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  1. #1
    Senior Member AirborneSapper7's Avatar
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    SAN BERNARDINO, CALIFORNIA, WEIGHING CHAPTER 9 BANKRUPTCY

    Because Once You Drop By Bankruptcy Court, You Don't Stop: San Bernardino On Chapter 9 Deck


    Submitted by Tyler Durden on 07/10/2012 22:14 -040

    Meredith Whitney made her doomsday prediction. The nothing. Nothing. Then lots of glib muni expert pundits gloating because the Fed, the ECB, the BOJ, the BOE, the SNB, and of course, the central bank of Kenya, had managed to delay the inevitable by a year. Then some more nothing. Then suddenly Stockton, Mammoth Lakes, and now San Bernardino all file in the span of 2 weeks.

    • SAN BERNARDINO, CALIFORNIA, WEIGHING CHAPTER 9 BANKRUPTCY - BBG
    • SAN BERNARDINO COUNCIL TO DISCUSS ACTION, SPOKESWOMAN SAYS - BBG
    • SAN BERNARDINO SPOKESWOMAN GWENDOLYN WATERS SPOKE IN INTERVIEW - BBG


    There is a reason marginal events are oh so very important: because as Greece showed, and now one after another broke California municipalities are dropping like flies, one the precedent is there, the easiest thing to do is to just hit Print on that Chapter X petition. After all everyone else is doing it, and remember: he who files first, files best.

    Because Once You Drop By Bankruptcy Court, You Don't Stop: San Bernardino On Chapter 9 Deck | ZeroHedge
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    Senior Member AirborneSapper7's Avatar
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    Eminent-Domain 'Transfer Of Wealth'-Program Challenges Remain


    Submitted by Tyler Durden on 07/10/2012 10:11 -0400

    The debate around San Bernardino County’s proposed program to use eminent domain rights to seize ownership of underwater mortgages has continued to heat up since we first wrote about it here last week. As Barclays notes, the county (along with two other cities in the area) has formed a joint powers authority, which would not need permission from the respective city councils unless they need public money. There are conflicting reports of the path that such an authority would take and the role of private investors. However, the most likely path seems to be that the authority is funded by private investors and it uses this money to buy current loans that are underwater at a "fair price" and then refi the borrower into a new private or more likely into an FHA mortgage. So, this program, if implemented, is likely to be a transfer of wealth from existing investors in these loans to the city governments and the newer investors led by venture-capital firms. Barclays does note though that there are many challenges to such a program including the legal issue of whether eminent domain can be used to seize financial assets in this fashion, especially if the primary beneficiaries are private investors at the expense of existing investors, which include, among others, pension funds and mutual funds and the fact that new mortgage origination is likely to suffer with new mortgagees bearing the costs of such a program in the form of higher mortgage rates/less credit availability.
    Barclays: Eminent domain debate heats up
    The debate around San Bernardino County’s proposed program to use eminent domain rights to seize ownership of underwater mortgages has continued to heat up since we first wrote about it. The county (along with two other cities in the area) has formed a joint powers authority, which would not need permission from the respective city councils unless they need public money.

    Possible mechanics
    There are conflicting reports of the path that such an authority would take and the role of private investors. However, the most likely path seems to be that the authority is funded by private investors and it uses this money to buy current loans that are underwater at a "fair price". The next step would be to refinance the borrower into a new private or more likely into an FHA mortgage (at, for example, 97% LTV of the currently appraised value). For the investors funding this program to make money, this implies that the "fair price" must be at a discount from the property’s worth (assuming that the new mortgage is at most a 97% LTV FHA loan). With this discount, the price paid for the loan is likely to be much lower than the value of the lifetime cash flows expected to be paid on such a current loan. So, this program, if implemented, is likely to be a transfer of wealth from existing investors in these loans to the city governments and the newer investors led by venture-capital firms, such as Mortgage Resolution Partners. Based on our limited understanding, it appears to us that the effect will be very similar to doing a FHA short refi with current investors taking a slightly higher loss (than a short refi) and the difference going to the city governments and the new investors.

    A host of challenges likely
    There are many challenges to such a program. First, there is the legal issue of whether eminent domain can be used to seize financial assets in this fashion, especially if the primary beneficiaries are private investors at the expense of existing investors, which include, among others, pension funds and mutual funds. Next, the plan appears to be exclusively targeted at mortgages in MBS that are not backed by the GSEs/GNMA. These mortgages form less than 10% of all mortgages in the country. The use of eminent domain requires the counties to show that the property seizure is for public use. If the program targets less than 10% of all mortgages, it would be hard to justify this as being for public use. Finally, new mortgage origination is likely to suffer with new mortgagees bearing the costs of such a program in the form of higher mortgage rates/less credit availability. Given this new uncertainty, which effectively subordinates a first-lien mortgage to the local governments, private lenders are likely to demand compensation for this in the form of higher interest rates and higher down payment requirements. This is likely to increase the burden on the taxpayer as more and more mortgages will have to be backed by the GSEs/FHA. In an environment where Congress is calling for efforts to revive private lending and to wean the mortgage market off of taxpayer assistance, such a move would be highly short-sighted and counter-productive, in our view.

    Eminent-Domain 'Transfer Of Wealth'-Program Challenges Remain | ZeroHedge
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    Senior Member AirborneSapper7's Avatar
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    San Bernardino becomes 3rd Calif. city in 2 weeks to file for bankruptcy protection

    By NBC Los Angeles

    San Bernardino became the third California city in less than two weeks to file municipal bankruptcy protection Tuesday night when the city council voted to make the move in the face of a $45-million budget shortfall.

    Shortly before the council's vote, Interim Mayor Andrea Miller recommended the city of 209,000 seek bankruptcy protection due, in part, to its inability to make payroll over the next three months, the Los Angeles Times reported.

    If the payroll is not met, the city attorney says there could be a mass exodus of employees. While the mayor says that's scenario is unlikely, bankruptcy protection gives the city time to avoid payroll delinquency.

    The move followed city negotiations that conceded $10 million from employees and slashed the workforce by 20 percent over the last four years, the newspaper reported.

    Read the story on NBCLosAngeles.com

    Special budget meetings were set for Tuesday and Wednesday.

    Tuesday's special budget meeting began with a prayer invoking the "wisdom of God to be liberally poured down" on city officials.

    San Bernardino has a 15.7 percent unemployment rate and about 5,000 homes in foreclosure.

    'Severe financial haircut'
    San Bernardino Mayor Pat Morris said the decision was the beginning of a "difficult conversation about the city's budget and the city's future."

    Stockton, Calif. files for Chapter 9 bankruptcy

    "I have no doubt there will be cuts across the board," Morris told NBC4. "A host of savings are required. This is going to be a severe financial haircut for the city."

    The vote makes San Bernardino the latest California city to teeter on the edge of bankruptcy.
    Officials in Stockton said their June decision to seek federal bankruptcy protection was the "only choice" for the city that was unable to reach finance agreements with creditors to address a $26 million budget shortfall.

    Mammoth Lakes, Calif. files for bankruptcy
    On July 4, Mammoth Lakes sought bankruptcy protection from a $43 million court judgment, according to Bloomberg News.

    In the six decades since Congress created bankruptcy protection for cities, fewer than 500 municipal bankruptcy petitions have been filed, according to the United States Courts website.

    San Bernardino becomes 3rd Calif. city in 2 weeks to file for bankruptcy protection - U.S. News
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