(Reuters) - Officials in California’s San Bernardino County began talking with a private investor group about a controversial proposal to condemn distressed mortgages back in January, some five months before the investor group’s involvement became public, county records show.
And after an initial telephone conference call on January 31, the investor group, Mortgage Resolution Partners, and the county signed an agreement to keep their communications secret, according to a copy of the February 9 agreement.
The novel plan developed by San Francisco-based Mortgage Resolution Partners to use the government’s power of eminent domain to seize and restructure poor-performing mortgages in a bid to aid troubled homeowners 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.
On Thursday, prominent bond manager Jeffrey Gundlach, who oversees more than $38 billion in assets, joined the rising chorus of opposition by calling the plan to restructure mortgages with eminent domain “grossly unconstitutional.”
Evidence that officials of San Bernardino County, which has set up a special committee to study the idea, acted to maintain the secrecy of its talks with Mortgage Resolution Partners is opening a new round of criticism.
“We are gravely concerned that a public policy proposal purportedly created to change the course of our housing market would be kept clear of public view for months,” said Paul Herrera, government affairs director for San Bernardino-area Realtors associations. “Whatever its merits and faults, they need to be vetted publicly and transparently.”
The county records, obtained by Reuters through a California public record request, show that officials with Mortgage Resolution Partners and the county either talked on the phone or met in person a half dozen times from January through June. The initial January 31 phone call took place three weeks after Mortgage Resolution Partners sent out a fundraising request to wealthy investors.
In June, Reuters first reported that San Bernardino County, located in the parched inland tracts east of Los Angeles, was giving serious consideration to Mortgage Resolution Partners’ eminent domain proposal.
The county has seen its fortunes rise and fall with the building boom and subsequent bust and is struggling with one of California’s highest unemployment rates and one of the nation’s highest foreclosure rates.
The Inland Valley Association of Realtors, which is one of California’s biggest Realtor associations, was one 18 investment trade groups -- including the Securities Industry and Financial Markets Association and the American Bankers Association -- that sent a letter to San Bernardino County opposing the use of eminent domain to seize mortgages.
Steven Gluckstern, chairman of Mortgage Resolution Partners, said there never was any intent to do something without involving a public discussion. He said the investor group asked the county to sign the non-disclosure agreement because it was still researching the eminent domain proposal.
Gluckstern said Mortgage Resolution Partners still has similar non-disclosure agreements with “several” other counties and municipalities it is talking to.
“We are simply trying to protect documents,” he said. “There was no intention that this was going to get slipped in under the rug.”
David Wert, spokesman for San Bernardino County, said the county has made no decision on whether to use eminent domain to condemn mortgages and has made no decision about working with Mortgage Resolution Partners.
He said after the media began asking questions about Mortgage Resolution Partners, the county asked the firm to end the non-disclosure agreement, which it did.
On Friday, the group established by San Bernardino County to study the proposal was scheduled to hold its first meeting.
The group is looking at whether it is appropriate to 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.
Mortgage Resolution Partners would work with the county to help find institutional investors willing to help finance the eminent domain strategy and make money from the sale of the restructured loans.
Wert said there are more than 150,000 families in San Bernardino County who owe more on their mortgages than their homes are worth and need help to stay in their homes. He said “finding a solution would benefit everyone.”
The county is home to the financially struggling city of San Bernardino, which with a population of over 200,000 is the largest municipality in the county and could become the third California city to file for bankruptcy this year.
The San Bernardino City Council voted Tuesday to file for bankruptcy. Some local officials have blamed the recession and high rate of home foreclosures for contributing to the city’s financial plight.
The county’s eminent domain idea, meanwhile, is garnering support from some economists who see it as way to help cash-strapped borrowers stay in their homes by significantly reducing their monthly mortgage payments.
A growing list of economists is endorsing the plan, including Yale University economist Robert Shiller, who say household debt reduction is necessary to reignite the economy.
L. Randall Wray, professor of economics at the University of Missouri-Kansas City, said the plan bears consideration. “There cannot be any recovery until we turn around housing,” he said. “Eminent domain may be the only way local governments can try to resolve the crisis.”
That view was seconded by Paul McCulley, a former portfolio manager and Federal Reserve watcher for top bond fund operator Pimco and now a senior fellow with the Global Interdependence Center, a Philadelphia-based think tank: “This is a very intriguing idea. A legal system-midwifed, modern-day jubilee.”
Meanwhile, opposition to the proposal continues to grow. On Friday, the American Securitization Forum, a Wall Street trade group that represents more than 300 firms and investor groups, issued a “white paper” showing why it would be illegal to use eminent domain to seize mortgages.
In a webcast Thursday, Gundlach, the founder of DoubleLine Capital, said even if a county or municipality tried to seized underwater mortgages it would not survive a constitutional challenge. If it did, he said, that would open the door to “massive repudiation of credit debt in the United States.”
Editing by Leslie Adler