The impact that the foreclosure and housing meltdown have had in California is unquestionable. But it appears one planned response to the crisis is now facing internal questions as a San Bernardino Joint Powers Authority has moved away from eminent domain towards a path of cooperation and outreach.

San Bernardino’s Homeownership Protection Program Joint Powers Authority had made statewide and national headlines when it formed, calling for local governments to use their Eminent Domain powers to take over underwater mortgages and re-sell them to homeowners at a market rate. The controversy that ensued ensnared nearly every layer of government and the banking industry.

Now, that plan appears to be forgone as a new Affirmation of Continuing Cooperation has abandoned any mention of acquiring underwater properties – through eminent domain or any other means. Instead, the JPA’s cooperation agreement seeks to “promote increased consumer utilization of mortgage assistance programs and resources by exchanging information and enhancing public-private coordination.”

The Joint Powers Authority, and its member agencies, had come under intense pressure from Wall Street firms and banks. On Wall Street, a local government effort to subvert market principles was seen as an assault on the free market system itself. Further, those banks and lenders claimed that such brash and unprecedented intrusion into the lender-borrower relationship would have drastic impacts on future lending and credit for not only the agencies, but for private borrowers as well.

“[The use of Eminent Domain] would also be immensely destructive to US mortgage markets by undermining the sanctity of the contractual relationship between a borrower and creditor, and similarly undermining existing securitization transactions,” wrote the Securities Industry and Financial Markets Association (SIFMA) in a letter to the San Bernardino Board of Supervisors. “Such an action would likely significantly reduce access to credit for mortgage borrowers in the San Bernardino area and other areas that undertake similar actions.”

That letter and the unveiled threats therein elicited responses both in the news and from California elected leaders. Lt. Governor Gavin Newsom wrote directly to Attorney General Eric Holder and the Department of Justice to defend the rights of local governments to improve their local housing markets.

“This is a boycott, and it is a per se violation of… Antitrust Acts,” wrote Newsom on September 10, 2012. “Investors working through SIFMA did in fact implement a rule to boycott jurisdictions that use eminent domain to acquire private loans by excluding all of their residents’ federal guaranteed loans from normal trading. This violates antitrust laws.”

Newsom went on in his letter to describe a variety of other factors that are violations of federal law, including “geographic redlining” which is a violation of consumer protection laws and a variety of instances that demonstrates collusion between major banks and lending institutions.

The proposal was the first of its kind in the nation. A Bay Area financier had agreed to cooperate with the JPA to not only purchase the mortgages through eminent domain, but also then re-sell them to the homeowners at market prices and market interest rates. In exchange, the financier would have received a fee per mortgage processed.

[Originally posted on PublicCEO at 12:50 on Jan 24, 2013]