Bay Area firm's idea to lift underwater homeowners to positive equity loses steam

Published: Monday, May. 20, 2013 - 12:00 am | Page 1D

A year ago, with the real estate market still in a deep slump, a San Francisco firm caught the attention of officials in California and elsewhere with its novel idea of using eminent domain to seize underwater mortgages in order to reduce the amount that borrowers owe.

Now, with home prices rising again and facing fierce opposition from the financial industry, Mortgage Resolution Partners has seen some of its first and best prospects back off. Sacramento, San Bernardino County and Chicago are among the localities that took a look and passed – at least for now.

The firm's chairman, venture capitalist Steven Gluckstern, said it is focusing instead on a handful of smaller cities with which it has signed advisory agreements. They include Richmond in the Bay Area and the Los Angeles-area communities of El Monte and La Puente, he said. The firm, known as MRP, also said it had signed up San Joaquin and Orange Cove, two small towns near Fresno.

Those cities could be test cases for a plan that Gluckstern insisted will lift thousands of homeowners into positive equity. Households that are deeply underwater are unlikely to feel the effects of the nascent housing recovery anytime soon, he contended. And Gluckstern said he still thinks Sacramento could benefit from the program.

The latest available figures, from the end of last year, showed Sacramento had about 150,000 homeowners who owed more than their houses were worth, including thousands who owed twice their homes' value. Those numbers probably have lessened significantly in recent months, as housing prices surged, but it could be years before many homeowners have equity in their homes.

"Obviously the city of Sacramento has a big problem and we'd love to be helpful there," Gluckstern said. "The problem has not evaporated. It hasn't gone away, despite the recovery. Underwater homeowners are still underwater. Where we are really focused is on the deeply underwater folks."

Opponents in the mortgage industry call Mortgage Resolution Partners' plan a scheme intended to profit its financiers and investors. To stop it in its tracks, they have traveled the country and sent letters to any city that considers the plan. They contend the proposal is an illegal use of eminent domain, and that it will wreak havoc on mortgage markets and end up in protracted legal battles.

"MRP sells themselves as a community advisory group but it is really a vulture fund that's trying to take advantage of an opportunity in the marketplace to enrich themselves," said Tim Cameron, an executive with the Security Industries and Financial Markets Association.

Gluckstern counters that it was the financial industry that helped create the national mortgage meltdown and now objects to efforts to try to fix it. A positive outcome for any city would set off a chain reaction of communities eager to embrace MRP's proposal, he said.

"If it happens and happens successfully, it will spread like a wildfire," Gluckstern said. "That's one of the reasons the opposition is working so hard to prevent us from being successful."

Mortgage Resolution Partners says it would help cities identify mortgages to purchase or take through eminent domain, which is normally used to seize property for such public works projects such as highways. Only mortgages bundled into so-called private label securities would qualify; those backed by federal mortgage giants Freddie Mac and Fannie Mae would not be included.

The firm recommends buying only mortgages on which homeowners are current on payments – causing opponents to level charges of cherry-picking performing loans while leaving troubled loans untouched.

Industry opposition

MRP's investors would front the vast sums to local governments to buy the mortgages. The purchase price must be less than a home is currently worth. MRP claims this discounted price would in fact be fair market value – once the costs to the lender of going through the foreclosure process are included. Opponents argue it's a rip-off that shortchanges note holders.

With MRP's help, the homeowner would then refinance at the home's current value. Investors, local governments and MRP would split the difference.

Gluckstern uses this example: A homeowner paid $300,000 for a home in the boom that is now worth $200,000 and has a mortgage for more than the home is worth.

A city would seize the mortgage and pay the note holder $160,000. The homeowner would then refinance for $190,000, with MRP, its investors and cities sharing the profits.

The firm began pitching its plan last year to areas hit hardest by the housing bust.

San Bernardino and the cities of Ontario and Fontana were among the first to show serious interest. They formed a joint powers authority and held meetings to explore the plan. In January, the cities and county rejected it amid strong opposition from mortgage, banking and real estate interests and an absence of public support, said county spokesman David Wert.

Chicago, too, held hearings but opted not to move forward.

MRP also courted officials in Sacramento, Elk Grove and Rancho Cordova. Sacramento Vice Mayor Angelique Ashby, who represents foreclosure-stricken North Natomas, expressed interest in hearing more. So did Elk Grove Mayor Gary Davis and advisers to Sacramento Mayor Kevin Johnson.

But no cities in the region proceeded further.

"It just seemed that the risks outweighed the benefits," Davis said. "You're taking a tool (eminent domain) designed for public works projects and using heavy-handed measures to weigh in on the free market."

Ashby, who recently had a baby, could not be reached for comment.

'Second thoughts'

Johnson senior adviser Cassandra Jennings said city officials last spoke with Mortgage Resolution Partners earlier this year. They want to see if any other cities have success with the plan before moving ahead, she said. They also expect the housing recovery will lift many homeowners out of negative equity, doing away with the need for drastic measures, she said. "Right now we're just waiting and seeing," Jennings said.

MRP is still in the early stages of working with the cities that have signed advisory agreements with it, Gluckstern said. It could be some time before any attempt is made to seize mortgages using eminent domain.

"They've hired MRP to represent them to collect data and to determine which homeowners might work with them," Gluckstern said.

The cities can make offers to purchase loans from note holders – the first step in the eminent domain process, he said. But they are not obligated to use eminent domain under the agreements.

Officials in most of the cities that signed up with MRP did not respond to requests for comment.

Gabriel Jimenez, the mayor of Orange Cove, said Mortgage Resolution Partners came to town and pitched its plan, contending that nearly a third of the city's homeowners were underwater.

That surprised the mayor. The city of 9,000, surrounded by orange groves, is nestled against the Sierra Nevada foothills in Fresno County and didn't have much of a housing boom, he said. But the city went along, he said.

Since signing the agreement, Jimenez said he's heard objections and is having doubts about the San Francisco financiers.

"We received mail from Realtors," Jimenez said. "They said it's no good, so I'm having second thoughts about what they're up to."

Call The Bee's Hudson Sangree, (916) 321-1191.

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