San Bernardino County abandons mortgage plan

San Bernardino County and two of its cities abandoned a plan that would use eminent domain to seize troubled mortgages and write down debt for homeowners.

The decision strikes a blow to an idea that garnered national attention as a potential -- if unconventional and controversial -- solution to the mortgage crisis.

The proposal was unanimously shot down in a vote by members of the Joint Powers Authority that the county and the cities, Ontario and Fontana, formed last year to explore the idea. Greg Devereaux, county chief executive and chair of the authority’s five-member board, said it gave up on the eminent domain plan because of its lack of public support.

Devereaux also echoed criticisms by the mortgage industry and Wall Street groups, who have argued such a plan would spark lawsuits, higher interest rates and a tightened market for borrowers.

“It introduced risk into the market that we couldn’t quantify,” Devereaux said. “It wasn’t a decision that a board like this should make unless there was overwhelming support in the community for going forward with that solution, and assuming that risk; that support never materialized.”

Eminent domain is usually used to seize land -- not loans -- to serve the public good, as when local governments seize blighted properties. The San Bernardino County effort would have been the first widespread attempt at using eminent domain to seize residential mortgages.

Fontana vowed to continue exploring the idea, despite the authority’s rejection. “It would be irresponsible for the city of Fontana to not examine all options available to strengthen our community by helping our underwater homeowners,” Fontana Mayor Acquanetta Warren said. “It is our intention to go forth aggressively to help find local solutions to Fontana’s mortgage and foreclosure crisis.”

The idea was first floated to Devereaux last year by representatives of the San Francisco firm Mortgage Resolution Partners, who have been traveling the country to promote the plan. Thursday’s rejection in the Inland Empire was not the first time the idea has been shot down. Chicago Mayor Rahm Emanuel rejected the idea last year for his city, saying, “I just don’t think that’s the right instrument.”

It’s nevertheless a blow to efforts to employ the strategy on a broad scale. San Bernardino County was among the hardest hit by the housing bust, with plummeting prices trapping tens of thousands of homeowners in underwater mortgages. Devereaux was the first public official approached by Mortgage Resolution Partners to consider the idea, and proponents and critics had been watching developments closely.

Steven Gluckstern, chairman of Mortgage Resolution Partners, was disappointed by the board’s decision. But his group is talking with more than 30 other jurisdictions across the country, he said.

“It is a bump in the road, but this is a marathon, and we have had lots of conversations,” Gluckstern said.

The mortgage investment industries have called the plan a government overreach that would nullify valid contracts and hurt the local housing market. An eminent domain mortgage plan would harm not only local communities financially, industry advocates argued, but also pensioners who had invested in the “private label” mortgage securities that the plan targeted. One of those groups has been the Securities Industry and Financial Markets Assn.

“We are encouraged” at the rejection, Timothy Cameron, managing director and head of SIFMA’s Asset Management Group, said Thursday. “The unprecedented, potential use of eminent domain would cause severe damage to struggling housing markets and is likely unconstitutional on its face.”

Dustin Hobbs, spokesman for the California Assn. of Bankers, expressed relief that the board decided to change course and pledged that his organization would work more closely with the three communities to address the mortgage woes of their constituents.

But Linda Roberts-Ross, a bankruptcy attorney in Yucaipa who counsels troubled borrowers, said she would have liked to have seen the board keep the eminent domain option on the table.

“I think we need to do something drastic,” Roberts-Ross said. “Every day I counsel people, ‘Walk away from the house, you don’t have any equity, you’re not going to have any equity in your lifetime.... Why should you be a tenant to the bank with all the obligations of an owner?’ ”

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alejandro.lazo@latimes.com