1. BEIJING BRUSSELS CHICAGO DALLAS FRANKFURT GENEVA HONG KONG LONDON LOS ANGELES NEW YORK SAN FRANCISCO SHANGHAI SINGAPORE TOKYO WASHINGTON, D.C. Use of Eminent Domain to Restructure Underwater Mortgage Loans

2. Overview Summary/Status of Eminent Domain Plan (as proposed by Mortgage Resolution Partners (MRP)) Brief Review of Eminent Domain Process (California) Legal Arguments for Use of Eminent Domain Legal Arguments Against Use of Eminent Domain 2

3. 3 Summary/Status: Overview of MRPs Eminent Domain Plan Identify targeted loans: (a) underwater but ( b) currently performing; and (c) in private label securitization trusts Use eminent domain power to seize the loan, paying 75%-80% of the current market value for property –Valuation based on foreclosure discount Loan is refinanced (principal reduced) into a conforming FHA loan that will then be packaged into Ginnie Mae mortgage-backed securities

4. 4 Summary/Status: Economics for MRP MRP raises capital from investors to front eminent domain pay-outs and legal expenses MRP and investors profit from seizures Example given by MRP Chairman Steven Gluckstern to the Sacramento Bee: o Homeowner has $300,000 mortgage for property worth $200,000 o City seizes the loan for $160,000 o MRP helps refinance the loan at $190,000 o $30,000 profit split between local government, MRP investors; MRP takes a flat fee of $4,500/transaction

5. 5 Summary/Status: Economics for MRP Gluckstern projects investor profit margin of 7-8% per transaction, annual return of 20%: We thought up this idea, were going to execute it for communities that choose to ask us to execute it for them, and for that were going to charge a fixed fee per loan resolved. Im an entrepreneur… Is the thought theres something wrong with making money in helping to solve a problem? - Interview with WSJ.com, July 19, 2012

6. 6 Summary/Status: San Bernardino County San Bernardino County and the cities of Ontario and Fontana formed Joint Powers Authority JPA met August 16: Approved drafting of a formal RFP to be released at a future hearing –Commenters at meeting were critical of eminent domain plan –County CEO quoted as saying: I am certain this board would not approve a proposal that singles out eminent domain as an approach. We are not here to look for any one approach. We are here to look for ideas. Inland Valley Daily Bulletin, Aug. 16, 2012.

7. 7 Summary/Status : Chicago and Others Chicagos Committee on Finance together with the Committee on Housing and Real Estate held a hearing on August 14 –Subsequently, Mayor Emanuel indicated that he doesnt believe that use of eminent domain is the right way to address the problem…. Other municipalities considering the plan include Elk Grove/Sacramento; Berkeley; Suffolk County, N.Y., but no formal proposals have been adopted

8. 8 Summary/Status: FHFA Response The Federal Housing Finance Agency indicated on August 8, 2012 that it has significant concerns about the use of eminent domain to revise existing financial contracts and the alteration of the value of [Fannie Mae and Freddie Macs] or [Federal Home Loan Banks] securities holdings. FHFA has requested input by September 7, 2012 as to whether or not action should be taken on its part as conservator for Fannie Mae and Freddie Mac and as regulator for the Federal Home Loan Banks

9. 9 Overview of Eminent Domain Process (California) Eminent domain involves the taking of property –(a) for a public use –(b) upon payment of just compensation Power rests in the sovereign authority of the State; by statute, can be exercised by municipalities, local authorities (like the JPA)

10. Overview of Eminent Domain Process (California) Legal Process: 1)Entity identifies property to be taken; provides notice and opportunity to appear at a hearing 2)After hearing, entity adopts a resolution of necessity (a)states the public use (b)identifies the property to be taken (c)declares that the taking is necessary and done in a manner that maximizes public good while minimizing private injury 3)Entity initiates a judicial proceeding: –Court decides whether taking is legally permitted –Jury decides what just compensation is required 10

11. 11 Legal Arguments for Use of Eminent Domain Well-settled that eminent domain is not limited to real property; may include loans or other intangible property Public use broadly interpreted as public purpose; courts typically defer to legislative findings. See Kelo v. City of New London, 545 U.S. 469 (2005). MRPs Argument: –Underwater borrowers are at high risk of foreclosure, leading to blight; other negative consequences to being underwater –Principal reduction would be in the interests of all participants –Collective action problem – particularly with private label securitization trusts – precludes solution

12. 12 Legal Arguments Against Use of Eminent Domain: Overview Not a Proper Public Use Interference with Interstate Commerce/ Contractual Rights Territorial Limitation on Loans (Notes) Held Outside Jurisdiction MRPs Proposal Would Not Provide Just Compensation

13. 13 Legal Arguments Against Eminent Domain: Public Use Kelo (and other case law) distinguishes between comprehensive development plan and 1-to-1 taking of property –Kelo was a 5-4 decision; Kennedy concurrence favored higher level of scrutiny –Unprecedented to have a private entity (MRP) shopping eminent domain as a business plan –Defining public use to mean anything that incidentally benefits the public would make the requirement meaningless MRPs plan is ill-targeted to address purported goals of preventing foreclosure and remedying blight: –Cherry-picks best borrowers at relatively less risk of default; default rates stabilizing/declining –Targets only private-label loans –Narrow scope of program mitigates purported benefit

14. 14 Legal Arguments Against Eminent Domain: Interference with Commerce Dormant commerce clause prohibits states from (a) directly regulating interstate commerce or (b) unjustifiably interfering with interstate commerce Targeting private-label loans – i.e., loans supporting RMBS – arguably is a direct and intentional regulation of interstate commerce MRPs proposal threatens to severely harm, interfere with RMBS market (especially if widely adopted) FHFA concerns/position against use of eminent domain supports the argument Constitutional prohibition against impairment of contract is a separate constitutional check, but is likely tied to the just compensation issue

15. Legal Arguments Against Eminent Domain: Jurisdictional Limitation Potential jurisdictional limitation on attempt to seize loans where the trusts are formed or notes are held outside of the County/State No clear authority on the issue Analogies to escheat, tax law provide basis to argue that loans are located outside of the jurisdiction MRP argues that location of debtor and real property allows for jurisdiction over the loan Jurisdictional issues may also effect level of deference, under California law, given to JPAs finding of public use 15

16. 16 Legal Arguments Against Eminent Domain: Just Compensation Just compensation is fair market value, generally defined as highest price that would be agreed to between buyer and seller acting without compulsion MRPs investment strategy is dependent on paying only 75-80% of the property value Discount is derived from treating performing loans as if they are currently in foreclosure –Loans are not in or necessarily likely to go into foreclosure –MRPs valuation ignores future cash flow Problem of how to compensate RMBS holders –Arguable requirement to compensate for harm to investment