California County Considers Using Eminent Domain to Seize Underwater Mortgages

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Local authorities from San Bernardino County in California and two of its cities have recently joined together to create a Joint Powers Authority (JPA) with the purpose of seizing and restructuring certain mortgages to help underwater homeowners in an effort to stimulate the local economy. This so called “Homeownership Protection Program” is spearheaded by Mortgage Resolution Partners LLC (MRP), a San Francisco-based venture-capital firm, and would target mortgages that are not in default but which are owed by borrowers whose home values have depreciated to the point that that they are now less than the loan amounts — i.e., “underwater.”

Under the Program, local governments would take title to the mortgages (not the underlying real property) and pay the mortgage holders “fair market value” using money provided by institutional investors. The government and investors would then issue new mortgages to homeowners writing down the loan amounts to slightly below the fair market value of the home, which would enable distressed home-owners to acquire equity and reduce their monthly payments. The restructured mortgages could then be sold to third-party investors, with the government recovering administrative costs and MRP earning a fee on each transaction.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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