Wall Street’s largest lobbying group is objecting to the use of eminent domain by municipalities to seize mortgages packaged into bonds so the loans can be shrunk to aid homeowners who owe more than their properties’ values.
San Bernardino County in California is exploring the strategy along with the cities of Fontana and Ontario there. Robert Shiller, an economics professor at Yale University and co-creator of the S&P/Case-Shiller property-value indexes, supported the approach in a June 23 op-ed in the New York Times.
Both the investment firm and bank members of the Securities Industry and Financial Markets Association have “very serious concerns” based on an agreement approved last week by San Bernardino officials granting the authority to study and create such a program, said Ken Bentsen, executive vice president for public policy and advocacy at the New York-based trade group. By using eminent-domain powers, municipalities can force the sale of private property at prices deemed to be fair if doing so serves a public purpose.
“We have very serious concerns and strong objection to the concept of using eminent domain to seize a mortgage for the purpose of restructuring it, no matter how meritorious the goal might be,” Bentsen said today in a telephone interview. “We think it raises the serious constitutional issues of a government entity overstepping its bounds.”
San Bernardino is exploring the idea because about 150,000 homes, or half of those in the county with a mortgage, are underwater and officials need to try to rescue the housing market, said Greg Devereaux, its chief executive officer.
“I understand it’s controversial, but we have to explore it,” Devereaux said in a telephone interview.
Taking the step may limit the availability of credit to homeowners by making lenders doubt the strength of their contracts, Bentsen said.
“It would have far-reaching ramifications, certainly to the mortgage markets in that jurisdiction and perhaps more broadly,” he said.
The American Securitization Forum, a separate trade group, is exploring the legality of the proposal, said Executive Director Tom Deutsch. “It would be extremely destructive to the use of securitization on a go-forward basis, which would further frustrate efforts by the federal government to bring private capital into the mortgage markets,” he said. “The question then is it a legal and appropriate use of government power for a public purpose? If it’s not, legal challenges appear likely to ensue.”
Mortgage Resolution Partners LLC, a San Francisco-based investment firm headed by Steven Gluckstern, proposed the plan, according to Devereaux. Such a firm may be the buyer of the loans at discounts to a home’s value and then rework them.
“There’s no doubt this is entirely constitutional,” Robert Hockett, a professor of law at Cornell University who has advised Mortgage Resolution Partners on the plan, said in a telephone interview. “This is a completely garden-variety public purpose.”
Gluckstern said in an e-mailed statement that legal scholars have made it clear that using eminent domain to save neighborhoods serves valid public purposes and is constitutional.
“The Washington lobbyists for Wall Street are opposed even though they agree it has merits to help average Americans who are struggling,” Gluckstern wrote. “We’ll take the advice of legal scholars over the comments of Wall Street’s lobbyists any day.”