* San Bernardino began talks with investor group in January
* County and Mortgage Resolution Partners agreed not to
* Wall Street opposition to eminent domain mounts
By Matthew Goldstein and Jennifer Ablan
July 13 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 Jan. 31,
the investor group, Mortgage Resolution Partners, and the county
signed an agreement to keep their communications secret,
according to a copy of the Feb. 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 Jan. 31 phone call took place three weeks after Mortgage
Resolution Partners sent out a fundraising request to wealthy
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
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
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
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
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."