An agency set up by county officials in San Bernardino County, California were scheduled to meet Thursday morning to determine whether the county and several of its larger cities will proceed with their controversial eminent domain plan.  Under the proposal, passed by the county's Board of Governors in June, the local governments would use their power, usually employed to take real property for a public purpose, to seize underwater mortgages and restructure them into new obligations based on the homes' current market values.

The area in what is known as California's Inland Empire saw explosive growth and an accompanying surge in home prices during the boom of the early 2000s and when the crash came the area was clobbered.  The Federal Housing Finance Agency' (FHFA) Housing Price Index for the area shows that the metropolitan area has suffered price declines in 19 of the last 20 quarters; declines that 11.57 percent in each period.  The Joint Powers Authority (JPA), the agency set up to manage any eminent domain proceedings, provided information today (derived from Zillow) showing that 60.3 percent of the homes in the area are underwater and that the average homeowner has $115,755 in negative equity compared to a national average of $75,644.  One of the cities in the MSA, Stockton, recently filed bankruptcy.

Among the persons scheduled to present arguments to the Authority is Tim Cameron, representing the Securities Industry and Financial Markets Association (SIFMA.)    SIFMA released Cameron's prepared remarks in which he stated his group's strong objections to the proposals.  As SIMFA has stated in previous press releases, they doubt the legality and constitutionality of any such eminent domain actions and they make it clear that they will take legal action if the county goes forward.  Cameron also raises the specter of a significant negative impact on consumers saying the use of the powers "would significantly harm mortgage finance markets, reduce access to credit for borrowers, and negatively impact average investors' portfolios.  In our view," he said, "the long-term costs and liability risks of an eminent domain proposal far outweigh any professed short-term benefits to a small group of performing homeowners."

The SIFMA representatives suggests that the JPA should widen its target beyond the "few thousand people who have good credit, are current on their mortgage payments, and most importantly, happen to have mortgages that have been sold in the private label securities market. Is this really", he asks, "where the JPA wants to focus its time and attention?"

He suggests instead that they work to address issues in their area more broadly, in a way that "would actually provide assistance to borrowers in near-term danger of foreclosure," and in a manner that both provides assistance and protects the interests of all County residents, savers, pension fund participants, retirees, and prospective mortgage borrowers.  "If the problem that is trying to be solved is the result of depressed property values, the solution should positively impact property values, not exacerbate declines or curtail the willingness of investors to invest in the County's housing and its residents".

"Further, the JPA needs to fully appreciate and scrutinize the permanent, negative consequences for the national housing finance system resulting from undermining the concept of secured lending resulting from the exercise of eminent domain in the proposed manner," Cameron said.

His statement goes on to suggest that better coordination among policy makers and industry participants could increase awareness and participation in the many programs that already exist to assist homeowners.  There are a lot of programs from various levels of government and from mortgage services already out there, he said.  "Local officials could be particularly helpful in identifying additional communication avenues and in bringing those homeowners to the table that may be reluctant to respond to industry outreach out of skepticism or fear."

He concluded by suggesting that JPA should "engage with the industry to better understand the situation on the ground in San Bernardino, what has been tried, and where opportunities for improvement exist. For example, you may be interested to know that loan modification rates in San Bernardino far exceed national averages and even averages across California."

Today's JPA meeting is for the stated purpose of authorizing the Authority staff to issue a Request for Proposals (RFP) to operate a Home Protection and Foreclosure Prevention Program for the county and if that is approved the RFP will be issued shortly.  

Both Berkeley, California and Chicago have made several similar eminent domain proposals in recent weeks and FHFA has expressed its concern that such programs would adversely affect Freddie Mac and Fannie Mae for which it is the conservator.