Mortgage Seizure Plan Sparks Bondholder Talks With County

A California county’s top executive addressed bondholders including Angelo Gordon & Co. and AllianceBernstein LP amid mounting concern it will use eminent domain to seize mortgages packaged into securities to aid homeowners who owe more than the properties’ values.

The Association of Mortgage Investors organized a conference call on June 27 with San Bernardino County Chief Executive Officer Greg Devereaux, said Chris Katopis, the Washington-based group’s executive director. Staff and members of other trade organizations were also invited to participate, he said, amid speculation the unprecedented strategy may serve as a template for other areas.

“I told them we haven’t decided to do anything yet,” Devereaux said yesterday in a telephone interview. “I said we have a very large problem that’s causing severe economic problems and part of our exploring ways to deal with it is hearing from people like those representatives of the securities industry.”

Eighteen trade groups including the American Bankers Association, National Association of Home Builders and Securities Industry and Financial Markets Association sent letters yesterday to California officials expressing their “strong objection.” They warned it would “actually further depress housing values in the county by restricting the flow of credit to home buyers.” The county is the largest by area in the U.S., excluding Hawaii and Alaska, according to its website.

Stabilize Markets

Advocates led by Mortgage Resolution Partners LLC say the strategy would help stabilize housing markets by reducing foreclosures and that it’s legally possible. The firm, which proposed the initiative, seeks to provide services including aid arranging the financing that local governments would need to purchase non-delinquent loans before cutting the balances and then refinancing borrowers into new debt. Asset managers and trade groups say that may be unlawful or unfair, and create bond losses that hurt other Americans and restrict lending.

“This gets an ’A’ for creativity but what are you actually accomplishing?” said Jonathan Lieberman, head of residential-mortgage securities at New York-based Angelo Gordon, which oversees about $24 billion. “The benefit to a few selected homeowners and the profits for the private sponsor will be vastly outweighed by the harm to responsible citizens, homeowners and investors. That’s not a legitimate ’public use’ for purposes of eminent domain.”

Forced Sales

The plan may affect 3,165 loans, with $1 billion in balances, in the two San Bernardino cities exploring it, according to a report yesterday by Amherst Securities Group LP. If extended to the rest of California, it might cover 214,355 mortgages, or $87.3 billion, with the amount elsewhere in the U.S. totaling 314,339 loans, or $69.5 billion, the firm said.

The proposal “does not sit well with anyone” in the market for home-loan securities, said Vincent Fiorillo, a senior portfolio manager at DoubleLine Capital LP, saying he was speaking as president of the mortgage-investor group. “We are going to try to make alternative suggestions to San Bernardino county.”

DoubleLine, which is based in Los Angeles, has about $35 billion in assets under management. Mike Canter, a portfolio manager at AllianceBernstein, is troubled that the proposal focuses on only one part of the market, a slice where principal forgiveness is already being used more often than in others, he said. The New York-based firm oversees about $400 billion.

Eminent Domain

San Bernardino is exploring the strategy along with the cities of Fontana and Ontario there. An agreement approved last week granted them the authority to study and create a program.

Robert Shiller, the economics professor at Yale University and co-creator of the S&P/Case-Shiller home-price indexes, supported the idea in a June 23 op-ed in the New York Times. By using eminent-domain powers, municipalities can force the sale of private property at prices deemed to be fair-market values if doing so serves a public purpose.

Other trade groups invited to the call this week included the Association of Institutional Investors, Securities Industry and Financial Markets Association and American Securitization Forum, Katopis said. The two latter organizations had begun publicly signaling opposition to the proposal.

“We had a very constructive dialog, and we have agreed to continue this dialog,” Katopis said, referring to the conference call. “AMI remains concerned and strongly opposed to San Bernardino’s plan as we understand it.”

Damaged Bondholders

ASF Executive Director Tom Deutsch said his staff didn’t join the call. His group is exploring whether a program would be “a legal and appropriate use of government power,” he said June 27. Members of Sifma, Wall Street’s largest lobbying organization, have “very serious concerns,” said Ken Bentsen, an executive vice president.

Damaged bondholders may include pension funds such as California Public Employees’ Retirement System that oversee money for retirees living in the areas, mutual funds and real estate investment trusts owned by retail investors, and government-tied holders such as American International Group Inc., Fannie Mae and the federal public-private investment funds started in the financial crisis, Angelo Gordon’s Lieberman said.

Steven Gluckstern, the head of San Francisco-based Mortgage Resolution, said no bondholders will be hurt because the loans would be bought for amounts that could be objected to in court.

Fair Value

“The owner of the loan today would get fair value for it,” he said yesterday in a telephone interview. “I just think they haven’t actually looked at the facts.”

Based on mortgage-bond contracts, loan servicers and trustees probably have no obligation to object to the prices offered, leaving investors forced to accept amounts that are too low, Laurie Goodman, the Amherst analyst, said in her report.

An e-mail to the press office of Calpers this week wasn’t returned. James Ankner, a spokesman for New York-based AIG, declined to comment.

Mortgage Resolution’s proposal covers only loans in securities without government backing. While that excludes mortgages held by banks or guaranteed by Fannie Mae and Freddie Mac, the two government-supported firms also own those so-called non-agency bonds.

The Federal Housing Finance Agency, the overseer of Fannie Mae and Freddie Mac, “is reviewing this proposed use of eminent domain,” Stefanie Johnson, a spokeswoman, said in an e-mail.

Flat Fees

Gluckstern said his firm’s own potential role is misunderstood. It would charge flat per-loan fees for work managing the program, rather than profiting by buying and then reselling loans itself, he said.

It is “deep in conversations” with entities that may provide the needed, non-recourse financing to municipalities. Governments could likely resell debt after a refinancing for more than its purchase price and use the gain to pay interest to or share profits with those lenders, he said.

Devereaux, the county CEO, said an authority created to explore the program will probably next month begin the process of writing a request for proposals. He said “multiple” non-profit groups had also expressed interest in participating.

Scott Simon, the mortgage head at Pacific Investment Management Co., which runs the world’s largest bond fund, said the initiative could undermine investor desire to lend to homeowners. Government-backed programs have accounted for more than 90 percent of new mortgages since 2008 amid tumbling home values and soaring defaults.

‘Monster Payments’

“It would put another nail in the coffin of the private mortgage market,” Simon said. “It just means you’re going to need to have monster credit scores and monster down payments if you’re ever going to have a private market.”

Pimco is among investors that say they support greater targeted use of principal forgiveness for “underwater” borrowers with loans backing their bonds. More than 20 percent of U.S. homeowners with mortgages owe more than their property’s values, according to data firm CoreLogic Inc. About half of the homes with mortgages in San Bernardino are underwater, Devereaux said.

“We think this accelerates the clean-up of the problems that are preventing the private-label securitization market from coming back,” Gluckstern said.

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