There are other rumblings in San Bernardino besides its pending bankruptcy. A plan to utilize eminent domain to seize underwater mortgages in an effort to stem the housing crisis at no cost to municipalities is raising controversy.
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The claim is that seizing the worst debt-laden properties enables loans to be restructured in a way that homeowners can remain in their homes with a newly restructured mortgage based on a court-determined value. But does the plan really work as intended?
SIFMA says no. The organization represents holders of mortgage-backed securities and says the plan, instead, positions a group of opportunistic investors to profit from a different group of investors. It notes that the plan would place San Bernardino and others considering such moves in a vulnerable legal position regarding citizens’ rights under the US Constitution.
SIFMA says that losses on mortgages are born by individual investors and savers and that the cities employing the plan would only seize those loans that were still performing. This continues to place the burden of losses on investors in mortgage-backed securities.
The cities argue that the plan would help the local economy by keeping homeowners in their homes. But SIFMA argues that restructuring the loans at a court-determined fair market value prohibits normal buying and selling activity.
If that’s true, then there’s little hope the mortgages would increase in value and investors holding securities made up of pools of those mortgages are forced to take losses they will not recover. Homeowners, as well, have no hope of the values of their homes increasing since government set values permanently at a lower level.
In 2005, the US Supreme Court said that seizure of property for an acceptable public purpose
was constitutional. But an actual case ruined a property owner’s live and disrupted the surrounding community so that the project was never actually undertaken.
Some lucky property owners escaped the government’s plan and were able to sell their properties later at four times the government-offered price. Whether the plan in San Bernardino is more beneficial to the municipality than it is to property owners and investors is the debate between the company wishing to implement the plan and SIFMA.