approved by the Courts. It should make us all shamefaced, we really need to change
    our government, and look at just what our schools are teaching those who are so
    absent in moral judgement and taking positions of authority. Cleaning house takes
    on a whole new meaning………………………………….William

  • Pkorman

    This is not communism. It reads like a form of hardcore fascism, to me. Oleg is correct. The mortgage contracts call for foreclosure and this reading of eminent domain, politically agitated by Altman, should be repelled in both the civil and criminal systems. This official perversion of the law will be answered by the laws of economics and human nature, which do not operate at the whim of corrupt politicians and their cronies.

    • stevefraser

      Fascism is in effect communism, the worship of the State, with private property. Fascism is not "the corporate control of the State" (this was Stalin's very successful propaganda)…..See J. Goldberg's "Liberal Fascism".

    • Oleg

      I think you are quite correct, the one definition I heard of in relation to how Facism differs from Communism is that they allow private property but the state tells you what to do with it even though you pay for that property and it's upkeep. Under Communism there is no private property, the state owns and maintains it. However as is usually the case under Communism the state stole or exproproiated the property from it's former owners, who often met and untimely end in the basement of a secret police headquarters or a prison camp. This is quite clearly Facistic in nature, the government doesn' like what the rightful owner of the property is doing with that property so they decided to expropriate it and hand it to their connected friends.
      I'm not sure how the Supreme Court ruling would apply to this situation since the financial gain of a select and connected few could hardly be argued to be in the public interest, since there is already a well established legal process to clear out bad debts. There have also been proposals to clear up underwater mortgages by encouraging lenders to negotiate with mortgage holders to write off most of the debt on these underwater morgages, but again that would be a legal process involving only the interested parties. Unlike the New Haven case they are using political machinations solely to interfere with private legal contracts as a entrepreneurial enterprise, if any local government officials are benefiting financialy from doing this, I.E sharing in the profits with Mortgage Resolution Partners, it is the very definition of racketeering so how would a court give legal blessing to this?