Two cities in San Bernardino County and the county itself are considering using eminent domain to seize mortgages on troubled homes, sell them to investors at “market value” who would then create new mortgages for the homeowner with presumably much lower monthly payments. These mortgages would then be sold to other investors, so the original lenders would get their money back. Thus, distressed homeowners get to keep their houses and everyone is happy, right?

Wrong. The original mortgage holders will of course howl in rage at a plan that could cost them substantial amounts of money. Further, how will market value be determined? Will it be by looking at comparable distressed properties or by fiat from a municipality? The owner of the mortgage will not be able to say no if a municipality seizes the mortgage under eminent domain. But not only is this a certainly novel interpretation of eminent domain (although no doubt legal) the real problem may lie with those who hold the mortgages.

Most of the mortgage holders are institutional investors and hedge funds that gobbled up securitized mortgages during the real estate bubble. Not only are they quite capable of unleashing battalions of lawyers against California cities to block eminent domain, another real if unspoken problem lies in ownership of a particular mortgage. There has been so much fraud, sloppy record keeping, and securitized mortgages that determining who owns a mortgage isn’t always obvious.

Mortgage Resolution Partners has proposed to San Bernardino County that they act as a middleman, as a vulture fund, by finding lenders who will buy the condemned mortgages.  But others argue there is no need for a middleman, especially not a private corporation, when the government could simply do it themselves. Further, MRP wants the cities and county to only condemn mortgages where the owner is still making payments but the house is worth less than the mortgage. Thus, they are cherry-picking the best of the bad and leaving the real toxic slop, the vacant and foreclosed homes, for someone else to deal with.

Who needs MRP as middleman? By skimming off only the best mortgages, it is taking almost none of the risk and stands to reap windfall profits for raising capital and shuffling paper. If the federal government got serious about this concept, it has plenty of resources through its feeble HAMP program to acquire distressed mortgages, reduce the principal to fair market value, and give the homeowner all of the break.

MRP says they’re the good guys.

"This is not a bunch of Wall Street guys sitting around saying, `How do we make money?'" he said. "This was a bunch of Wall Street guys sitting around saying, `How do you solve this problem?'"

The central problem is the utterly devastated San Bernardino real estate market. The area is mostly a bedroom community for Los Angeles and the median home price has dropped from $370,000 to $150,000 in five years. That’s a lot of pain.

I said MRP was a vulture fund. That’s not necessarily a put-down. Vultures perform useful and essential services by getting rid of the dead. Desperate times require desperate solutions. And San Bernardino County is desperate.