As long as it is acting to further a public purpose, a local government may acquire any kind of loan including performing, delinquent or defaulted loans. A government may purchase underwater performing loans to further a number of purposes -- as years of crisis have proven, negative equity is the single greatest predictor of future default, and it creates harm even absent default (including reduced homeowner investment in property maintenance and dislocation in the local property sales market and worker mobility because of restrictions on short sales). Each local government will determine which types of loans to acquire to further the public purposes it wants to serve.
The U.S. Supreme Court expressly considered this question and unanimously rejected it in Hawaii Housing Authority v. Midkiff, saying that "the Contract Clause has never been thought to protect against the exercise of the power of eminent domain."
Not at all. Connecticut has used its power of eminent domain to condemn bondholder rights in $4 billion of tax-exempt state debt, converting it to taxable debt. New York State law explicitly authorizes the Long Island Power Authority to use eminent domain to acquire debt. In addition, Congress has considered using eminent domain to acquire underwater debt owed by railroads, and Florida has considered forming a state board with the authority to use eminent domain to acquire debt owed by Florida municipalities.
Local governments will choose. They will determine which loans to acquire and in which areas in order to make a meaningful difference to their communities. We will partner with these committed local governments to screen loans for eligibility and inclusion in their programs.
Homeowners will have the same rights and the same obligations that they have now under their loan agreements. This program simply changes the owner of their loans, not the terms of the loans. The program does not create any additional risk for the homeowners. If they do not refinance then they simply continue to pay on their existing loans.
No. Everyone in California has the opportunity to purchase a home by borrowing from a lender who is willing to take a loss if home prices decline by more than the homeowner's down payment. The lender willingly takes the risk when making the loan, and the fair market value of the loan reflects that risk. By purchasing the loan at fair value, the local government gives the lender the benefit of its bargain. By accepting an economically rational refinancing or other resolution with homeowners, the local government affords them the benefit of their bargain without forcing them to default and flood the local housing market with additional foreclosed homes.
The local government will pay the fair value of the loans, as both state and federal law require. The purchase will not create any losses for the trusts that hold the loans; the fair value of the loans reflects losses that have already occurred because of the extraordinary collapse of real estate prices in affected communities.
The trusts that currently hold the mortgage loans will have the right to receive the fair market value of the loans. This includes the right to a trial to determine the fair value of the loans if the trusts disagree with the local government’s valuation.
The community does not pay MRP. The funder pays MRP a fee for each loan acquired by the community. This fee is very similar to the fee paid by the federal government to banks that modify mortgages under federal programs. The MRP fee does not depend on the price the community pays for the acquired loans. MRP is not a private equity firm, a hedge fund or a mortgage lender or servicer.
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