California cities eye plan to seize mortgages

Associated Press ^ | July 16, 2012 | AMY TAXIN and CHRISTINA REXRODE

[magellan]

In the foreclosure-battered inland stretches of California, local government officials desperate for change are weighing a controversial but inventive way to fix troubled mortgages: Condemn them.

Typically, eminent domain has been used to clear property for infrastructure projects like highways, schools and sewage plants. But supporters say that giving help to struggling borrowers is also a legitimate use of eminent domain, because it's in the public interest.

Under the proposal, a city or county would sign on as a client of Mortgage Resolution Partners, then condemn certain mortgages. The mortgages are typically owned by private investors like hedge funds and pension funds.

Mortgage Resolution Partners will focus on mortgages where the borrowers are current on their payments but are "under water," meaning their mortgage costs more than the home is worth. After being condemned and seized, the mortgages would be rewritten based on the homes' current values. The borrowers would get to stay, but with cheaper monthly payments. The city or county would resell the loans to other private investors, so it could pay back the investors who funded the seizure and pay a flat fee to Mortgage Resolution Partners.

Rick Rayl, an eminent domain lawyer in Irvine, Calif., who is not connected to the company, isn't so sure.

"The lenders are going to be livid," he said. He thinks the plan could have unintended consequences, like discouraging banks and other lenders from making new mortgage loans in an area.

[magellan]

I am curious. Does anyone know what happens to property subject to a mortgage in a legitimate eminent domain situation?

First, the Fifth Amendment does not state "fair market value", it states "just compensation". Just compensation is subjective.

Assume a major road is being built, and it causes the city to condemn some houses under eminent domain for right of way.

What would happen if the city declares just compensation to be some value, say, current market value, and the owner of the property is underwater on their mortgage?

Since the mortgage owner owns title to the property, I assume the eminent domain discussions are solely with the mortgage holder, and the mortgage signee is released from any obligation.

I am curious if there is any case law on this.

[Girlene]

Unbelievable....now cities are proposing property theft.

[Beagle8U]

I would think the mortgage holder would still hold a valid contract, and debt thereof, with the persons that signed it.

Thus, the mortgage holder would get all the funds for the ceased property, and those who signed the contract would still owe any balance due on the original contract.

If you have a car repossessed and the value is less than the owed contract, you will still owe the the full balance, even though you no longer own the car.

I think similar rules would apply in this case.

[HereInTheHeartland]

Hugo Chavez would approve.

[CodeToad]

Except even under Kelo the government must pay fair market price for any asset it takes, including a mortgage.

[Uncle Chip]

I’ll bet, even with the falling home values and Prop 13 in place, that the property taxes on those structures are staying up there.

[GOPJ]

When I was a kid we'd hear stories of Communist going into countries and 'nationalizing' the industry ... ( that's short for stealing factories and companies from the people who created them)...

Guess this is a variation of that corruption...

Way to go Californian - you're becoming the 'Detroit' of States.

[newzjunkey]

Mortgage Resolution Partners will focus on mortgages where the borrowers are current on their payments but are "under water," meaning their mortgage costs more than the home is worth. After being condemned and seized, the mortgages would be rewritten based on the homes' current values. The borrowers would get to stay, but with cheaper monthly payments.

Uh... these people DO NOT need any help. They are current on their mortgages.

Don't distort the market! It was a risk; if they want to recover on their "investment" just stay in the home longer. Get over your self-entitlement and accept responsibility for the decisions and gamble you took.

This get rich quick scheme of house swapping every few years needs to stop.

Let's be honest, that's what will happen. These people will turn around and sell out as soon as equity starts to build which will be far faster than it otherwise would've if gov't didn't try to change the rules and steal money from the lenders or taxpayers.

This scheme can start a new bubble while undermining basic freedoms.

[magellan]

"Let's be honest, that's what will happen. These people will turn around and sell out as soon as equity starts to build which will be far faster than it otherwise would've if gov't didn't try to change the rules and steal money from the lenders or taxpayers."

Great point. And this will make it easier for those who are current but underwater on their mortgages to get into a position to sell their houses and move the heck out of California.