Underwater secrets

Local governments'  have often stirred controversy with their use of eminent domain. While it's supposed to be used for the public good, too often it has been used to profit developers, while the public just feels ripped off.

Still, the idea of local governments using eminent domain as a tool to stabilize home prices in some of Southern California’s hardest hit communities is an intriguing one.

It’s the kind of bold action that’s been missing in the government’s limp response to the foreclosure crisis.

But the scheme that’s unfolding in Southern California’s Inland Empire, rated as the one of the most underwater in the nation, is a step in the wrong direction.

It smacks of politically-connected high-finance types, boasting of their access to politicians as their “secret formula,” wheeling and dealing in secret.

A san Francisco venture capital firm is cooking up a scheme in San Bernardino to use the government’s eminent domain power to seize some underwater mortgages from investors who own them and have been unwilling to offer borrowers principal reduction that would allow them to stay in their homes.

The firm’s idea, apparently, is to for San Bernardino County and other local government’s form a joint powers authority that would allow those government to act together to use eminent domain to seize mortgage loans, not the property, of underwater homeowners who were not behind on their payments at “market value.”

Then, according to the scheme, the firm would find investors to issue new mortgages to the homeowners at that lower, more affordable “market value.”]

The plan was hatched by San Francisco-based Mortgage Resolution Partners. That’s the firm originally headed by Phil Angelides, former state treasurer, real estate developer and venture capitalist best known recently for leading a congressionally-appointed investigation into the financial crisis.

After issuing a report highly critical of the banks, Angelides didn’t stump the country to put pressure on authorities to follow up on his report with prosecutions.

He went into the mortgage business himself, swaddling his efforts to make profits from distressed mortgages in good intentions of finding solutions to the foreclosure crisis.

It was Angelides who boasted in a letter to potential investors that his firms’ secret formula was its connections to public officials. Reuters reported that Angelides told potential investors they could generate 20 percent profits.

After Angelides’ involvement in the firm was publicized earlier this year, he stepped aside. Replacing him was Steven Gluckstern, a hedge fund veteran who was one of President Obama’s major bundlers in the 2008 election.

According to published reports, Mortgage Partners would make its profit charging a fee on every mortgage seized. How much will it be paid and how? That hasn’t been disclosed. But according to Naked Capitalism, its sources say that the firm expects to make a 5.5 percent fee on each mortgage ­– paid for by having the government seize the mortgages at a discount and sell them back to the homeowner for a profit.

The most serious general flaw in the scheme is that has unfolded behind the cloak of confidentiality agreements between government officials and Mortgage Resolution Partners, with no public disclosure or debate on the concept or details, giving the whole deal the stink of a sweetheart deal, not a solution.

When the Riverside Press-Enterprise sought written records of communication between county officials and the mortgage firm, they were told there were none.

The use of eminent domain is highly controversial because it has often been justified as benefiting the public when it ends up benefiting real estate developers. In this case, investors who own the mortgage loans have already weighed in opposing the plan. Though the plan’s backers say eminent domain has been used to seize intangible goods, they acknowledge it hasn’t been used to seize mortgage loans before. So investors are likely to challenge the process in court.

But I wouldn’t shed too many tears for the investors, who have stood in the way of principal reductions or any other means of helping homeowners.

Another question raised by the current plan: why is only Mortgage Resolutions Partners being considered as a partner for the joint powers authority? The idea should be put out for an open bid. Maybe other firms would have even better plans and offer a better deal.

And there are plenty of other issues surrounding the plan. Walter Hackett is a former banker who is now lead attorney in the Legal Aid Riverside’s branch near San Bernardino. While he likes the idea of using eminent domain as a tool to stabilize home prices,

he questions why eminent domain would be used to seize mortgage loans – which are more difficult to set a price on – rather than property itself. Seizing the property and paying the investor for the fair market value of the property, rather than the mortgage, would extinguish the old mortgage and the new investors could then issue a new one to the borrower at the market value.

Hackett also questions why eminent domain would be used only on mortgages deemed current, so-called performing loans, rather than including properties that have already fallen into foreclosure that are still owned by investors. “Former owners, or others might be able to afford reduced payments once the properties are priced at market value, rather than at the price of the underwater mortgage,” Hackett said.

Hackett’s unusual background, having been a banker and represented homeowners in foreclosure, would be invaluable in redesigning such a proposal. It should not be left only to the venture capitalists and the county politicians.

I’m not suggesting that local governments shouldn’t find a way to use eminent domain or find other creative solutions to help struggling homeowners. But we also need to stop assuming that when the financiers and politicians go into the back room, they come out with something that’s in our interest – even if they say it is.

We learned from the bailout and the government’s subsequent coddling of the financial industry how the secrecy and lack of transparency undermine trust in both our financial system and our government.

However inconvenient to the bankers and hedge fund honchos, such proposals must be hammered out with full public participation and debate. We don’t need any more secret formulas” brewed with corporate cash and political connections in back rooms with you and me kept out.

 

 

Foreclosures / Martin Column - 07/12/2012

Around the Web: They Told Us So

The foreclosure robo-signing scandal may not have been making headlines until a month ago, but nobody should be surprised that it has finally erupted.

There have been warnings after warnings, all of them ignored by politicians, policy makers and the mainstream media.

Among those who have been ringing the alarm bells is Florida lawyer April Charney, with Jacksonville Area Legal Aid, who has traveled the country to train lawyers how to challenge foreclosures. In California, Walter Hackett, of Inland Empire Legal Services, has overseen a listserv for consumer attorneys representing borrowers facing foreclosure. Web sites like 4closurefraud.org have also been relentlessly focused on the issue.

Earlier this year, Mother Jones ran a stinging story, “Can Anyone Stop The Predatory Lenders?” detailing the misdeeds of mortgage servicers. Reporter Andy Kroll pointed out that the feds were basically paying the same shoddy characters who engineered the subprime crisis to fix the mess.

And Bloomberg’s Jonathan Weil cautions against taking comfort from the big bankers who are now trying to minimize the impact of the fiasco they created. “Three years ago, as the subprime mortgage crisis began to spiral, one of the lessons the public should have learned is that the leaders of these companies often have no idea what’s going on inside them,” Weil writes. “We may be witnessing the same phenomenon again. There’s no excuse this time for anyone to be surprised.”

Around the Web / Foreclosures / Martin Column - 10/21/2010

"Conspiracy of Ignorance" Demands Attention

In California, the nation’s largest real estate market, the robo-signing scandal has produced many calls to halt foreclosures, but little real change so far.

For several years, lawyers who represent borrowers in foreclosure have been complaining about massive and gnarly problems in the foreclosure process.

Because of the way Wall Street sliced and diced mortgages into derivatives and sold them off, the ownership of the mortgage had often not been properly documented, these lawyers said.

Such documentation is a basic legal requirement of foreclosures.

But they couldn’t get many judges to go along with them, especially in California, where, by state law, judges don’t typically oversee foreclosures. They only get involved if a borrower files suit to block a foreclosure, and even then, the courts are reluctant to do anything that would benefit borrowers who haven’t been paying their mortgages.

But disclosures over the past week in the robo-signing scandal may change that, after bank officials disclosed that they signed thousands of foreclosure documents without reading them first. Among the problems were documents that appeared to be forged or inaccurate assessments of how much borrowers owed on their mortgages.

In states with court-supervised foreclosures, the big banks voluntarily called a halt to foreclosures. But not in non-judicial foreclosure states like California.

The banks’ position so far is that the robo-signing doesn’t represent any substantial problems in the documentation, just that they were overwhelmed and understaffed and couldn’t keep up with the paperwork.

Walter Hackett disagrees. He’s a former bank executive who now represents borrowers in foreclosure at Inland Empire Legal Services. Hackett also runs an online bulletin board for lawyers fighting foreclosure. “Sloppy paperwork is too nice a way to describe it,” Hackett told me. “It’s a conspiracy of ignorance.”

He recalled dealing with Wells Fargo on behalf of one client. They were promising his client a loan modification; however, by the time Hackett untangled the paperwork, it turned out the mortgage was actually owned by another bank.  “Before a bank can foreclose on a property, they have to prove that they own the note,” Hackett said.

Meanwhile, Attorney General Jerry Brown has issued cease and desist orders against some of the big banks that have acknowledged problems in their paperwork. But Brown’s concern is not actually the robo-signing, a spokesman said, but whether the banks are complying with a California state law that requires the banks to attempt to work out a loan modification before they foreclose on a borrower.

Brown spokesman Jim Finefrock said, “We’re talking to them [the banks]. We’re hoping for a resolution of the matter.”

He acknowledged that Brown was focused on compliance with the California law, not the larger issues of whether documents had been improperly filed in foreclosure cases.

The implications of the foreclosure fiasco are potentially huge, what Reuters business blogger Felix Salmon describes as “the mother of all legal messes.” If the problems with the paperwork prove substantial, they could undermine previous foreclosures and home sales, leading to a waves of litigation involving borrowers, homeowners banks and investors. The bad news for the economy is that the robo-signing scandal will only prolong the foreclosure crisis, keeping those facing foreclosure, and the entire housing market, from attaining some kind of stability.

While politicians and organizations have been calling for investigations and moratoriums on foreclosures, those are only a start. We need real leadership to forge long-term solutions, instead of the weak half-measures we’ve gotten so far. Maybe the robo-signing mess will offer the opportunity for the administration, the banks and the investors to try again to solve the foreclosure debacle and to get it right this time.

Foreclosures / Martin Column - 10/08/2010