California Lt. Gov. Gavin Newsom has called on the Securities Industry and Financial Markets Association (SIFMA) to cease making threats to the local officials of San Bernardino County, Calif. SIFMA recently attacked the idea of local governments using existing law to help families remain in their homes and keep their communities viable. The San Bernardino County region is considering the acquisition, by private investors via eminent domain, of home-secured loans, to protect homeownership while delivering the market value of the old loans to their owners.
"Communities have been ravaged by the housing crisis and the financial sector has had long enough to fix the problem they helped create," said Lt. Gov. Newsom. "We cannot let another day go by while families are forced from their homes. We must think big and help our local governments develop solutions—because the industry and federal government have not."
San Bernardino County Chief Executive Officer Greg Devereaux, joined by the cities of Ontario and Fontana, have set up a JointPowers Authority (JPA) to explore options to keep people in their homes before they reach the foreclosure stage.
"This may be an aggressive idea, but communities such as San Bernardino, Chicago and others have no choice in these desperate times," said Newsom. "We cannot allow Wall Street, who exploited the housing market for financial gain, to kill an idea before it is given a fair hearing."
Steven Gluckstern, chairman of Mortgage Resolution Partners in San Francisco, proposed a plan of municipalities seizing underwater mortgages in the name of eminent domain. Eminent domain is defined as the government taking over properties without an owner’s consent. Gluckstern sees his idea as a fix to rehabbing neighborhoods threatened by distressed properties and rapidly declining property values.
Under Gluckstern's plan, the pilot communities would refinance these mortgages at rates reflecting the current value of the home. The second step is to sell the mortgage back to the underwater homeowner at the current lower market rate (currently in the 3.5 percent range). Acccording to Fitch, if Gluckstern's plan materializes, nearly $7 billion worth of mortgages would be called into question in San Bernardino. Opposition to the eminent domain concept, including investors and banks have challenged the legality of the concept.
"The true injustice of the last few years is that as banks were bailed out and government claimed it has done all it can, the homeowner, the backbone of our communities, has received nothing but eviction notices," said Lt. Gov. Newsom. "We need to help the people that government bailout programs have left behind—ordinary folks that have worked hard to keep their homes even as values plummeted. The economic power that would be unleashed if consumers are untethered from the anchor of these underwater mortgages would result in a return of consumer confidence, economic grow and job creation."
On July 9, San Bernardino, currently faced with a $46-million deficit, became the third California city in less than 30 to file for bankruptcy protection.
"I applaud the leaders in San Bernardino for thinking and acting big to protect their communities," said Newsom. "Greg Devereaux's communities are some of the hardest hit in the country and his leadership on this issue should be rewarded with support not the threats of a Washington, DC interest groups that are protecting Wall Street. The Washington, D.C. special interest groups needs to back off. We owe it to homeowners everywhere to see if the solutions being discussed in San Bernardino will work."