The mayor of Hesparia, California, Russ Blewett, acknowledges the irony in his support of a plan calling for the government seizure of mortgages from homeowners in his town of 90,000 high in the Mojave Desert.
“I’m more conservative than Attila the Hun,” said Blewett, a former real estate developer, who describes himself as a hardened individualist who rarely advocates for more government in citizens’ lives.
Blewett, however, has joined other elected officials in California to push for a controversial new strategy using eminent domain—the right of government to seize private property for public use—to rescue U.S. homeowners still reeling from the collapse of the housing market four years ago.
Under the plan, local governments would take the mortgages from owners of so-called “underwater” homes—properties that are worth less than the value of the outstanding loan—and refinance the debt to lower the interest rates and monthly mortgage payments.
The plan, the brainchild of a San Francisco-based community advisory group called Mortgage Resolution Partners, could help homeowners avoid foreclosure and offer economic stimulus to communities nationwide, proponents say.
But it has also sparked a ferocious response from Wall Street financiers and a Republican congressman, who say the plan would upend the $5 trillion mortgage-backed securities market and who are threatening to withhold home lending in participating communities.
The epicenter of this battle is California’s San Bernardino Country, the largest county in the contiguous United States by area. About 3,000 residents of Hesperia, which is tucked in the county’s southwestern corner, would benefit from the eminent domain rescue, Blewett said.
By refinancing these mortgages and allowing homeowners to take advantage of record-low interest rates, Hesperia could see an extra $3 million in revenue annually, Blewett said.
“Right now that money is going down the toilet, in a sense, because it’s going into the pocket of the people who helped create the problem,” Blewett said, referring to financial institutions whose insatiable appetite for mortgage debt precipitated the 2008 economic crisis.
Across San Bernardino County, about 150,000 mortgages—half of the total number of mortgages—are underwater, according to David Wert, a spokesman for the county government.
“That’s a tremendous drag on our local economy,” Wert said. “Those are 150,000 families that are trapped in their homes. … If we could free up a significant number of those people, we think it would provide a very significant stimulus to our local economy.”
Officials in San Bernardino County say the snail’s pace of federal homeowner assistance efforts—like the Home Affordable Refinance Program—have forced them to take the initiative in helping their constituents deal with the fallout of the housing collapse.
“Clearly if the problem was being handled at another level, we wouldn’t be looking for a local government option,” Wert said.
Wert said, however, that officials had not really believed a local solution was possible until Mortgage Resolution Partners approached San Bernardino County with its eminent domain plan.
MRP’s chairman, Steven Gluckstern, said he and his partners came up with the idea while brainstorming approaches to “fixing the most vexing and difficult problems facing our economic recovery.”
“If we don’t fix the mortgage problem, we’ll end up having a lost decade,” Gluckstern said.
To be sure, Gluckstern and his partners are not acting strictly out of altruism. Under the plan, MRP finds private investors to finance the purchase of targeted mortgages at the price set by the court in the eminent domain proceedings. For its efforts, MRP would take a $4,500 transaction fee per mortgage, Gluckstern said.
Some 22 percent of all residential properties with a mortgage—totaling 10.8 million homes—in the U.S. are underwater, according to data released this month by the business analytics company CoreLogic. Not all of these would be eligible for MRP’s plan, which would only target so-called “private label” mortgages—loans that are not backed up by the federal government—and would require the homeowner’s consent before moving forward, Gluckstern said.
Officials in San Bernardino County and elsewhere across the United States say they are only in the very early stages of considering the proposal, whose viability will rely on whether U.S. courts accept the eminent domain argument that the government can seize these mortgages for public use in exchange for fair compensation to the owners of the debt.
Eminent domain has been used in the U.S. to seize property in the path of proposed highways, infrastructure, and other planned public projects.
Gideon Kanner, a prominent authority on eminent domain law and professor of law emeritus at the Loyola Law School in Los Angeles, said that while he thinks MRP’s proposal is terrible public policy with unpredictable legal consequences, there’s a good chance the courts will rule in favor of the eminent domain argument.
In the meantime, the proposed plan’s powerful opponents are not waiting around for the courts. Major investment trade groups have warned local officials in San Bernardino County that moving forward with the plan could make it more difficult for residents of those towns and cities to obtain loans in the future.
And earlier this month, Rep. John Campbell, a California Republican, introduced a federal bill that would forbid that country’s leading mortgage lenders from purchasing or guaranteeing loans in counties and communities that use eminent domain to seize mortgages—a practice he said would be unconstitutional.
“If any city or county does this, no one in that city or county would be able to get a loan in the future,” Campbell said in a statement. “It would eliminate the ability for most people to get loans.”
Resistance to MRP’s proposed plan cuts across party politics. Rahm Emanuel, Chicago’s Democratic mayor and President Barack Obama’s former chief of staff, has said he does not believe eminent domain is the right approach to dealing with underwater mortgages.
Blewett, the Hesperia mayor and former real estate developer, said that until the country’s housing woes are fixed, partisan clashes over the economy will be an exercise in futility—regardless of whether Obama or Republican challenger Mitt Romney wins the November 6 presidential election.
“There will be no recovery in this economy until housing recovers,” Blewett said.