Wells Fargo Bank, National Association et al v. City of Richmond, California et al

Filing 9

Declaration of John Ertman in Support of 8 MOTION for Preliminary Injunction filed byDeutsche Bank National Trust Company, Deutsche Bank Trust Company Americas, Wells Fargo Bank, National Association. (Attachments: # 1 Exhibit A, # 2 Exhibit B, # 3 Exhibit C, # 4 Exhibit D, # 5 Exhibit E, # 6 Exhibit F, # 7 Exhibit G, # 8 Exhibit H, # 9 Exhibit I, # 10 Exhibit J, # 11 Exhibit K, # 12 Exhibit L, # 13 Exhibit M)(Related document(s) 8 ) (Tsai, Rocky) (Filed on 8/8/2013)

EXHIBIT B

Cities in California Consider Seizing Mortgages - WSJ.com

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July 4, 2012, 7:58 p.m. ET

Cities Consider Seizing Mortgages
By NICK TIMIRAOS

A handful of local officials in California who say the housing bust is a public blight on their cities
may invoke their eminent-domain powers to restructure mortgages as a way to help some
borrowers who owe more than their homes are worth.
Investors holding the current mortgages predict the move will backfire by driving up borrowing
costs and further depress property values. "I don't see how you could find it anything other than
appalling," said Scott Simon, a managing director at Pacific Investment Management Co., or Pimco,
a unit of Allianz SE.
Eminent domain allows a government to forcibly acquire
property that is then reused in a way considered good for
the public—new housing, roads, shopping centers and
the like. Owners of the properties are entitled to
compensation, which is usually determined by a court.
But instead of tearing down property, California's San
Bernardino County and two of its largest cities, Ontario
and Fontana, want to put eminent domain to a highly
unorthodox use to keep people in their homes.
The municipalities, about 45 minutes east of Los
Angeles, would acquire underwater mortgages from
investors and cut the loan principal to match the current
property value. Then, they would resell the reduced
mortgages to new investors.
The eminent-domain gambit is the brainchild of San
Francisco-based venture-capital firm Mortgage
Resolution Partners, which has hired investment banks
Evercore Partners and Westwood Capital to raise funds
from private investors. The company's chief executive,
Graham Williams, is a mortgage-industry veteran who
helped pioneer lending programs for low-income
borrowers at Bank of America Corp. in the early 1990s. Its chairman, Steven Gluckstern, is an
entrepreneur who once owned the New York Islanders hockey franchise. Evercore's founder and co-

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Cities in California Consider Seizing Mortgages - WSJ.com

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chairman, Roger Altman, served in the Clinton administration and is raising funds for President
Barack Obama's re-election effort.
For a home with an existing $300,000 mortgage that
now has a market value of $150,000, Mortgage
Bank, Bond Groups Join to Oppose Eminent
Resolution Partners might argue the loan is worth only
Domain on Mortgages 6/29/2012
$120,000. If a judge agreed, the program's private
financiers would fund the city's seizure of the loan, paying the current loan investors that reduced
amount. Then, they could offer to help the homeowner refinance into a new $145,000 30-year
mortgage backed by the Federal Housing Administration, which has a program allowing borrowers
to have as little as 2.25% in equity. That would leave $25,000 in profit, minus the origination costs,
to be divided between the city, Mortgage Resolution Partners and its investors.
Earlier

Proponents say this would help residents shed debt loads that are restraining economic growth,
while preventing foreclosures that are eroding the tax base. But unlike the beneficiaries of most
recent mortgage-modification efforts, who must show hardship, these borrowers would have to be
current on their payments to participate. And the program initially would focus only on mortgagebacked securities that aren't federally guaranteed—about 10% of all outstanding U.S. mortgages.
The move is yet another sign of the desperate measures taken by cities still reeling from the effects
of the housing bust. Several have declared bankruptcy.
More
Powerpoint on the Homeownership
Protection Program
Frequently Asked Questions
Legal Brief: Breaking the Mortgage Debt
Impasse
Joint Exercise of Powers Agreement:
Homeownership Protection Program

"A number of cities, mayors, city managers have come to
me and said, 'How soon can we get in?' " said Greg
Devereaux, San Bernardino County's chief executive. He
said he learned of the program last year from a
California state official. He said county officials haven't
yet made a firm decision on whether to proceed. "We
think it would be irresponsible, given the size of the
problem in our county, not to at least explore it," he said.

Unemployment in San Bernardino County, the nation's 12th-most-populous county, is among the
nation's highest and tops 30% in some parts. More than two in five borrowers with a mortgage
owed more than their homes were worth at the end of March.
The seizure of home-mortgage liens, but not the underlying homes, hasn't ever been conducted
through eminent domain, as far as the group's principals can tell. And while they believe they have
a strong legal case, they expect loan owners to sue.
"California legal precedent and political posture favor the program and constitute an ideal proving
ground," Mortgage Resolution Partners said in a presentation to investors reviewed by The Wall
Street Journal.
The document said it would begin with a $5 billion effort in California that could grow to three
million mortgages as part of a $500 billion multistate effort.
Several states have authorized the taking of other
intangible property, such as insurance policies, shares of stock or rights of way, according to Robert
Hockett, a Cornell University professor of law and adviser to Mortgage Resolution Partners.
In 1984, the U.S. Supreme Court upheld the state of Hawaii's use of eminent domain to transfer
residential tracts of land to renters to break up a landownership oligopoly and stabilize home
prices. In 2005, the court affirmed the right of a Connecticut town to use eminent domain to

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Cities in California Consider Seizing Mortgages - WSJ.com

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transfer non-blighted homes to a private developer to spur redevelopment. That spurred several
states to pass laws restricting such powers.
The three local California governments have created joint
powers authorities that don't need permission from their
city councils or board of supervisors to move forward
unless they need public money. That means if the
agencies back proposals that are privately financed, the
plans could only be stopped from moving forward in
court.
Mortgage-bond investors—who are the property owners,
for eminent-domain purposes—say the program would
A house for sale in Fontana, San Bernardino
do nothing to deal with the biggest problems—borrowers
County, Calif., in 2009.
already in default. "Shouldn't that be the first priority?"
said Laurie Goodman, senior managing director at
broker-dealer Amherst Securities Group LP.
REUTERS

A letter sent last week to city leaders from 18 trade associations, led by the Securities Industry and
Financial Markets Association, warned that such a move "could actually serve to further depress
housing values" by making banks less willing to lend. The plan's backers are unfazed. "The exact
opposite is true. There's no private market right now," said Mr. Gluckstern of Mortgage Resolution
Partners. "Until you clear out this problem [of underwater loans], private lending will not come
back."
Write to Nick Timiraos at [e-mail]

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