Former San Francisco Mayor Willie Brown and a longtime business partner are among investors in a company drawing criticism for working with local government officials to take over and discount underwater mortgages.
The plan gained impetus last month, when officials in San Bernardino County formed a joint powers authority to consider a proposal from San Francisco-based Mortgage Resolution Partners for local governments to use their powers of eminent domain to seize underwater mortgages.
The company would raise capital to buy the mortgages from lenders at their depressed market price, perhaps less than half their original value. It would then offer the existing homeowners a new mortgage at a value in between the two, preventing foreclosure and pocketing a profit in the process.
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The strategy, which Berkeley real estate investor Bill Falik told The Bay Citizen he helped develop, is expected to generate profits of as much as 20 percent, according to an October pitch to potential funders.
Brown and Falik are among 12 founding investors in Mortgage Resolution Partners, according to company spokesman Peter Ragone. Though San Bernardino is the furthest along, the company hopes to partner with local governments across the country to use eminent domain as a tool in fighting blight, Ragone added.
Bond investors, the real estate industry and the editorial pages of national newspapers have denounced the plan as a politically wired money grab, warning that lenders will shun areas where they face the threat of government seizure of their home loans.
New buyers would be unable to get new loans in those communities, they allege. House prices might drop further, increasing, rather than reducing, blight.
Some critics also complain that their warnings are being ignored in Sacramento and Washington because the Mortgage Resolution Partners deal is backed by politically powerful individuals.
Ragone characterized the criticism as the self-serving complaints of financiers.
“This is the typical canard that Wall Street and its lobbyists used whenever they don’t support an innovative public policy,” he said in an email. “Loans will still be made and investors will still make returns. Capitalism will carry on.”
Brown did not respond to telephone and email messages requesting comment.
This isn’t the first time Falik, with Brown as an investment partner, has pursued a strategy that hinged on controversial real estate decisions by municipal officials.
In the boom years of California’s real estate market, then-Assembly Speaker Brown was a partner in a series of Falik-run real estate partnerships that helped turn thousands of acres of Central Valley farmland into new housing developments. In that case, the key was persuading local officials to rezone Sacramento River floodplain.
“We had some successful investments, and we had some successes involving permits in Sacramento,” Falik said, adding that Brown was only one of 140 partners in those investments. “But I’m a very careful lawyer: I never met with Willie concerning one of my projects.”
Today, owners of the homes built on that land, like thousands of other California homeowners, find their houses worth less than what they owe. Falik said that the new company, Mortgage Resolution Partners, would help local governments overcome problems preventing lenders from assisting such underwater borrowers.
Many U.S. loans have been resold to investors as packages of mortgage-backed securities. These arrangements often prohibit loan discounting. In theory, an eminent domain seizure could override those contracts.
“I talked to my business partners in Sacramento, and they say nothing is selling because there’s all this foreclosure overhang,” Falik said. “If you can keep people in their homes and give them a mortgage in some way where they can continue to pay, it would make a huge difference in terms of blight.”
On June 28, a group of 18 financial services lobbying organizations, including the American Bankers Association and the Inland Valley Association of Realtors, sent a joint letter to five San Bernardino County-area officials denouncing Mortgage Resolution Partners’ eminent domain plan. The proposal raises important “constitutional issues,” the letter said, suggesting the possibility of lawsuits.
Despite the major industry players on the critical letter’s masthead, opponents have had difficulties rallying politicians to their side, said Steve Manos, president of the Inland Valley Association of Realtors.
“From our vantage point, bringing attention to this was difficult. There seemed to be a reluctance for some people to take up the fight, though this seemed to be an easy one,” Manos said. “You have serious influence coming from heavy hitters.”
Others have warned that political influence might play a role in Mortgage Resolution Partners’ strategy as well. In January, Reuters reported that Mortgage Resolution Partners had sent a letter to potential investors saying the company would use “legal and political leverage” to purchase distressed mortgage, and that its founding executive chairman, Phil Angelides, “will be front-line center stage nationally.”
In February, U.S. Rep. Patrick T. McHenry, R-N.C., sent a letter to Shaun Donovan, secretary of the Department of Housing and Urban Development, expressing concern about “influence peddling” by prominent California politicians linked to Mortgage Resolution Partners.
Company spokesman Ragone, who served as communications director for former Gov. Gray Davis and press secretary for San Francisco Mayor Gavin Newsom, said in an email that Mortgage Resolution Partners’ use of the term “political leverage” has been misunderstood.
The January memo was an “outdated presentation where we used that phrase to characterize the policy of using eminent domain,” Ragone wrote.
Falik said the initial sales pitch promising “legal and political leverage” has morphed into perfecting a legal strategy focused on allowing homeowners to remain in their homes.
“I think initially people were thinking about politics more, and obviously, Willie is politically connected and very savvy, and so is Phil,” Falik said. “But it became a reality that this is much more legal in nature.”
Angelides, a former California state treasurer who also headed the U.S. Financial Crisis Inquiry Commission, has since left the company, replaced as chairman by venture capitalist and prominent Democratic Party fundraiser Steven Gluckstern.
But Angelides and Gluckstern together pitched the eminent domain idea in a Jan. 31 conference call with San Bernardino County CEO Greg Devereaux, according to a copy of Devereaux’s calendar obtained by The Bay Citizen. In March, April and May Devereaux’s calendar noted scheduled phone calls with Mortgage Resolution Partners executives, including Falik.
Mortgage Resolution Partners representatives mentioned during their conversations with him that Brown was an investor, said San Bernardino County spokesman David Wert.
However, Devereaux would not “be influenced by any political clout Mr. Brown or Mr. Angelides are perceived to have in the Bay Area,” Wert said. “I think it could be agreed they have no such clout outside of the Bay Area and Sacramento.”