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A New Idea?

Perhaps you recall last year that the county of San Bernardino, the heart of the California inland empire devastated by the real estate meltdown, was considering buying up underwater mortgages and refinancing them for the owners to help them stay in their homes.  Where did the county come up with the idea?  A company called Mortgage Resolution Partners had developed a plan to purchase “private-label securities.”  These are formed from mortgages which were split into pieces, made into bonds and sold to investors.  These loans become almost impossible to modify because there are too many investors involved in them.  The only way to deal with them is to allow them to go through foreclosure.  MRP came up with an idea to deal with these unmodifiable loans.  Their business plan is to take these loans, which have no identifiable owner and get someone to take ownership of the loans.  In this case, the government agency in which the houses secured by the loans are located, be it city or county.  How do governments take over privately owned property?  By condemning it through their powers of eminent domain.  MRP wants the governments to condemn the mortgages and restructure them.

MRP has put together monies from investors to pay for the court costs of condemning the mortgage through the judicial system.  The mortgage is paid off, at 80 percent of market value of the house, by the MRP investors and the homeowner gets a new mortgage at a principal closer to the value of the home.  The difference, or profit,  between the amount paid to the bond holders and the  new mortgage is divided up, with one-third going to the county or city, one-third to the investors in MRP and $4500 to MRP.  The remainder pays transaction closing costs.  Research has shown that if a homeowner is less than 15 percent underwater on a mortgage, the homeowner is happy to stay in the home.

So what happened to the plan?  Financial servicers, real estate groups, the securities industry, the Mortgage Bankers Association and the Federal Housing Finance Authority all came out vehemently against the ideal.  Concerns were raised regarding the use of eminent domain to restructure loans and what the effect might be on mortgage markets.  The strength of the opponents made it impossible for the County of San Bernardino to enact the MRP proposal.

Nevada has now floated a similar proposal, but based on a nonprofit program.  The state would buy up distressed mortgages from the federal government at a discount of 30 percent, using funds from the national mortgage settlement and other, federal, sources, and then help the homeowner refinance.  The mortgages would be selected by the program; homeowners could not apply for it.  For more information, here is a link to an article in the Review Journal.



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