Anyone who follows eminent domain issues no doubt by now has heard about the plan of some government agencies to condemn underwater mortgages -- essentially as a mechanism to refinance those loans to give borrowers loans that better reflect the current fair market value of their homes.
There has been much debate on the issue, and it has included a whole lot of rhetoric that has started to look a bit like an election campaign. I've heard extreme arguments both in favor and against the plan.
My intention here is not to advocate for or against the plan. Rather, I hope to help better -- and more fairly -- frame the issues so that people understand what exactly is being proposed, how it might work, and what legal obstacles the plan could face. Since the issue is a bit complicated, I intend to publish a series of posts over the next few days addressing this topic.
The plan currently receiving the most publicity comes to us from an entity called Mortgage Resolution Partners, a firm that is raising money to fund the acquisition of the loans. Those loans will then be sold, and MRP will earn a fee for each loan. MRP describes the plan as follows:
- Assists communities with demonstrated public purpose in acquiring performing, deeply underwater mortgage loans and offering to refinance them into sustainable loans with lower principal balances to avoid the costs of future defaults and foreclosures. Participation is voluntary; the program does not affect homeowners who choose not to refinance.
- Is privately funded, requiring no taxes or funding from communities or homeowners.
- Targets loans trapped in private securitization trusts; avoids mortgages whose owners have broad powers to reduce principal, such as banks and local government agencies.
- Creates incentives for homeowners to maintain their good credit to qualify for the program. Many other mortgage programs require borrowers to default before considering their needs.
After a market analysis, [the government] seizes the mortgages. Then it can pay them off at fair value, or a little over that, with money from new investors, issuing new mortgages with smaller balances to the homeowners. Taxpayers are not involved, and no government deficit is incurred. Since homeowners are no longer underwater and have good credit, they are unlikely to default, so the new investors can expect to be repaid.
For today, I want to try to explain what is really being proposed – and what is not. The plan does not involve every underwater mortgage that exists. What you might (reasonably) assume is that the idea is to acquire non-performing loans. In other words, the government could condemn loans already in default, helping to save homes from likely foreclosure. Sounds like a laudable goal, right?
But the reality is that the plan does not involve those loans. To the contrary, the plan is to condemn only performing loans. In other words, loans where the borrower owes more than the house is worth, but where the borrower has continued to make timely payments on the loan.
As explained in a June 16 AP News report by Amy Taxin and Christina Rexrode, "The company says that focusing on borrowers who are current on their loans is a smart way to do business, rewarding those who are already working hard to keep their homes. But, [Rick] Rayl pointed out, those are also the exact mortgages that investors are eager to keep." This focus on performing loans is important, and it impacts other pieces of the equation.
More on that, and other aspects of the plan, later. In the next post, I'll take a look at whether the plan is legal.
Rick Rayl is an experienced litigator on a broad range of complex civil litigation issues. His practice is concentrated primarily on eminent domain, inverse condemnation, and other real-estate-valuation disputes. His public ...
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