Eminent Domain Still Considered by San Bernardino County

Interesting article on Eminent Domain by Ben Hoffman in the Huffington Post about the eminent domain proposal in San Bernardino County, the ongoing hearings, and the lobby efforts to stop this public official from making a daring move, watched by other hard-hit communities:

Proponents, meanwhile, argue that bold measures are worth considering in the face of a festering foreclosure crisis. Recent modest increases in home prices have done little to help the estimated 16 million underwater homeowners nationwide, who, according to the real estate valuation website Zillow, collectively owe $1.2 trillion more than their homes are worth.

The proposal also comes amidst broad frustration with the Obama administration, which has so far refused to offer a broad-based plan to bail out underwater borrowers, even as taxpayers have spent hundreds of billions of dollars to prop up banks.

“We’ve seen a bailout of the banking industry, but no bailout for homeowners,” said Arie Giddens, a San Bernardino resident whose home is worth less than half the $300,000 she paid for it in 2005, according to Zillow.

. . .

The problem for Gomez is the principal. He owes $413,000 on a home worth $217,000. IndyMac won’t consider him for a loan modification that forgives some of this debt because the private investor that owns the loan won’t allow it, according to Vargas.

This is a scenario that housing counselors say they face all the time. Refinancing at lower interest rates is very helpful for many borrowers, but others are so deep underwater that the only way they can realistically expect to save their homes is through some form of debt relief, usually called principal reduction. But the odds of the average borrower qualifying are slim.

Though most homeowners associate their mortgage with the bank or other financial institution that mails them their monthly bill, in most instances, these companies merely service, or manage, the loan. That is because loans are bought and sold on the secondary market like any other commodity. Though this happens without input from the borrower, where a loan winds up matters greatly when it comes to qualifying for principal reduction.

The most fortunate are the 500,000 to 1 million underwater borrowers whose loans are held on the books of one of the five banks, including Bank of America and JPMorgan Chase, that agreed earlier this year to offer at least $10 billion in debt forgiveness. Though early reports on whether this help is reaching many homeowners is mixed, the banks must reach this target or face financial penalties.

The second and largest pool of loans are owned or controlled by the government-owned mortgage companies Fannie Mae and Freddie Mac. Of these mortgages, an estimated 3.3 million are underwater. These borrowers don’t qualify at all for principal reduction. Edward DeMarco, the acting director of the Federal Housing Finance Agency who essentially calls the shots at Fannie and Freddie, has said that giving debt relief to some borrowers would threaten the covenant between borrowers and lenders, and encourage those making their payments on time to default and cash in.

Private investors, including pension funds like California Public Employees’ Retirement System and the giant bond fund Pacific Investment Management Co., own much of the rest of the outstanding mortgage debt, which adds up to about 10 percent of all loans.

These mortgages, though small in number, are most likely to be deeply underwater, and thus are in the most danger of failing. Privately owned loans are three times as likely as Fannie Mae or Freddie Mac loans to be underwater, for example. Vlahoplus of Mortgage Resolution Partners said the eminent domain proposal is designed to target exactly these privately held mortgages that are at the highest risk of foreclosure.

Yet principal reduction on these privately held loans almost never happens, for reasons that aren’t entirely clear. The banks that manage the loans typically argue that their contracts with private investors prohibit principal reduction. And since the loans are so often sliced and diced into bonds owned by many different investors, there is usually no single entity that the banks can approach and ask to revise the agreement — though many private investors have said that this interpretation is nonsense.

“Investors have been as abused by servicers as many consumers,” Katopis, the executive director of the Association of Mortgage Investors, said in an interview with The Huffington Post. “We understand it is sometimes worth taking a 30 percent loss to avoid a 60 percent loss.”

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