California Is Playing With Mortgage Fire

The borrower would be offered a refinancing, with possible assistance from the Federal Housing Administration, meaning that the borrower might only need 2.5% equity in the home, so that the refinanced balance could be more than the amount that the investor was paid.

Mortgage Resolution Partners is a private firm led by Graham Williams, a former director of residential lending at Bank of America. The company did not respond to a request for comment.

Wirt says that San Bernardino County "has not determined whether or not it would be a good idea" to move forward with the novel use of eminent domain being explored by the Joint Powers Authority, but also says "our economy is in crisis mode and the sooner we can do something to help people, the better, as lot of people trapped in underwater mortgages could eventually face foreclosure."

Mayer says that in order for this new use of eminent domain to pass muster, the cities and the county "have to show that the eminent domain proceeding is benefiting the public as a whole, rather than just individual property holders. Absent that, it will be deemed unconstitutional."

Hobbs calls the specter of mortgage modifications foisted upon MBS investors through the use of eminent domain "disturbing, to say the least," and while the California Mortgage Bankers Association is "not exactly sure what the program is going to look like," the program "could chill investor activity in certain territories."

Mark Dowling, CEO of the Inland Valleys Association of Realtors says his organization is also "against the use of eminent domain to modify mortgages." Regarding the benefits to the public at large from keeping homes from becoming vacant and potentially run down, he says the municipalities "have code enforcement policies in place that would already oversee the maintenance."

"Homeownership [in California] usually involves two owners, the homeowner and the deed-in-trust holder," Dowling says, adding "our board does not feel it is appropriate to deny one of the owner's rights while protecting the other owners' rights and interests."

Chris Katopis -- the executive director for the Association of Mortgage Investors -- says "our members are strongly opposed" to the use of eminent domain to force mortgage loan modifications, and that "we're looking at something of a land grab by a very small group of investors."

Wirt says that the first public meeting of the Joint Powers Authority will "occur this month, possibly next week," although no specific date has been set.

-- Written by Philip van Doorn in Jupiter, Fla.

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Philip W. van Doorn is a member of TheStreet's banking and finance team, commenting on industry and regulatory trends. He previously served as the senior analyst for TheStreet.com Ratings, responsible for assigning financial strength ratings to banks and savings and loan institutions. Mr. van Doorn previously served as a loan operations officer at Riverside National Bank in Fort Pierce, Fla., and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a bachelor of science in business administration from Long Island University.

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