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California County Weighs Drastic Plan to Aid Homeowners

San Bernardino County is considering an eminent domain plan on underwater homes that would lower mortgage payments.

Fontana, Calif. – Browning lawns surround the otherwise neat houses in these once-sparkling developments where foreclosures have become more common than neighborhood cookouts. Each patch of dead grass is a reminder of the inescapable truth: many homes here, as they are elsewhere around the country, are worth half what they were just five years ago.

Desperate for a way out of a housing collapse that has crippled the region, officials in San Bernardino County, where Fontana is one of the largest cities, are exploring a drastic option — using eminent domain to buy up mortgages for homes that are underwater.

Then, the idea goes, the county could cut the mortgages to the current value of the homes and resell the mortgages to a private investment firm, which would allow homeowners to lower their monthly payments and hang onto their property.

Although the county has a long way to go before it could put the policy in place, the mere idea has already rankled the banking community, whose leaders say it would set a dangerous precedent of allowing a government entity to act as a lender and would discourage banks from granting loans in the area.

A decade ago, Fontana and other cities here in the Inland Empire — the vast suburban sprawl east of Los Angeles — were just beginning to boom, with new subdivisions opening seemingly every weekend.

Now, San Bernardino County, the largest county in the country, has cities with some of the nation’s highest foreclosure rates.

“Sooner or later,” said Mayor Acquanetta Warren of Fontana, who has seen the value of her own home cut in half, “all these people who are upside down on their homes are just going to leave the keys out on the door and say forget it. This was supposed to be the promised land, and now we have people waiting in some kind of hellish purgatory. The people who were so eager to give us money before now won’t even talk to us.”

The idea to use eminent domain to seize mortgages first came from a group of venture capitalists in San Francisco, Mortgage Resolution Partners, who would collect a fee for each of the restructured loans. The firm is also trying to persuade officials in Nevada and Florida to try the idea. San Bernardino County officials were immediately intrigued, given that roughly half the homes in the area are underwater and the unemployment rate remains at nearly 12 percent. (Last week, the City of San Bernardino voted to file for bankruptcy, saying it would not be able to cover payroll costs through the summer.)

Officials in Suffolk County, N.Y., where about 10 percent of the homes are valued at less than their loans, are also considering the mortgage plan.

“Nobody else is addressing this adequately, and we’re still stuck,” said Regina Calcaterra, the chief deputy county executive in Suffolk County. “If Washington or the private sector was able to address this, there wouldn’t be a need and we wouldn’t even have this conversation.”

Scott Larson, 42, moved to his current home in Upland, in the western part of San Bernardino County, in 2003. A couple years later, when his three-bedroom home was appraised at more than $500,000, he refinanced to renovate his backyard. Now, he says, banks will not even consider modifying his loan.

“I always look for other places to cut so I can do right and make the loan payment, but the odds are really against me doing that for a long time,” he said. “I’m willing to start over and take another 30-year loan to stay here, but I don’t know who is looking out to let me do that.”

San Bernardino County once relied on residents like Mr. Larson buying small starter homes and moving into larger properties, a dream that now seems quaint. But many community leaders here say the overall economy will not improve without housing construction starting again.

“We have what we regard as a systemic problem, but it’s felt most urgently at the local level,” said Steven M. Gluckstern, the chairman of Mortgage Resolution Partners. “We have all these people who want to be able to stay in their homes and keep that, but it is getting to be impossible. Until you fix this problem, you can’t fix any other problems.”

As for the group’s eminent domain idea, “if it works, every mayor of every city is going to want to do this,” Mr. Gluckstern said.

More than 20,000 homeowners in the county could ultimately be eligible for the program, which would first focus on Fontana and Ontario, two of the largest cities in the county. The county is just beginning to consider how it could move forward with the proposal and officials say they will consider alternatives, but many banking and mortgage groups have already voiced skepticism or hostility about the plan.

Ken Bentsen, the executive vice president of the Securities Industry and Financial Markets Association, said the idea would almost certainly be challenged in court and would have a major impact on the local market.

“If the government has the ability to abrogate the contract at will and at the expense of the bond holder, the investor is going to do one of two things: require a tremendous premium for the risk they are incurring, or just not invest at all,” Mr. Bentsen said. “It would be a risk factor that would be impossible to underwrite.”

Under the current proposal, only homeowners who are current on their payments would be eligible for the program, a policy some have criticized because it does little to help the neediest people.

While Greg Devereaux, San Bernardino’s chief executive, has hardly been surprised that so many banking and mortgage lenders are against the plan, their level of opposition has angered him.

“There is no doubt that we have a major problem that we have to do something about, or it will probably be a decade, if not two, for our economy to recover,” he said. “It’s as if this can’t even be a discussion. If they want to come and talk and propose other solutions, great, but that’s not what is happening. Instead they are just trying to kill it because they have nothing but their own interest in mind.”

Steve Manos, the president of Inland Valleys Association of Realtors, said the housing market was already showing signs of improvement, with fewer homes on the market and bidding wars breaking out among some buyers.

“We are seeing a recovery, but it’s a fragile recovery,” Mr. Manos said. “This is the perfect example of something that could derail it quickly.”

Mr. Devereaux said he hoped to have a decision by December about whether the county will use eminent domain or some other strategy for helping homeowners. For now, he laughs and dismisses the notion that improvement is under way in the area.

“We’re seven years into things supposedly getting better and we have thousands more foreclosures?” he asked, answering with a quick bit of sarcasm. “My gosh, what an improvement.”