Municipalities Aim to Commandeer Mortgages


The American Securitization Forum is contesting an effort by local governments in California to seize mortgages from lenders.

The trade group is pitted against San Bernardino County, the towns of Fontana and Ontario, investment firm Mortgage Resolution Partners and investment-banking shop Westwood Capital. At issue is a joint ordinance, conceived by Mortgage Resolution and Westwood, that would allow the county and towns to exercise eminent domain to “condemn” mortgages on behalf of borrowers who owe more than their homes are worth.

The ordinance was proposed April 10 and could be adopted as early as next week, with the first condemnations coming this month. The only thing standing in its way at this point is removing the town of Hesperia, which has opted out of the process.

However, ASF is formulating a strategy for challenging the measure and hasn’t ruled out legal challenges. Large mortgage lenders within the trade group’s constituency also are poised to aid in the push, as are mortgage-bond buyers.

ASF representatives are scheduled to meet with Mortgage Resolution and Westwood in the coming days to discuss the issue. “We’re doing a lot more due diligence on San Bernardino,” ASF executive director Tom Deutsch said. “We’re taking it very seriously given the potential consequences of other municipalities following suit, and looking at its constitutionality.”

Typically, local governments use eminent domain to take ownership of blighted properties or to acquire land for public-works projects. They’ve never resorted to the measure to gain control of home loans. In this case, the entities would use eminent-domain claims to buy mortgages from lenders for less than the amount owed — using funding supplied by Mortgage Resolution and Westwood.

Borrowers’ principal then would be reduced to levels at which they no longer would be under water, at which point Mortgage Resolution and Westwood would attempt to sell the loans to investors for a gain. The firms also would collect fees for handling the process.

The stated goal of the ordinance is to keep residents facing foreclosure from losing their homes. But securitization professionals feel that San Francisco-based Mortgage Resolution and New York-based Westwood are in it for the money. Mortgage Resolution in particular is seen as driving the initiative.

ASF, meanwhile, is concerned that the measure could result in losses for holders of bonds backed by condemned loans. It also is worried that the effort could dampen demand for similar securities.

The trade group hopes to stop the initiative early on. While California was an obvious starting point given high foreclosure rates, Mortgage Resolution and Westwood already are pitching the idea to municipalities in other states that were hit hard by the housing crisis, including Florida.

CORRECTION (6/22/12): This article has been corrected. The original version misidentified the town that dropped out of a plan to use eminent domain to condemn home loans. Hesperia is the municipality that is awaiting removal from a proposed ordinance on the matter. Hermosa never was part of the process.

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