LOS ANGELES — A plan by San Bernardino County, Calif., to seize mortgages and restructure them for underwater homeowners using eminent domain is perhaps the most aggressive example of how local governments are seeking new ways to combat foreclosure.
The cities of Ontario and Fontana are partnering with the county to create a Homeownership Protection Program that would use private funds to acquire underwater mortgages from investors. The county and the two cities have created a joint authority to explore the plan. The authority's first public meeting will be next week.
David Wert, a spokesman for the county, said the program could offer a solution to the vast number of loans that are stuck underwater, with more money owed than the property is worth. Countywide, the program could benefit 20,000 to 30,000 homeowners, he said.
“The only thing we are doing at this point is conducting a conversation,” Wert said. “This is a proposal that could — if everything checks out — address the problem on a fairly large scale.”
Plan has opponents
Although in its initial stages, the proposal has attracted controversy. A number of banking, financial and business groups oppose it, contending that seizing mortgages would raise constitutional issues and could increase lending costs in those cities.
The California Mortgage Bankers Association, the American Bankers Association and the American Securitization Forum, along with several other financial groups, sent a letter of opposition to the county and the two cities.
“We believe that the contemplated use of eminent domain raises very serious legal and constitutional issues,” the letter read. “It would also be immensely destructive to U.S. mortgage markets by undermining the sanctity of the contractual relationship between a borrower and creditor, and similarly undermining existing securitization transactions.”