Debra J. Saunders
There are some ideas so convoluted that only an expert (or wannabe expert) could love them.

For example: collateralized debt obligations, which seemed like a good idea until the mortgage meltdown swamped the U.S. economy.

Into this hallowed territory comes a new instrument, playing its siren song.

San Francisco startup Mortgage Resolution Partners has come up with the brilliant idea of getting local governments to use the power of eminent domain to seize underwater mortgages and pay the mortgage holders something less than the market value of the home. That allows the homeowner to get a new, lower-balance mortgage that better reflects the home's worth and generates enough cash to allow the local government and Mortgage Resolution Partners to benefit.

The startup is trying to sell the scheme as a win-win for practically everyone harmed by the housing slump.

Underwater homeowners will enjoy lower mortgage payments. (Caveat emptor: Mortgage Resolution Partners doesn't want any mortgages in default.)

Cities no longer will have to worry about an exodus of foreclosed homeowners, who leave behind empty homes, which undercut the property values of entire neighborhoods.

Pension funds and other investors who hold the original mortgages are the only losers.

But maybe not, said Mortgage Resolution Partners Chairman Steven Gluckstern. Those who hold the mortgages already marked down the value because of falling prices; they are "no worse off and may be better off by provision of the liquidity."

Sounds too good to be true.

"The investors we represent don't think they're doing them a favor," said Ken Bentsen of the Securities Industry and Financial Markets Association. If this idea really is so great for current mortgage holders, let Mortgage Resolution Partners make arrangements on the open market. In California, Fontana and Ontario and unincorporated parts of San Bernardino County, where about half the homes are underwater and local government is contemplating filing for bankruptcy, already have set up a joint powers authority. It could be the first-in-the-nation practitioner. To Bentsen, this means lenders will not be eager to issue new loans, as they, too, would be subject to seizure.

Mortgage Resolution Partners brass argues that the power of eminent domain is well-established, as long as local governments can point to a solid public use -- in this case, preventing foreclosures.


Debra J. Saunders


 
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