California Lieutenant Governor Gavin Newsom blasted a Washington trade group on Friday for making what he called threats against local officials in the state's San Bernardino County. As was reported in MND, in June the county's Board of Supervisors outlined and approved a plan to use its eminent domain authority to seize and restructure underwater mortgages. Since that action officials in Berkley and Chicago have passed similar measures.
Almost immediately after the San Bernardino vote the Securities Industry and Financial Markets Association (SIFMA) blasted the proposal saying in a press release that the action will "result in significant harm to the residents the agreement intends to help." The plan, SIFMA said, may cause loans to homeowners in the area to be "excluded from securitizations, and some portfolio lenders could withdraw from these markets. In other words, this program could actually serve to further depress housing values in the country by restricting the flow of credit to home buyers."
On Friday Newsom said "The Washington, DC special interest groups need to back off. We owe it to homeowners everywhere to see if the solutions being discussed in San Bernardino will work." He called on SIFMA "to cease making threats to the local officials of San Bernardino County." Newsom said that the financial sector has had long enough to fix the problems they helped create. "We must think big and help our local governments develop solutions - because the industry and federal government have not."
"This may be an aggressive idea, but communities such as San Bernardino, Chicago and others have no choice in these desperate times," Newsom continued. "We cannot allow Wall Street, who exploited the housing market for financial gain, to kill an idea before it is given a fair hearing." To untether homeowners from the anchor of underwater mortgages would restore consumer confidence, give a boost to the economy and to job creation, he said.
"The true injustice of the last few years is that as banks were bailed out and government claimed it has done all it can, the homeowner, the backbone of our communities, has received nothing but eviction notices," said Newsom. "We need to help the people that government bailout programs have left behind - ordinary folks that have worked hard to keep their homes even as values plummeted."
If San Bernardino, Berkley, or Chicago proceed with their plans it would probably represent the first time eminent domain was used in the taking of financial instruments. It is traditionally used by government to seize properties needed for public projects and SIFMA members have stated that litigation would certainly follow any such actions, possibly tying up any resolution in the courts for years.
Reuters reported that Kenneth E. Bentsen, Jr., SIFMA's executive vice president for public policy and advocacy released a response to Newsom that said in part, "We're simply laying out the facts so that the county is fully informed of the impacts of the proposed actions. We believe that this inappropriate and unconstitutional use of eminent domain would result in unfair takings from every-day investors and pensioners and be immensely destructive to the U.S. mortgage markets."