Dechert's OnPoint: Underwater Mortgages Deserve More than Eminent Domain

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Mortgage Resolution Partners (“MRP”), a San Francisco-based venture-capital firm, continues to actively market its proposal to assist homeowners with underwater performing mortgage loans held in private label securitization by having such loans seized, refinanced, or restructured and sold to third party investors, with the government recovering the administration costs and MRP earning a fee on each transaction (the “Program”). For additional background information on MRP and the Program see here, here and here.

North Las Vegas is another city that is considering the Program (or some version of it) to help some of its constituents. North Las Vegas, like other cities across the country, has been hard hit by the housing crisis and thus is a prime target for MRP’s Program. MRP estimates that there are a total of 5,052 private-label securitized mortgage loans in North Las Vegas and, of those, 4,763 are underwater. In Clark County (the county in which North Las Vegas, Las Vegas, Boulder City and a few other cities sit), it is estimated that 63,000 homeowners with loans valued at $15.5 billion could be helped and more than 84% of them are underwater.

The Program being considered in North Las Vegas would look something like this: Mortgage loan with a balance of $300,000 secured by a home in North Las Vegas worth $200,000 would be bought by the City of North Las Vegas (presumably with capital provided by MRP) for say $150,000. The $150,000 purchase price would then be refinanced for a higher amount—say $190,000— leaving the homeowner with a lower principal balance (as her mortgage is now $190k instead of $300k) and $10k or so in equity in the house. The difference between the price paid for the loan and the refinanced loan—$40k—would cover the City’s costs and pay back investors. Additionally, MRP would receive a flat fee of $4,500 per transaction, while the city would get a 5% fee. North Las Vegas is to hold another city council meeting regarding the Program in June.

These are compelling numbers to local officials who want to make a mark for themselves and hold onto public office, but, at what expense? The Constitution? Patrick Dolan and CrunchedCredit’s own Linda Ann Bartosch teamed up to provide a summary and analysis of the legal and economic questions, as well as a summary of alternatives being sought, on behalf of Dechert’s Finance and Real Estate Group, which can be found here.