Is your program a giveaway to the undeserving who borrowed more than they should have to purchase houses they never should have owned?
No. Everyone in California has the opportunity to purchase a home by borrowing from a lender who is willing to take a loss if home prices decline by more than the homeowner’s down payment. The lender willingly takes the risk when making the loan, and the fair market value of the loan reflects that risk. By purchasing the loan at fair value, we give the lender the benefit of its bargain. By doing an economically rational modification or other resolution with homeowners, we afford them the benefit of their bargain without forcing them to default and flood the local housing market with additional foreclosed homes.Regardless of the legal niceties, is it just wrong and a moral hazard to let these homeowners stay in their homes?
No. We protect our neighbors’ homes, even allowing them to keep the equity in their homes while canceling their debts in bankruptcy, because it is the right thing for them and the right thing for us. In the U.S. we do not put our neighbors into debtor’s prison, or make them homeless unnecessarily. America is facing an economic crisis and the solution requires practical action that keeps people in their homes which benefits the entire community. The real moral hazard is that the system is forcing homeowners to default in order to achieve rational solutions.Hide How much will the local government pay for the loans? Will the purchase create losses for the trusts that hold the loans?
The local government will pay the fair value of the loans, as both state and federal law require. The purchase will not create any losses for the trusts that hold the loans; the fair value of the loans reflects losses that have already occurred because of the extraordinary collapse of real estate prices in affected communities.What is the fair market value of a loan, and how will you determine it?
Fair market value is the price that a willing buyer would pay a willing seller, neither under any obligation to buy or sell. Similar sales of troubled loans in the secondary market exist and are good evidence of fair value. These sales occur at a significant discount to the fair value of the home because of the “foreclosure discount” — the market’s recognition of the cost in time, money and effort to foreclose on the homeowner and thereafter to maintain and sell the property. We will use these market data points and supplemental methods including discounted cash flow modeling.Hide Who really owns the loans?
Securitization trusts typically hold the first mortgage loans that will be purchased by eminent domain. A variety of investors including hedge funds and mutual funds own interests in the trusts and thus the ultimate right to payments for the loans. Third party banks service the loans, and third party trustees monitor the servicers. Banks typically hold the second mortgage loans.Hide What rights will the loan owners have?
The trusts that currently hold the mortgage loans will have the right to receive the fair market value of the loans. This includes the right to a trial to determine the fair value of the loans if the trusts disagree with the local government’s valuation.Who pays the costs of legal challenges to the Program?
Mortgage Resolution PartnersHow is MRP paid?
The community does not pay MRP. The funder pays MPR a fee for each loan acquired by the community. This fee is very similar to the fee paid by the federal government to banks that modify mortgages under federal programs. The MRP fee does not depend on the price the community pays for the acquired loans. MRP is not a private equity firm, a hedge fund or a mortgage lender or servicer.
The Funder lends money that is used to acquire underwater mortgages to the community and earns interest income. The Funder’s collateral is the underwater mortgages and the lender has no other recourse to the community.
And here’s how MRP responds to “a continuing campaign to intimidate local governments” and “transparent tactics” by SIFMA:
In its continuing campaign to intimidate local governments, SIFMA has commissioned a legal memorandum from O’Melveny & Meyers suggesting that local governments have no constitutional authority for the proposed acquisition of mortgage loans to protect their residents and neighborhoods. O’Melveny misstates both the facts and the law, and they are wrong on all counts. It is worth reviewing several of O’Melveny’s arguments to see how transparent SIFMA’s tactics are.
Contract Clause. The memo omits the U.S. Supreme Court precedent directly on point that explicitly considers and unanimously rejects O’Melveny’s Contract Clause argument, concluding that it has “no merit” because “the Contract Clause has never been thought to protect against the exercise of the power of eminent domain.” SIFMA wants us to believe that cities can acquire a house to widen a road, moving a couple out of a home in which they raised a family and a neighborhood of lifelong friends, but cannot acquire mortgage loans to save that same home and neighborhood from destruction. SIFMA’s members think that their financial assets are more sacred than the family home. They are just plain wrong.
Location of Loans. The memo omits the controlling California Supreme Court precedent, under whose authority mortgage loans are located at the borrower’s mortgaged home. Instead, O’Melveny cites only a trial court decision from Maryland. This typifies SIFMA’s myopia on the entire mortgage crisis – it is more concerned with the view from around the Beltway than from the hard hit cities that the mortgage crisis is destroying.
Value of a Loan. O’Melveny values an underwater mortgage loan based on nationwide data for generic home loans, concluding that “there is no basis for assuming the loan will default.”  But no one proposes acquiring generic national loans; communities will acquire deeply underwater loans from private label securitization trusts, which default at alarming rates. Fannie Mae projects 40-69% remaining cumulative default rates for PLS loans originated in the peak bubble years. Again, SIFMA reveals its myopic view of the mortgage crisis with this transparently specious argument. Prime loans with good payment histories in Manhattan or the suburbs of Washington DC might have low default rates. But not the toxic PLS loans originated during the credit bubble that are a principal cause of the underwater mortgage crisis.
O’Melveny’s memo is untrustworthy on its face. Its remaining arguments are more of the same — misstating the facts and the law, and wrong on all counts. The memo is a mere advocacy piece designed to intimidate local governments. Why? Every month that SIFMA and its members delay this vital program in San Bernardino, another hundred homeowners who could have kept their homes become delinquent. SIFMA is trying to stop governments from “seizing” loans – so that its members can continue to seize homes.
We cannot look to national organizations or national government to solve the mortgage crisis. They have not and will not solve it. We must look to and support local governments. They are the closest to the crisis and to the people and neighborhoods that it harms. The problem is local, and so is the solution.