No Marriage for Mortgage Resolution Partners Yet (But Proposal Still Being Considered)

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photo of Krystyna M. BlakesleeLast summer, we at Crunched Credit wrote (here, here and here) about Mortgage Resolution Partner’s (“MRP”), a San Francisco-based venture-capital firm, proposal whereby underwater performing residential mortgage loans held in private label securitization would be 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”), which (or some version of which) was (and in some cases still is) being considered by, for example, the County of San Bernardino (which has dropped the idea), the City of Chicago (a decision on whether to move forward is still pending), Wayne County, MI (Detroit area) (Wayne County has dropped the idea), and the City of Salinas, CA (which has entered into an agreement with MRP to provide residential foreclosure data but has indicated that this agreement does not mean that they are considering the Program at this time).

Now, among the list of towns, cities and counties considering the Program (or some version of it) is the City of Brockton, Massachusetts. Brockton, MA like a lot of municipalities across the U.S. has seen its share of falling housing prices, unemployment and homeowners living in underwater homes (approximately 7,000 of them are underwater as of January 2013). With that said, things aren’t just gloom and doom. As interest rates continue to remain low and housing prices slowly creep up, the situation in many areas (including, Brockton, for example) has improved: in 2010, Brockton had 422 foreclosures filed and 766 notices of foreclosure issued, while in 2011, there were 281 foreclosures and 500 notices issued, and in 2012, there were 266 foreclosures and 489 notices issued. Rest assured, the market will continue to correct itself (albeit slowly).

In an effort to help struggling homeowners, the Brockton City Council, at the end of last year, voted to form a group tasked with exploring “using eminent domain power to seize bad mortgage loans that have devastated many residents and, with a private financial partner, sell them back at lower interest rates to help people keep their homes.” The working group will consider the eminent domain program, the legal ramifications of such program and may even consult with MRP. The first meeting was held on or about March 7 and a second meeting was held on March 21st. A third meeting on this topic is scheduled for April 11th.

Before the first meeting on or about March 7, one of the Brockton City Council members published a working paper which outlined the proposal being considered and its goal. According to the working paper, “there will be no problem in translating eminent domain law to apply to mortgage debts because mortgages are considered a type of ownership of property in Massachusetts, a type of title in property” and the “goal of this initiative is to purchase all underwater, securitized mortgages to re-stabilize the local market, to protect the homes of those who hadn’t been foreclosed yet but were already in the foreclosure pipeline or in danger.” The working paper goes on to tout the benefits of the eminent domain proposal by stating that (a) the purchasing of loans at current fair market value immediately stabilizes the local housing market creating a floor to the downward price slide created by foreclosure sales, (b) stops the market push of rental costs as major banks empty foreclosed properties, and (c) getting homeowners out from underwater mortgage loans will cause homeowners to spend the savings elsewhere—estimating $2.7 million in spending per year mostly in Brockton. Moreover, the working paper estimates that the cost to Brockton to purchase all of the underwater mortgage loans would be about $200-$400 million (the entire Brockton City budget is $330 million). Brockton will need to consider fundraising proposals like bonding and loans to pay for the proposal.

At the March 21st meeting, the working group was to investigate the use of eminent domain to acquire and restructure underwater mortgages. The working group has targeted about 2,300 mortgages which could result in more than $15,600,000 in savings to property owners. The working group plans to finalize a strategy for consideration and review by May.

The eminent domain plan being considered by Brockton, MA is opposed by the usual suspects (e.g., the American Securitization Forum and SIFMA) making arguments we have discussed previously here and here. The American Securitization Forum issued a comment letter (which I highly recommend reading) setting forth its arguments against the proposal, including, (a) the fact that the Program raises fundamental legal concerns, (b) to the extent that the Program targets ‘performing’ loans, the proposal is not a valid “public use”, as required by eminent domain jurisprudence, (c) the Program would run afoul of the prohibition against impairing the obligations of contracts, (d) Brockton’s power is not broad enough to affect mortgage loans held outside of its jurisdiction, and (e) MRP’s valuation model is flawed and would not withstand a “fair value” challenge, thereby making the Program uneconomical for MRP (which, as we all know, is the real reason for MRP’s proposal). SIFMA also commissioned a memorandum, which found, among other things, that “Brockton’s plan is wholly incompatible with the lawful and constitutional exercise of the eminent domain power delegated by the Legislature to Brockton under the governing statute and the Massachusetts Declaration of Rights.”

MRP isn’t laying low either. Steven Gluckstern, the chairman of MRP, is campaigning in favor of the Program, arguing that “everybody is better off” if foreclosure is prevented and the homeowner is able to stay in his/her home. It looks like Salinas, a farming town located in central California, is working with MRP. If Salinas decides to adopt the Program (or some version of it) this would be a win for MRP as Gluckstern considers Salinas “just the right size” with 2,500 underwater mortgages. This “right size” appears to be necessary so that the nation’s attention is grasped and, ultimately, MRP’s lawyers can argue “during the all-but-inevitable Supreme Court case that reducing homeowners’ mortgage payments has macroeconomic benefits such as boosting consumer spending.” MRP has reached out to at least one member of the City Counsel of Merced, California regarding the Program (and likely others in CA, Nevada and across the country), and it appears that Gluckstern has found a town willing to partner with MRP stating that “[t]hey are ready to go and we [MRP] are just holding them off for the moment because it is so small that it might even be dismissed as irrelevant.”

Even as I write this article, another city has joined the ranks of Salinas, CA and maybe has gone even further. On April 2, 2013 (see agenda here) (see webcast of the council meeting here), the City Council of Richmond, CA approved an agreement with MRP, pursuant to which MRP will “assist the City of Richmond in reducing the impact of the mortgage crisis, by advising on the acquisition of mortgage loans through the use of eminent domain, in order to restructure or refinance the loans and thereby preserving home ownership, restoring homeowner equity and stabilizing the communities' housing market and economy by allowing many homeowners to remain in their homes.” From listening to the City Council meeting (but without the benefit of having a copy of the agreement), it appears that the City of Richmond is ready and willing to move forward with the Program (or some other version of it). The City Council is looking to set loan criteria in advance and to evaluate such criteria before MRP moves forward with implementing the Program with respect to specific properties. It will be interesting to see what that criteria looks like—underwater, performing, profitable for MRP. According to the city attorney, MRP will be paying all the costs and indemnifying the City of Richmond. There is some debate about whether MRP has enough money and insurance to cover all of the City’s losses but, in the end, it looks like the City will be relying on MRP’s insurance.

I doubt this is the last we have heard of the Program and its various permutations, as more and more cities, towns and counties are considering the Program. Hopefully, the fact that none of San Bernardino County, Wayne County or Chicago have implemented the idea will weigh heavily on Brockton’s decision (even some members of the Brockton City Council seem to have considered that there may be inherent flaws in the proposal) but you just need one city council willing to act in the face of the better argument and we may be discussing and fighting more than just proposals. And then there is the City of Richmond . . . . We will keep you updated as we hear more.