San Bernardino County Condemns Using Eminent Domain on Mortgages

San Bernardino County and two of its cities unanimously rejected a proposal that would have authorized eminent domain to seize troubled mortgages and write down debt for homeowners. Greg Devereaux, chief executive of the county, said the idea was scrapped for lack of public support and concerns about unintended consequences from mortgage analysts.

This proposal was pushed by Steven Gluckstern and his San Francisco investment firm Mortgage Resolution Partners. In essence, MRP would arrange the funding for purchasing and refinancing the underwater homes. The loans’ principal would be reduced and MRP would resell the homes to new investors who would cover the costs for the city and MRP’s brokerage fee: $4,500 per loan.

Unsurprisingly, the plan seeped with cronyism. According to a report by Mother Jones, Gluckstern’s “allies include business-friendly Democrats such as former San Francisco mayors Willie Brown (an MRP investor) and California Lt. Gov. Gavin Newsom.” Indeed, MRP even described its political connections as its “secret formula.”

As the Institute for Justice’s litigation director Dana Berliner wrote in Doublethink,

“…the proposal involves transferring property (mortgages and mortgage securities) from their current owners to another set of owners, with a hefty profit going to the second owners and a hefty loss going to the first.  In other words, local governments are proposing to play favorites and to wield their enormous power to secure benefits for some at the expense of others…Eminent domain projects rarely live up to their promises, and cities’ attempts to engage in central economic planning often have unintended, and disastrous, consequences.”

Fortunately, many local residents staunchly opposed the plan. David Wert, a spokesman for the county, claimed very few homeowners actually expressed support for the plan: “Some residents said, ‘We don’t like eminent domain in any form.’”

In addition, using eminent domain to seize mortgages was widely condemned by the mortgage and securities industries. The Securities Industry and Financial Markets Association said this plan would be an “unquantifiable new risk” jeopardizing the “amount of credit available to potential homeowners.” The Association of Mortgage Investors described the scheme as “simply a wealth transfer from everyday Californians to a handful of wealthy, well-connected investment bankers.”

While this is certainly great news for homeowners and property rights, this plan against dead pledges is not dead yet. MRP asserts 30 jurisdictions are still considering the mortgage seizure proposal, with Brockton, Mass. the latest city to study the plan.

-- Nick Sibilla

Nick Sibilla is a writer at the Institute for Justice

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