RENEE MONTAGNE, HOST:
Here in California, financially struggling San Bernardino County takes up a controversial new idea for addressing its housing problems. County officials are considering using their power of eminent domain to take over underwater mortgages. The idea is to allow those whose homes are worth less than the loan to refinance. And it would be the first time a local government used its powers for this purpose. The proposal is both creative and, some say, outrageous.
As NPR's Yuki Noguchi reports, San Bernardino, the largest county in the U.S., could become a test case for this novel housing plan.
YUKI NOGUCHI, BYLINE: Just over a year ago, Steve Gluckstern and other entrepreneurs formed what eventually became Mortgage Resolution Partners. Their goal: To devise a plan that would both make money and fix the housing problem.
STEVE GLUCKSTERN: Despite efforts by the federal government, the state government, private enterprise, the attorneys general - you go down the long list - we've come up with no solutions.
NOGUCHI: In San Bernardino County, half of all homes are underwater. Some are in the process of foreclosure, but a good number of homeowners are still paying their mortgages - with only distant hopes their homes will recover value.
This week, the city of San Bernardino voted to file for bankruptcy - another indication of the region's distress.
GLUCKSTERN: When you owe more on your house than the house is worth, your behavior changes. You don't spend money going out to the local restaurant. You don't hire the local handyman. So, our thesis is unless you fix this problem, you can't really have the recovery we're all hoping for.
NOGUCHI: Gluckstern says the way banks packaged and traded loans makes them difficult to modify. What's needed to undo that, he argues, is a powerful legal tool that can force mortgage investors to sell those loans and cut through all the red tape.
GLUCKSTERN: We have to take specific and, I think, unusual and unique action.
NOGUCHI: Action, like eminent domain. Governments typically use eminent domain to compel takeover of property for the purpose of building highways or even for private development. But there are two basic constraints. First, it must serve a public purpose; second, the property owner must receive just compensation. In this latest proposal, San Bernardino County, along with two of its largest cities, Fontana and Ontario, would use eminent domain to buy loans where the homeowner is underwater but current on payments. The loans would be acquired at a discount, a large enough discount that would enable new lenders to refinance the mortgage at a lower amount, if the homeowner so chooses. The entire program would be funded by Mortgage Resolution Partners, which in turn would collect a fee for every loan that's modified. The proposal already has lots of vocal opposition.
PAUL HERRERA: Eminent domain is created for public benefit, and the majority of the benefit for this is private.
NOGUCHI: Paul Herrera is a spokesman for the Inland Valleys Association of Realtors. He says this plan would only enrich Mortgage Resolution Partners, whose original members included Phil Angelides, the former California state treasurer and chair of a federal commission looking into the cause of the financial crisis. Also opposed is Chris Katopis, who directs the Association of Mortgage Investors.
CHRIS KATOPIS: There's no money for nothing.
NOGUCHI: He says this proposal would rip off mortgage investors who say the value of their contracts entitles them to be paid in full.
KATOPIS: This really sends a signal that it's bad to do business in San Bernardino, and that if you play by the rules, you could get harmed.
NOGUCHI: In the future, he says, banks will either not lend or charge more for lending in the area.
ACQUANETTA WARREN: I came from Compton, South Central L.A., where they had nothing but redlining. I'm used to banks not doing the right thing in our areas.
NOGUCHI: That's Acquanetta Warren, mayor of Fontana, one of the cities considering this proposal. She says it's hard enough to modify a home loan and now banks are trying to shut down discussion of other solutions.
WARREN: I mean, that's the kind of discussion they want to have instead of saying, you know what? Can we come to the table and talk? Can we figure out how we can help people?
NOGUCHI: Are you yourself underwater on your home?
WARREN: Oh, yeah, absolutely.
NOGUCHI: Both sides acknowledge that the proposal, if adopted, will likely end up in court. Howell Jackson, a law professor at Harvard, says whether it survives such a challenge depends on how the actual deal gets structured, but...
HOWELL JACKSON: My own personal view is this is a legitimate public purpose, and the community would benefit from having these properties cleaned up.
NOGUCHI: Meanwhile, Mortgage Resolution Partners says it's in discussions with other cities, as well. Yuki Noguchi, NPR News.
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