San Bernardino County Backs Down From Shoddy VC Plan Using Eminent Domain

A Southern California government official from a depressed county tried to go up against Wall Street this summer when he shocked the mortgage bond community by telling them he was thinking about using eminent domain to force-buy underwater mortgages out of the securities at a discount. That man was Greg Devereaux, a former city planner, who is the appointed CEO of San Bernardino County located in the Inland Empire of Southern California. It’s one of the largest counties in the state who had one of it’s larger cities file bankruptcy last year. On Thursday at a public hearing Devereaux did a bit of a 180 and basically said he couldn’t take the risk of using eminent domain because Wall Street would attack it and his constituents were voicing they really didn’t want to do it.

I was on the ground for six weeks this summer following the hearings and community reaction in the county. Viewers of RT’s Keiser Report saw me explain how these good-hearted muni officials were about to get bamboozled by a San Francisco venture capitalist with a firm call Mortgage Resolution Partners. What we were really faced with was two finance groups duking it out over profits with financial screwed homeowners as the sucker in the middle. MRP played San Bernardino’s heart-strings by promising to clean out the abundance of underwater homes in the county that were keeping real estate recovery at a stall.

Except as I exposed on Keiser Report, MRP was really just setting themselves up to make a double-digit profit if they could get Devereaux to break contract law and buy the underwater mortgages at a discount to their value within the mortgage bond. Meaning RMBS holders, which include pension funds, could get their investment wiped out. By breaking contract law San Bernardino County risked high borrowing rates via banks afraid to do business with anyone in the county going forward. The kicker was MRP wasn’t going to buy mortgages with borrowers who were not paying; instead they wanted the cream of the crop, the paying overvalued mortgages, so they could off load them down the road to the FHA or GSE’s. There wasn’t a lot of risk for MRP in the plan but there sure was for the local residents.

San Bernardino County spokesperson David Wert wrote in an email after the vote to drop eminent domain:

“Board Chairman Greg Devereaux pointed out many experts have warned the use of eminent domain would destabilize an already weak local housing market and even worsen the mortgage crisis. At the same time, very few local homeowners and other stakeholders expressed support for the use of eminent domain. Many, in fact, opposed such a strategy.”

When the plan was first presented the local Inland Emprie press and liberal media like Huffington Post were working like public relation dogs for MRP. Glossing over the fine print details of how a homeowner could get totally screwed if their loan was bought via eminent domain. But as my peers in the financial press picked up on what was really going on and we saw Reuters to the Wall Street Journal writing about the evil pitfalls residents would face and it got local business owners, real estate agents, or homeowners not underwater really worried.

Devereaux says he never fully committed to do MRP’s plan but he did think it was worth telling his residents about so a public debate could happen. That debate turned into a somewhat union ball breaking style of backroom convos by the wall street lobby groups with relators and homeowners across the county. Devereaux’s office told me SIFMA even threaten them ‘not to talk about eminent domain publically’ or all holy hell would break out for their local economy. That threat didn’t bode well with progressive minded Devereaux who thinks governments job is to share openly with it’s resident (shocking right). The county was hoping at some point data would come out that showed the plan was good for the community as a whole but bad data kept showing up in the press that made Devereaux look like he’d be Darth Vadar leading the evil empire if he just started condemning mortgages with his power of eminent domain.

San Bernardino County has some of the poorest neighborhoods in southern California mixed in with a few gem upper middle class cities like Lake Arrowhead and Redlands. Cites that didn’t allow a housing boom in the last decade and were not packed with underwater homeowners.

These cities are not particularly populated with people who understand high finance like you’d see in Fairfield County, CT but they are college educated, often Republican, and had to do some quick education on how a mortgage bond security worked. The best thing MRP did by coming to town was educate San Bernardino County residents how high finance products work so they can make better decisions the next time a stranger shows up looking like a healer with a quick fix plan to ‘help’ their troubled economy.

Devereaux said at the last hearing even he got an education from bond lobby groups like SIFMA and SIFMA sure now knows where San Bernardino is now. The county is still seeking housing fix proposals from the private sector–this time they will ask for firms to included a risk assessment in their plans. Good for Devereaux.

As for MRP they put out a spin statement this week that said in the last year they’ve talked to around 30 cities who are still entertaining their eminent domain housing plan – although Chicago has also turned them down. Tad Friend at The New Yorker was able to follow Steven Gluckstern of MRP around late this summer and detailed how a northern cal town, Salinas, was interested at first but after news reports started to show flaws and consequences to his plan they backed down.

I found it interesting Gluckstern choose a journalist, Tad Friend, who doesn’t have a history of reporting on high-finance or wall street firms to cover his agenda. Friend is a good story teller who was able to quote Gluckstern admitting the homeowner would not have a choice if their home was bought out of the RMBS via eminent domain. A glaring fact that hadn’t been reported yet. The New Yorker also doesn’t tell the reader where some of their bold statistical statements come from. Such as “yet even as homes prices have risen for six of the past seven months, twenty person of America’s homeowners remain underwater”. That kind of statement is just to broad and the reporter should know he needed to source in the story where that data comes from so the reader can judge its accuracy. (Friend has now answered he used corelogic numbers for his story but I think it should have been stated in the print) This is the kind of thing we saw Gluckstern do all last year. Throw up numbers that reporters had to go back and fact check. Jon Prior at Housingwire found his number of underwater homes for San Bernardino County included Riverside, which is not in San Bernardino County, and his 60% underwater projection was really only a 43% number according to corelogic.

America is founded on free market capitalism. It’s interesting to watch who’s still fighting to keep that alive these days.

Editors Note: I grew up in a resort mountain community called Lake Arrowhead that is in San Bernardino County. I haven’t lived there in near 20 years but I applaud its residents for doing their homework and using their voices to stop a plan they didn’t think would benefit their community. It was also refreshing to see that government listened to them.

San Bernardino County Voters Can Still Dissolve Eminent Domain JPA

I am on finance TV show the Keiser Report today reporting from So-Cal’s Inland Empire about a private finance firm, Mortgage Resolution Partners, using San Bernardino County’s CEO Greg Devereaux as their guinea pig in a controversial eminent domain housing plan. A plan never attempted before that could effect future borrowing rates hurting local homeowners yet also gives them the chance to put to screws to Wall Street investors who have them in a debt death spiral. There are so many what-ifs to using eminent domain this way and miss information is being spun by both parties. After being on the ground in the county for a month here’s a few observations I think residents need to pay attention to.

First your local papers, The Sun, Press Enterprise, and even the LA Times just don’t have local reporters covering the story with the industry knowledge to understand how high-finance works so they can ask smart questions and get you the set of facts you need to make a decision. One thing’s for sure the current plan is all about those who know about how high-finance works trying to take advantage of those who don’t for a fat profit. Lefty politicians will tout its merits without reading the details of the plan and MRP has even hired a professor, Robert Hockett of Cornell, to spout out feel good expert sentences to reporters that are often inaccurate.

I get worried for readers when we see the LA Times housing reporter write, “Hockett has said that using eminent domain to seize underwater mortgages that have been securitized makes sense because often those mortgages can’t be sold at market value for legal reasons. Often, those loans must be sold at face value — a higher price — because of the contracts governing them.”

That sentence just isn’t true. The LA Times could have called over to the mortgage bond experts at SIFMA who explained, “No, he’s wrong, because the loans generally can’t be sold at all at the whim of the trustee prior to default. At whatever price.” Asset back traders confirmed mortgage bond trustees do sell loans out of the securities below face value, not often, but it happens.

A few national finance reporters and publications are trying to sort out the facts but MRP and the County just keep claiming they havn’t finalized anything – which kind of sound likes BS to me. I’d suggest reading Felix Salmon and Matt Goldstein at Reuters along with a group of high finance expert opinions Marc Hochstein has put together over at American Banker’s Bank Think to get your arms around the pros and cons of MRP’s home protection plan. On Max Keiser’s show I was referencing some really interesting points by Andrew Kahr, a banking industry veteran and opinion columnist for BankThink. Kahr spoke out against his own kind (Bankers) on why eminent domain could work but not the way MRP has planned it for San Bernardino. He even scolded mortgage investor groups for using fear of breaking contract law as the evil of all constitutional evils.

Today I also talked with Max Keiser about the County possibly violating California’s Brown Act. The notion that elected officials felt they needed to walk a grey line and break public trust to get their joint protection agency off the ground tells us a lot in this saga. With Paul Herrera, government affairs director for San Bernardino-area realtors association, now telling me that elected county board supervisors came to him all excited about the plan starting on February 15th – two months before the first public hearing in April – it’s getting clear the County felt it needed to meet in secret first to escape the wrath of deep pocket investor groups who‘d use the media to communicate all the scary pitfalls of this plan. And if reporters can’t get emails and meeting notes via FOIA request because the towns say they don’t have any, than MRP was also likely planning how they communicate (no emails) to keep their negotiations with San Bernardino County under wraps.

David Wert, spokesperson for San Bernardino County , swears to me the County doesn’t want to execute a plan that benefits one set of wealth investors over another and only helps one group of homeowners with jumbo loans who still have good credit. But local realtor groups don’t trust that. Bottom line is there is still time to reverse the formation of the Joint Protection Agency – the newly formed legal body run by Devereaux that is using county resources (lawyers and administrators) to make decisions on eminent domain. Herrera says if residents don’t want the plan they need to speak with their five elected board supervisors to get at least three to vote for dissolution of the JPA. Towns already signed on like Fontana and Ontario don’t have the money to fund a JPA on their own (lawyers are expensive) so it’s really at the feet of the County to pull this off–without a JPA they can‘t do the plan. Of course another idea is to let the JPA work through alternate plan details like including defaulting homeowners in the pool of loans MRP would buy. Even if they did that residents still better do their own research to understand on how the effects of counties using rule of law to break mortgage contracts could hurt them. They also need answers on any kind of gift tax they would have to pay if they got a principle reduction.

The reality is by using eminent domain this way what residents really have is a chance for an informed public to take control away from the banks and have a small role in redirecting their housing hell hole. And as I said on TV today if the banks had modified loan principles or at least written down these underwater loans to real market value years ago they might not be facing a possible take over by city governments that would hit their balance sheets with a big fat loss. I’d be watching if the people of San Bernardino County start showing up at public meetings to try and move the plan in a different direction through a collective vote or if a few high finance vets keep rolling along to pillage municipals.