- - Tuesday, August 6, 2013

A company run by prominent Democratic supporters is colluding with local governments to enact sweeping home mortgage reforms at the expense of taxpayers and lenders, according to a U.S. congressman.

Rep. John Campbell (R., Calif.) has introduced legislation that aims to prevent municipalities from using eminent domain to seize properties as a means to address mortgage foreclosures crises.

The proposal, he said in an interview, was spurred by schemes in his home state and elsewhere to use the government’s power to seize property to address high foreclosure rates and large numbers of underwater mortgages.

Richmond, Calif., is the latest city to attempt the plan. Officials in the city plan to use eminent domain to seize mortgages, paying lenders 80 percent of the current value of the homes, according to the New York Times.

The city will then allow borrowers to refinance at a slightly higher price and will split the difference with Mortgage Resolution Partners (MRP)—the company that is providing much of the capital for the effort—and other investors in the plan.

“There are many things I despise about this proposal, but one of them is that I don’t think there’s any legitimacy in public policy,” Campbell told the Washington Free Beacon.

“It’s entirely an effort of a private entity [MRP] to say, ‘If we can get local government to go along with us and basically rip off the taxpayers and financial institutions, and we share in the spoils, wouldn’t this be a great deal?’” Campbell said.

MRP’s role in similar schemes has come under scrutiny due to the company’s deep ties to Democratic politicians at the state and national level.

Steven Gluckstern, MRP’s chairman, bundled between $200,000 and $500,000 for President Barack Obama’s 2008 campaign. He has also personally donated more than $260,000 to Democratic candidates, committees, and interest groups, according to the Center for Responsive Politics.

MRP’s former executive chairman, Phil Angelides, was appointed by then-Speaker of the House Nancy Pelosi (D., Calif.) to a federal commission to investigate the causes of the financial crisis. According to other members of the panel, he attempted to downplay the role of federal backing for home loans in the 2008 financial crisis.

“As a result [of Angelides’ influence on the panel], the report’s discussion of the GSEs’ role in the financial crisis was almost completely perfunctory, and the whole report was a sad whitewash,” wrote Peter J. Wallison, a fellow in financial studies at the American Enterprise Institute and a member of the panel.

Angelides’ closeness with Pelosi and other political leaders in California raised eyebrows in 2012 as MRP attempted to lead a plan in San Bernardino, Calif., similar to the one being undertaken in Richmond.

As of mid-2012, according to the Bay Citizen, one of MRP’s top investors was former San Francisco mayor and California Assembly Speaker Willie Brown.

In a letter issued by the company in January of last year, MRP explained its strategy to use “legal and political leverage” to acquire distressed mortgages. The efforts, according to the letter, “just might do a good thing for America, and along the way get a great return on investment” for MRP.

According to Reuters, which first revealed the letter, the “secret formula” it described depended on “its leverage in ‘California politics’ and an executive chairman in Angelides, ‘who will be front-line center stage nationally.’”

Observers at the time raised concerns about MRP’s apparent use of political connections to secure lucrative real estate deals.

“The big question is, ‘How can he possibly jump to the front of the line when everybody’s been jockeying for this and to get to this feeding trough?” asked Laus Abdo, executive director at Las Vegas real estate advisory firm TriArchic Advisors.

“Perhaps because he knows where the front of the line is?” Adbo suggested.

Angelides stepped down after Reuters revealed the details of the internal MRP letter. The company did not respond to questions about its role in San Bernardino, Richmond, or elsewhere.

Campbell claims that MRP’s strategy remains explicitly political. The Richmond proposal, he said, “has no basis in constitutional law, no basis in public policy. Its only way to be created is through politics. It’s a way to make money through politics.”

He expressed concern that Richmond’s plan could spur other cities to adopt similar policies as they too are forced to confront distressed real estate markets.

“Someone who is in desperation will often do some very bad things in their desperation,” he said.

Financial experts say the top concern is less the immediate economic implications of the policy — though that is a concern — than the moral hazard that it would create: Cities around the country might decide to vacate debts en masse owed to financial institutions.

“Our concern remains that eminent domain refinancings will spread as soon as one community shows that it is a viable policy,” Jaret Seiberg, a senior policy analyst at Guggenheim Partners Washington Research Group, recently wrote.

“We believe the use of eminent domain to refinance underwater borrowers could damage the housing finance system by causing investors to question if the loans are really secured,” Seiberg warned.

North Las Vegas, Nev., is considering an eminent domain plan similar to Richmond’s. If the latter’s plan comes to fruition, it would likely build momentum for similar efforts in North Las Vegas and elsewhere.

Campbell even floated the possibility of similar plans being enacted in Detroit, which is undergoing bankruptcy proceedings.

“I would be stunned if MRP or someone that is in their chain of influence is not sitting talking to Detroit,” he said.

If Richmond does move forward, a constitutional challenge to the plan is “inevitable,” according to Alison Frankel, a legal columnist for Reuters.

Opponents of the measure, Frankel noted, may object on Fifth Amendment grounds: Richmond’s plan to pay lenders 80 percent of the value of the properties they seize, plaintiffs will likely argue, does not constitute “just compensation” required for the seizure of private property “for public use.”

“The Contracts Clause may also be a problem for eminent domain proponents,” Frankel wrote. “The clause prohibits states from interfering with private contracts unless there’s a ‘significant and legitimate public purpose.’”

Since the benefits of the seizures would be private in nature — helping distressed homeowners — that requirement could impede Richmond’s plan.

Campbell said the plan is “probably unconstitutional, but I don’t want to take that risk.” So he will attempt to head it off by creating a “poison pill,” in his words, that dissuades municipalities from using eminent domain as a means to address mortgage problems.

“If a jurisdiction uses eminent domain to seize mortgages, then the federal financial institutions that make or guarantee mortgages will no longer make or guarantee mortgages in that jurisdiction,” Campbell explained of the bill.

He expects the legislation to receive bipartisan support.

“I think we will be having some Democratic cosponsors,” he said.

“Many Democrats are passionately interested in trying to do something with underwater mortgages…[but] there are other ways to do it, where you don’t just forcibly write a mortgage down,” he said.

“There are some other proposals out there that could be used to help people with underwater mortgages but don’t just come in and arbitrarily force people to take big losses.”

Lachlan Markay is a staff writer for the Washington Free Beacon. He comes to the Beacon from the Heritage Foundation, where he was the conservative think tank’s first investigative reporter.

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