June 28, 2012
On June 28, ASF and a number of other industry trade associations submitted a letter to the San Bernardino County Board of Supervisors expressing strong opposition to the Joint Exercise of Powers Agreement (the “Agreement”) between the County of San Bernardino, the City of Ontario, and the City of Fontana forming a joint powers authority to create a “Homeownership Protection Program.” The letter explains that the potential use of eminent domain to seize mortgage loans may raise serious legal and constitutional issues, and that credit availability for home purchases and refinancing in the affected areas could be significantly compromised.
ASF has retained Mark Haddad, David Carpenter, and R.J. Carlson of Sidley Austin LLP as outside counsel on this matter.
The Program is intended to “assist in preserving home ownership and occupancy for homeowners with negative equity within the Parties’ jurisdictions, avoid the negative impacts of underwater loans and further foreclosures, and enhance the economic vitality and the health of their communities.” In particular, the Program may meet its goals through the acquisition of current, underwater loans by eminent domain at ‘fair market value.’
According to the Agreement, “the Program may include the Authority’s acquisition of underwater residential mortgage loans by voluntary purchase or eminent domain and the restructuring of these loans to allow homeowners to continue to own and occupy their homes.” After using eminent domain to purchase loans for fair market value, the joint powers authority could modify, restructure, hypothecate, assign, pledge, securitize, convey, or reconvey these loans and deeds of trust. It is our understanding that the Program hopes to utilize private capital to fund the purchases of these loans and the primary loans they will seek to seize are in private-label RMBS. The expectation is that private firms would refinance the seized mortgages into FHA loans for a quick takeout with substantial profits for the private firm. This private involvement raises substantial question whether the Cities would truly be meeting the ‘public purpose’ requirement for the Cities to exercise the power of eminent domain.
However, the Agreement stipulates that the joint powers authority may consider any of a number of options to achieve its mission. The Authority has indicated it will put out a request for proposals in the coming months to solicit ideas from interested parties.
The San Bernardino County Board of Supervisors previously approved the Agreement on April 10, 2012; however, while the City Councils of both Ontario and Fontana have taken actions approving entering into the Agreement, the City of Hesperia, which was included in the initial Agreement, has not. Therefore, the Board of Supervisors approved an amended Agreement on June 19, 2012 allowing the three jurisdictions to move forward, while allowing other jurisdictions to join the Agreement at a later time.
ASF Joint Comment Letter: San Bernardino Joint Exercise of Powers Agreement - June 28, 2012
San Bernardino Joint Exercise of Powers Agreement: Homeownership Protection Program - June 19, 2012
MRP FAQ: San Bernardino Eminent Domain
MRP Presentation: San Bernardino Eminent Domain
Professor Hockett Law Memorandum: Breaking the Mortgage Debt Impasse: Municipal Condemnation Proceedings and Public/Private Partnerships for Mortgage Loan Modification, Value Preservation, and Local Economic Recovery