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Can officials seize mortgages to save homeowners?

Marketplace Contributor Jun 27, 2012

Can officials seize mortgages to save homeowners?

Marketplace Contributor Jun 27, 2012

Tess Vigeland: Down through history, governments have used something known as “the power of eminent domain” to seize private property in the name of the greater public good. If the government wants to clear the way for a new highway, for example, it can force you to give up your home for fair compensation.

Now, some enterprising investors are suggesting a totally new twist on that idea to jumpstart the housing recovery in some of the country’s most distressed areas. Our senior business correspondent Bob Moon explains.

Bob Moon: There’s a big roadblock to economic recovery in Southern California’s San Bernardino County. Standing in the way is a whole mess of mortgages that are out of whack with home values. So officials are now considering using their power to clear away those troublesome loans — by seizing them.

Greg Devereaux: It’s kind of the flip-side, using eminent domain not to take people from their homes, but to keep people in their homes.

Greg Devereaux is the county’s chief administrative officer. He thinks it might be possible to force through thousands of affordable mortgages, instead of waiting for lenders to renegotiate with homeowners or evict them.

Devereaux: I’m intrigued by the idea, as is my board of supervisors, because it’s the first thing that we have been approached about that has the potential on sufficient scale to actually affect the market and the economy.

So here’s the pitch officials are exploring: A group of venture capitalists wants the county to use its eminent domain authority to seize mortgages funded by private investors, not banks. It’s those privately held mortgages that have been especially tough to renegotiate. The venture capital firm would buy out the original lenders, and the homeowner would get a new mortgage at the lower property value. That new loan would then be re-sold to other investors.

John Peterson: This sounds like an incredible can of worms.

Attorney John Peterson specializes in eminent domain cases here in Los Angeles. He says the original lenders could tie up the whole plan in a legal battle over what’s fair compensation — not to mention the fair use of government power.

Peterson: If the purpose is to acquire them through the public power and then turn them over to private property owners, or a private venture group, is that going to pass the scrutiny of the court, in terms of public use and necessity?

The firm floating this idea argues the public benefit is obvious. Steven Gluckstern heads Mortgage Resolution Partners, based in San Francisco. He says, sure, his investment group would make a fee on each restructured loan, but he insists the motive goes far beyond the profit potential.

Steven Gluckstern: This isn’t a group of people that came together to say, “Can we think of another way to make money?” This is a group of people that came together and said, “Can we solve what is an intractable problem that’s holding back a recovery in this country?” And that’s what I think we’ve done.

Gluckstern says Mortgage Resolution Partners is pitching the idea to officials in a handful of hard-hit states.

L.A. attorney John Peterson is skeptical about the as-yet untried approach.

Peterson: I could see politicians may argue that it has a noble purpose, but I think as with so many issues, the devil is in the details. And it will be surprising if this program is implemented anytime soon.

For now, San Bernardino County says it’s merely studying the idea.

In Los Angeles, I’m Bob Moon for Marketplace.

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