Eminent Domain is no longer under consideration as a mortgage modification tool in San Bernardino County California.  The County and two of its cities, Ontario and Fontana have announced they are abandoning a proposed plan to use that power to assist local homeowners with underwater mortgages.

Under the proposal the local governments would use their eminent domain authority to purchase loans from investor pools at less than face value.  They would then restructure them to reflect the actual value of the underlying collateral, repackage the new loans, and sell them to other investors.  San Bernardino County, located in southeast California's Inland Empire had a population explosion during the housing boom and then was hard hit especially hard by foreclosures and price declines.  The City of San Bernardino is currently seeking bankruptcy protection.   

The three entities formed a Joint Powers Authority (JPA) last summer to study the eminent domain idea proposed to them by Mortgage Resolution Partners, a San Francisco investment firm also established last summer by Phil Angelides apparently for the sole purpose of facilitating such mortgage purchases.  Angelides is the former chair of the Financial Crisis Inquiry Commission which investigated and issued a lengthy report on the causes of the U.S. housing market collapse.  According to a report earlier this month from Reuters, Angelides was seeking financial backers for his company, telling potential investors they might realize a 20 percent annual return.

The JPA voted unanimously on Thursday to table the proposal due, its chairman said, to a lack of public support but that it was looking into other alternatives to help homeowners in the three jurisdictions.    After the JPA had first announced its intention to study the idea it was picked up by other cities including Chicago and Brockton, Massachusetts. 

The proposal also gathered a lot of negative attention from interested parties who maintained that use of eminent domain for such a purpose would be an overreach, constitute an unconstitutional use of the eminent domain power and an unwarranted abridgement of investors' property rights.  The Acting Director of the Federal Housing Finance Agency (FHFA) Edward J. DeMarco opened a period of public comment on the proposal which had the potential of impacting loans owned or guaranteed by Fannie Mae and Freddie Mac which are in FHFA conservatorship.  California representative John Campbell introduced a bill, The Defending American Taxpayers from Abusive Government Takings Act which would have prohibited the Fannie, Freddie, FHA and the VA from buying loans in any community adopting such a plan.   

The most vocal opponent was the Securities Industry and Financial Markets Association (SIFMA) which represents the securities industry.  They issued a number of press releases indicating that any such action by a local government would result in a virtual shutdown of mortgage credit in that community.  Following the announcement that eminent domain was off the table SIFMA issued a statement which said in part, "We are encouraged to hear that the county has decided it will not pursue use of eminent domain to restructure mortgages. As SIFMA has said, the unprecedented, potential use of eminent domain would cause severe damage to struggling housing markets and is likely unconstitutional on its face. We are pleased that the County as recognized these risks and decided to move in other directions."

The statement also gave some indication SIFMA may have been negating with the JPA about the decision.  "The industry has remained committed to helping homeowners stay in their homes, and today we affirm to be more actively engaged with San Bernardino County. A number of existing programs can be better utilized and SIFMA, along with the JPA, are committed to working with servicers and local elected officials to assist homeowners." 

According to the Los Angeles Times, Steven Gluckstern, chairman of Mortgage Resolution Partners, said that while he was disappointed by JPAs decision, his group is in discussions with more than 30 other jurisdictions across the country and "he was confident that one of them would probably enact the plan during the first three months of this year."