Suffolk hears plan to seize homes with underwater mortgages
GalleriesSuffolk County Executive Steve Bellone
A California investment firm is pitching a controversial and untested plan to Suffolk County Executive Steve Bellone: Use the county's seizure powers to acquire "underwater" home mortgages.
While Bellone said he has no immediate plans to implement the proposal, he and other county officials met recently with Mortgage Resolution Partners, a new San Francisco company that also is advising a Southern California county beset by foreclosures.
Company officials who first contacted Suffolk last month argued that homeowners who owe more on their mortgages than their homes are worth are reining in spending in the local economy because they have to devote so much money to housing payments.
"This has persisted for six years in our country, and our argument is, unless you fix this problem, you can't enjoy economic recovery," said Steven Gluckstern, company chairman. Because the private sector isn't addressing the issue, government should use its power of eminent domain to take private holdings for the public interest, Gluckstern said.
Bellone said in an interview that he has no immediate plans to pursue the proposal.
"We'll look closely at what happens elsewhere," he said. "It's a novel approach, but it requires a significant amount of analysis and vetting."
The Securities Industry and Financial Markets Association said in a statement that the use of condemnation to "essentially renegotiate debts between private parties" would set a dangerous precedent. It also could be difficult to determine fair value for the mortgages, the association said.
Association of Mortgage Investors chief Chris Katopis said the tactic "will likely depress home values further, prevent lending, and drive away economic development."
Under the proposal, municipalities would use eminent domain to acquire securitized underwater home mortgages -- not the homes themselves -- from collective trusts that hold them. The municipalities would restructure the loans to reflect reduced home values, and resell them to investors. Homeowners then could more easily make payments.
Mortgages that are solely owned by banks would not be seized; unlike trusts with many investors, banks can more easily restructure loans, Mortgage Resolution said.
The company would collect a flat fee as a "community adviser" for each transaction, Gluckstern said.
In San Bernardino County, Calif., where officials also are considering a proposal by Mortgage Resolution, half of all home mortgages -- about 150,000 -- are underwater.
"We have no idea if it'll work," San Bernardino County spokesman David Wert said of the company's proposal.
"The best way may be for nonprofits to work directly with the investors interested in acquiring mortgages," Elkowitz said. "If [homeowners] can do this without government, they'd be better off. We have many people interested in these properties, and I see it being able to work with the private sector."