California Lieutenant Governor Gavin Newsom on Friday warned influential investor group Securities Industry and Financial Markets Association to "cease making threats to the local officials of San Bernardino County" over a plan to use eminent domain to seize underwater mortgages from private investors.
San Bernardino County, located east of Los Angeles, and some of its towns have set up a joint authority that would use the power of eminent domain to forcibly purchase distressed mortgages. Rather than evict homeowners through foreclosure, the public-private entity would offer residents fresh mortgages with reduced debts.
Newsom said governments that choose to employ eminent domain could be subject to a form of boycotting from mortgage investors, who would stop lending in communities that might use this power.
The Securities Industry and Financial Markets Association, known as SIFMA, and other investment trade groups have warned that the proposed use of eminent domain could scare away future mortgage financing.
"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," Newsom said in a statement first released to Reuters.
"This may be an aggressive idea, but communities such as San Bernardino, Chicago and others have no choice in these desperate times," said Newsom, a Democrat who was previously mayor of San Francisco. "We cannot allow Wall Street, who exploited the housing market for financial gain, to kill an idea before it is given a fair hearing."
On Wednesday, Chicago became the latest government -following San Bernardino County and Berkeley, California - to pass a resolution to hold hearings on whether to use eminent domain.
The novel plan to use eminent domain, developed by San Francisco-based Mortgage Resolution Partners, has raised the hackles of many on Wall Street, especially investors in mortgage-backed securities and the real estate business.
Traditionally, eminent domain is used by governments to seize properties to build highways and other public projects.
"We're simply laying out the facts so that the county is fully informed of the impacts of the proposed actions," Kenneth E. Bentsen, Jr., executive vice president for public policy and advocacy at SIFMA, said in a statement in response to Newsom. "We believe that this inappropriate and unconstitutional use of eminent domain would result in an unfair takings from every-day investors and pensioners and be immensely destructive to the U.S. mortgage markets.
Tom Deutsche, executive director of American Securitization Forum, commenting before Newsom issued his statement, said the issue would end up in litigation if any county or municipality tried to seize mortgages through eminent domain.
Litigation could set off a long court battle to determine the legality of seizing mortgages as opposed to the physical homes.
Newsom said in a phone interview that he plans to reach out to SIFMA and the mortgage investors it represents for a meeting in the near future.
(Reporting By Jennifer Ablan and Matthew Goldstein; Editing by Bernard Orr and Leslie Adler)