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Doesn't eminent domain only apply to real estate?

No. The power of eminent domain applies to every kind of property, including real estate, tangible personal property (goods), and intangible personal property (loans and other contracts).

Can the local government acquire both performing loans and defaulted loans?

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.

Why do you need eminent domain? Why don't you just buy loans in the market?

Private securitization trusts hold approximately $1.1 trillion of loans; we could offer to buy their underwater loans, but their trust agreements do not allow for voluntary sales. Eminent domain allows us to purchase those loans as well as related second mortgage loans if the holders of the seconds are also unable (or unwilling) to sell. Eminent domain is a way to successfully consolidate ownership of a homeowner's mortgage loans in the hands of someone with the economic incentive and freedom to modify or otherwise resolve them.

Doesn't the Contract Clause of the U.S. Constitution forbid purchasing contracts (like loans) through eminent domain?

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."

Isn't it novel and unprecedented to consider using eminent domain to acquire debt?

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.

Who will choose the mortgages?

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.

What rights and obligations will homeowners have when the local government acquires their loans? What happens to homeowners who do not refinance?

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.

Is your program a giveaway to the undeserving who borrowed more than they should have to purchase houses they never should have owned?

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.

Regardless of the legal niceties, is it just wrong and a moral hazard to let these homeowners stay in their homes?

No. We protect our neighbors' homes, even allowing them to keep the equity in their homes while canceling their debts in bankruptcy, because it is the right thing for them and the right thing for us. In the U.S. we do not put our neighbors into debtor's prison, or make them homeless unnecessarily. America is facing an economic crisis and the solution requires practical action that keeps people in their homes which benefits the entire community. The real moral hazard is that the system is forcing homeowners to default in order to achieve rational solutions.

How much will the local government pay for the loans? Will the purchase create losses for the trusts that hold the loans?

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.

What is the fair market value of a loan, and how will you determine it?

Fair market value is the price that a willing buyer would pay a willing seller, neither under any obligation to buy or sell. Similar sales of troubled loans in the secondary market exist and are good evidence of fair value. These sales occur at a significant discount to the fair value of the home because of the “foreclosure discount” -- the market's recognition of the cost in time, money and effort to foreclose on the homeowner and thereafter to maintain and sell the property. We will use these market data points and supplemental methods including discounted cash flow modeling.

Who really owns the loans?

Securitization trusts typically hold the first mortgage loans that will be purchased by eminent domain. A variety of investors including hedge funds and mutual funds own interests in the trusts and thus the ultimate right to payments for the loans. Third party banks service the loans, and third party trustees monitor the servicers. Banks typically hold the second mortgage loans.

What rights will the loan owners have?

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.

Who pays the costs of legal challenges to the Program?

Mortgage Resolution Partners

How is MRP paid?

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.

How is the Funder paid?

The Funder lends money that is used to acquire underwater mortgages to the community and earns interest income. The Funder’s collateral is the underwater mortgages and the lender has no other recourse to the community.