By: Micah MaidenbergJuly 30, 2012
(Crain’s) — Chicago’s City Council is wading into the debate about whether governments should use their eminent domain power to save borrowers from foreclosure.
Under a controversial plan pitched by a San Francisco-based investment firm, municipalities and counties would use their eminent domain authority to buy up mortgages that are “underwater,” or exceed the value of the homes securing them. The governments would then reduce the principal owed on the loans and sell them to private investors.
Officials in Southern California and in New York already are considering the idea. Now, Chicago Ald. Edward Burke (14th) wants a joint committee to convene by mid-August to consider whether the city should pursue such tactics.
“This is something that’s starting to percolate in all major cities around the country,” said Mr. Burke, the powerful chair of the council’s Committee on Finance. “I’d like Chicago to be the first if it’s beneficial.”
Mr. Burke and Ald. Carrie Austin (34th) introduced a resolution at the City Council meeting last week calling for a hearing on the matter. A spokeswoman for Mayor Rahm Emanuel said the mayor’s office is reviewing the resolution.
Finance groups oppose the use of eminent domain powers to seize mortgages, arguing that they don’t pass constitutional muster and will scare off lenders from communities that adopt such tactics.
“I think what the discussion will find is this would be a bad policy outcome for the city of Chicago,” said Thomas Deutsch, executive director of the New York-based American Securitization Forum, a trade group.
Mortgage Resolution Partners LLC, the San Francisco-based firm pushing the idea, has had “conversations with people in the state of Illinois about the potential use of this technique,” said Steven Gluckstern, the company’s chairman. He declined to discuss specifics.
“When you have underwater mortgages, no amount of modification is going to fix that problem,” Mr. Gluckstern said. “The way to fix that problem is principal reduction.”
The firm is targeting underwater loans that have been packaged into mortgage-backed securities but are not guaranteed by the federally backed housing agencies Fannie Mae or Freddie Mac.
More than 503,000 residential properties in Cook County with mortgages were underwater in the first quarter, representing nearly 33 percent of all homes with mortgages, according to a recent report from research firm CoreLogic.
Using eminent domain to seize mortgages “would help refinance some of the most difficult loans that are subject to legal restrictions that make principal reductions difficult or impossible,” said Thomas Feltner, vice president at the Woodstock Institute, a Chicago-based non-profit that focuses on lending issues.
He added that the mere possibility of the city using its eminent domain powers could nudge lenders into making principal reductions.
“It’s a new idea and I think we don’t know a lot about it,” said Cook County Commissioner Bridget Gainer (10th), who has focused on foreclosure-related issues during her time on the county board.
But Ms. Gainer said the debate is worth having.
“You need to be willing to challenge assumptions to get an answer to a problem that has been intractable,” she said.
The Illinois Mortgage Bankers Association, however, is all but certain to oppose a measure that would allow the city to use eminent domain to take over residential mortgages.
“I can’t see anyone on our board supporting this,” said James Trausch, the group’s general counsel. Mortgage lenders won’t underwrite debt if “your mortgage is subject to some outside agency determining what its value is.”