This is excerpted from the wsj.com and includes the paragraphs on how profits are determined. The homeowner is left at 100% LTV, old investors lose their shorts, new investors make 20% to 30%, and the guy who thought of it rakes in 4-5 points per deal:
Tapping the power of eminent domain to repair underwater mortgages could generate investor returns of up to 30% and billions of dollars in fees for bankers behind the proposal, according to people with knowledge of the plan.
Under the plan, loans that are current and underwater—that is, their balances are greater than the home’s value—would be seized from mortgage bonds at prices up to 25% below appraised home values, then refinanced through a federal loan program.
It isn’t clear whether the eminent domain plan will get off the ground. The proposal has disturbed financial trade groups who say it violates mortgage contracts and isn’t a public use as required under eminent domain. The groups assert that Mortgage Resolution Partners will encourage municipalities to deeply undercut market value when buying the loans, doling out losses to mortgage bondholders and handing big gains to itself and its investors.
Mortgage Resolution has estimated that it would take a fixed fee of $4,500 per loan as the operational manager, according to people who attended investor meetings. That is about what loan servicers get when modifying loans under a government program. Such fees could exceed $2 billion if the program caught on nationwide, and would grow if the plan goes beyond private-label loans, based on Amherst’s loan count.
Steven Gluckstern, chairman of Mortgage Resolution, declined to elaborate on how profits might be split. While he said the group’s main interest is to help homeowners and stabilize communities, he added: “We want to make money with the solution.”
As a manager, Mortgage Resolution would work with governments to identify and buy loans at 75% to 85% of current property values, said people in investor meetings. For a home worth $100,000, the program may pay $75,000 despite a principal balance that might be tens of thousands of dollars more.
The homeowner would apply to refinance into a $97,750 loan through a federal program. That leaves $22,750, plus a lender’s profit of $5,000 or more to cover MRP’s fee, valuation and legal costs, a reserve for the municipality, and investor profit. MRP has told investors they could see a return of 20% to 30%, said one investor who met with the firm.