San Francisco Debates Eminent Domain for Mortgages: Muni Credit

On December 7, Bloomberg published an article discussing a proposal for the city of San Francisco to use eminent domain to take over loans on property with a market value below the mortgage amount.

San Francisco Debates Eminent Domain for Mortgages: Muni Credit

San Francisco may become the biggest U.S. city to use its development powers to help homeowners avoid foreclosure, partnering with another California community whose own plan has come under fire from investors.

The proposal from a member of San Francisco’s Board of Supervisors would use eminent domain to take over loans on property with a market value below the mortgage amount. A lawmaker says it would help minorities in the city of about 837,000, while some officials see the move increasing borrowing costs and discouraging investors.

The city may find out as soon as next month. Officials are seeking approval to sell about $400 million of general-obligation bonds in January to refinance debt, said Nadia Sesay, San Francisco’s public-finance director. The controller also plans to release a study on the eminent-domain plan next month.

“We’ve seen a large exodus of working-class and middle-class households from the city and I wanted to look at a tool to support these homeowners,” San Francisco Supervisor John Avalos, who offered the plan, said in a phone interview.

Affordability Squeeze

The issue is part of a broader debate over housing affordability in San Francisco as technology-industry wealth drives up housing prices and squeezes the middle class. If the proposal succeeds, the city would join nearby Richmond, which is seeking municipal partners in the effort. Lawmakers in California’s San Bernardino County, as well as in Chicago and North Las Vegas, Nevada, considered and abandoned the idea.

San Francisco supervisors in October asked the controller to look into partnering with Richmond. The refinery town of about 108,000 voted in 2013 to adopt a plan to use eminent domain -- the right of governments to take private property for the public good -- to seize loans and modify them to help homeowners avoid foreclosure. San Francisco lawmakers also asked the controller to offer alternatives to help borrowers.

Wells Fargo & Co. (WFC)Deutsche Bank AG (DBK) and Bank of New York Mellon Corp. sued Richmond on behalf of investors that hold securities backed by mortgages in the community.

‘Negatively Perceived’

Such a program in San Francisco would “likely be negatively perceived by financial markets, insurers, other financial intermediaries and potential investors in the city’s bonds,” Sesay and Ben Rosenfield, the controller, said Oct. 6 in a memo to Mayor Ed Lee and the 11-seat Board of Supervisors.

If the city adopts that approach, it may have to sell debt using a negotiated sale, instead of a competitive offering, in which it auctions bonds to the highest bidder, they wrote.

“In these circumstances, such a sale may draw from fewer potential investors and transaction participants, resulting in higher sale costs and less competitive interest rates,” they said.

Rosenfield hasn’t heard from investors or banks about the proposal, he said in a telephone interview.

Hundreds of homeowners may benefit from such a program now, and it may reach thousands in the future, Avalos said in an Oct. 21 memo to fellow supervisors.

“I’d like to stress the importance of not abandoning a substantial number of low-income, minority San Francisco homeowners because we are afraid that Wall Street will retaliate against us,” he said.

Risk-Reward

The city is the nation’s most expensive housing market. The $975,000 median home price for San Francisco as of October is tops among major U.S. cities, according to data provider RealtyTrac.

In the city’s estimation, the program wouldn’t be worth the risk, as it would apply to a limited group of borrowers.

About 90,000 San Francisco homeowners hold mortgages, of which about 10,000 involve loans bundled for sale to investors, which is the target group, the report said, citing data provider CoreLogic. (CLGX) About 80 of those loans are underwater, less than 0.1 percent of owner-occupied mortgages, according to the memo from the controller and the public-finance director.

Starved Market

Michael Johnson, managing partner at Gurtin Fixed Income Management, says the pool of loans is so small that it wouldn’t materially increase the city’s bond costs, especially given the roaring demand for California debt.

“It would be watched, but in terms of actual borrowing costs and the way the market would view the city’s bonds, I don’t see that that would have a real effect,” Johnson, whose company oversees $9.5 billion in Solana Beach, California, said in an interview. “The market is starved for good-quality California bonds.”

Investor appetite for tax-free California bonds increased after voters in 2012 approved increases to levies on sales and income.

Richmond, east of San Francisco, has been looking to partner with other cities to establish an authority that would buy underwater mortgages at market value and reduce the loan principal.

Wells Fargo sued Richmond last year, saying the approach violates constitutional protections against impairing private contracts. The bank dropped its case in May because the city hadn’t carried out its plan.

Jen Hibbard, a spokeswoman for the San Francisco-based bank, whose mortgage business is the largest in the U.S., declined to comment on San Francisco’s plan.

The move “could undermine and have a chilling effect on the extension of credit to prospective homeowners,” the Mortgage Bankers Association, a Washington-based trade group, said in an October brief. Federal programs aimed at mortgage modifications would be a better alternative to help struggling homeowners, the brief said.

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About Safeguard 
Safeguard Properties is the largest mortgage field services company in the U.S. Founded in 1990 by Robert Klein and based in Valley View, Ohio, the company inspects and maintains defaulted and foreclosed properties for mortgage servicers, lenders, and other financial institutions. Safeguard employs approximately 1,700 people, in addition to a network of thousands of contractors nationally.
Website: www.safeguardproperties.com.

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