The idea, as being proposed in Ontario and Fontana, is to restructure mortgages for homeowners who are underwater - that is, those who owe more than their homes are worth. The mortgages would be bought from investors and then the loan principal would be cut to match current property value. After that, it's sold to new investors. Unlike many of those seeking loan modifications, borrowers would have to be current on their mortgage payments. Critics say that the plan would only depress property values. From the WSJ:
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-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 Resolution Partners might argue the loan is worth only $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.