San Bernardino Scraps Eminent Domain Plan

In a stunning reversal, San Bernardino County on Thursday abandoned a plan to restructure underwater mortgages through the use of eminent domain, citing a lack of support from the community.

San Bernardino County Chief Executive Officer Greg Devereaux said at a hearing Thursday that he would not move forward with a plan to use eminent domain to refinance underwater mortgages.

"It would be wrong for me to introduce that risk to the community without the community saying we want to take that chance," Devereaux at a hearing. "That level of support has not materialized."

San Bernardino and two other California cities, Fontana and Ontario, joined forced last year to create a joint powers authority, the formal mechanism that would implement the eminent domain plan.

After scrapping the entire proposal, the county official instead called for any ideas other than those using eminent domain that could fix the county's housing problems. Roughly 150,000 mortgages in the county are believed to be underwater, according to David Wert, a spokesman for the county.

The idea of using eminent domain to aid the housing market had created a firestorm for the county as dozens of local citizens, activists and mortgage lenders urged local officials to drop the plan, saying it would have a chilling effect on lending in the area.

"We heard from a lot of people in the mortgage, banking and investment industry all telling us for months that this would cause horrible unintended consequences and worsen our housing situation," Wert said. "And we heard from virtually no one in the community who said we should take the risk anyway."

Devereaux said eminent domain would affect San Bernardino "in a very negative way," primarily by making it tougher for residents to obtain credit, and ultimately buy and sell their homes. Banks and mortgage lenders had told the county that any plan to use eminent domain would result in higher costs for home loans because of the increased risk that a home could be seized by the local government.

Eminent domain was initially proposed by a San Francisco venture capital firm Mortgage Resolution Partners that planned to earn fees by acquiring and restructuring underwater loans where the borrower owes more than the home is worth.

But bondholders had objected to the plan from the beginning largely because the venture capital firm wanted to acquire loans that were not in default, raising questions of whether the plan served a public purpose.

Tom Deutsch, executive director of the American Securitization Forum, cheered Devereaux's decision to scrap the proposal.

"The use of eminent domain to seize mortgage loans would do more harm than good," he said in a statement Thursday. "Use of eminent domain would ultimately be counterproductive to the housing market and the return of private capital to the mortgage finance system."

The Federal Housing Finance Agency, which oversees Fannie Mae and Freddie Mac, and holds more than $200 billion in private-label mortgage-backed securities, had threatened last year to take legal action against San Bernardino because any losses from the use of eminent domain would ultimately be borne by taxpayers.

Other municipalities, including Berkeley, Calif., and Suffolk County in New York, are considering similar proposals to seize underwater mortgages via eminent domain. The Chicago City Council briefly flirted with the idea this past summer before Mayor Rahm Emanuel shot it down.