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Subprime Cottage: Eco-Friendly w. Eminent Domain View
December 11, 2007: Cast your mind back to Susette Kelo. She and her neighbors in the waterfront neighborhood of Fort Trumbull in New London, Connecticut, had their homes and investment properties taken from them by local government and the quasi-public New London Development Corporation. Poodle to Connecticut's Department of Economic and Community Development. Residents of Fort Trumbull were mainly blue collar. Some had lived there all their lives. Though the neighborhood was often described as “modest” those who used eminent domain to take it were not. A rich stew of politicians, planners, developers, and corporate interests decided the community of Fort Trumbull didn't deserve to exist. The land would better serve as a setting for a condo/hotel/office park that would enhance nearby Pfizer Pharmaceutical. Susette Kelo and a group of her neighbors fought the land grab all the way to the U.S. Supreme Court. Citing their property rights, as guaranteed by the Constitution.

Kelo et al realized the 5th Amendment to the Constitution allows government to take private property (providing just compensation is paid) for purposes of “public use”. But they figured the criteria wasn't being met by New London, since public use has traditionally meant schools, roads, bridges, etc.

In June, 2005, the decision re Kelo v. New London came down; the Supreme Court chose not to meddle (there's a first time for everything) in states' interpretations of public use. Hence New London, in eminent domain friendly Connecticut, was free to call a private development project that benefited a major corporation “public use”. Using the rationale that the project would potentially deliver more property taxes, jobs, and the elusive butterfly of revitalization. As always, the projected bennies required the broad base of taxpayers to kick in upfront-- to cover the legal costs of government's lengthy battle for Fort Trumbull, the salaries and consulting fees of a standing army of public and quasi-public land grabbers, the compensations for property owners (which increased as the state added carrots to the eminent domain stick) and pot sweeteners for the private developer and Pfizer.

Connecticut and New London were not unique in their belief in eminent domain as magic wand. Other state and municipal governments do the same hoodoo. But as foreclosures in inner cities threaten to bring down the house that subprime wack built, and luxury condo towers and suburban McMansion tracts turn overbuilt wasteland, it seems incredible that pols and pals continue to wag their wands over still-breathing neighborhoods in order to clear the way for speculative development projects. Guess it's just one more case of government(s) being behind the curve.

Speaking of the curve and those behind it, cast your mind back to Connecticut's Department of Economic and Community Development (DECD). The agency which breathed fire into the New London Development Corporation and its taking of Fort Trumbull. Until early 2007, another project on the DECD to-do list was to help Mortgage Lenders Network USA (MLN/USA) expand into a new corporate campus. Middletown-based MLN was the Mighty Mouse of subprime lending. They also pushed Alt-A (a step above subprime) and A-plus-plus. An ultra low interest, nonprime mortgage product which CEO Mitchell L. Heffernan characterized as “prime”. Another section of MLN serviced other lenders' mortgages (collecting payments, etc.) as did MLN's affiliate, Emax Financial Group, LLC in the Virgin Islands.

In 2005, MLN complained that Connecticut offered insufficient business incentives and threatened to expand operations in another state. In response, the DECD, the Connecticut Development Authority, and Governor Jodi Rell offered financial support for an MLN expansion in Wallingford; including tax breaks and a $4 million loan (at 2% interest) backed by the State Bond Commission. MLN took the deal and planted saplings to symbolize Mitch Heffernan's promise that “we will be sinking our roots deeper in Connecticut and growing jobs”.*

(Note to self: check seed catalog for heirloom jobs. Also hybrids.)

Throughout 2006, the DECD, Governor Rell, and local officials touted MLN as a subprime dynamo, whose government-jacked expansion would not only create jobs and increase tax revenues in Wallingford, but revitalize an entire highway corridor by turning it into a financial services hub. Nobody seemed aware of the buzz in the financial world re a bad moon rising for real estate. In 2005, the Mortgage Bankers Association reported that mortgage originations were slowing nationally and would continue to do so. By 2006, subprime lenders were being widely dished for shoddy lending practices (which grew more so as the market cooled) and a resulting rise in defaults and mortgage fraud. Plus, the banks and financial entities that supplied lenders with lines of credit and/or bought their mortgages to be bundled and sold as asset-backed securities, were getting edgy. Lines of credit were drying up. And subprime lenders were being pressed to buy back the bad loans that previously passed as solid gold.

As the subprime industry imploded, MLN cut loans like a house afire. $1.6 billion worth in the first half of 2006. By the second half, MLN was crumbling under the subprime trifecta of defaults, buy-backs and dead credit. As 2007 dawned, MLN collapsed. While Mitch Heffernan and other MLN execs tap danced on the brink of bankruptcy and multi-state license revocations, they stiffed borrowers, brokers, in-house employees, and creditors. They also claimed the Wallingford expansion would still happen and expressed hope the state loan would arrive. But the check hadn't been cut yet (sometimes government being behind the curve is a good thing) and the state ultimately said no go.

MLN's former future headquarters is still rising like a jolly green ziggurat. Michigan-based developer Workstage (a creation of Steelcase Inc., The Gale Company, and Morgan Stanley) owns the property. Workstage had partnered with Mortgage Lenders Network to create their new campus. MLN agreed to lease the property for 20 years with option to buy. They also agreed to outfit the building. Workstage, which specializes in “sustainable buildings”, now has a speculative one on its hands. Early 2008 is projected completion date. The 305,000 square foot space is being subdivided. If zoning allows, more parking will be added. Office vacancy rates across Connecticut are roughly 25%. Tenants wanted!

While subprime sent a toxic rush through the financial system, and MLN was among the polluters, their headquarters were set to be eco-friendly. Featuring the latest green technologies. Solar and wind power. Geothermal heating. “Rustic” was the design watchword. An adjoining 5,000 square foot conference center called the Founders Cottage, was going to look just like a traditional New England Cottage. Though not like the cottages bulldozed in Fort Trumbull by the New London Development Corporation. Those were 19th and 20th century structures. The Founders Cottage was going to be bucolic. Early American. Ho-- yonder the yeoman stands, a subprime mortgage in his hands...

The MLN saga continued through 2007. In February, MLN filed for bankruptcy in Delaware. Chapter 11, with protection. The Workstage agreements were among their jettisoned obligations. In March, Connecticut's Department of Labor sought a criminal arrest warrant for Mitch Heffernan, on 61 charges of failure to pay $3 million in wages and commissions. Heffernan's attorney claimed the charges were an attempt to circumvent bankruptcy law. Heffernan said the non-payment wasn't his fault. Residential Funding Company, a unit of GMAC Financial Services (a subsidiary of General Motors) made him do it. MLN and their Virgin Islands affiliate, Emax Financial, had serviced mortgages for Residential Funding. Residential is one of MLN's largest secured creditors. (Goldman Sachs is another.) As MLN prepared to file for bankruptcy, restructuring advisors from Residential allegedly told Heffernan to stiff employees. Residential claimed they never said any such thing and in April, moved to have Heffernan's “scandalous” allegations stricken from court records.

When May bloomed, MLN's ex-chief financial officer, Randy Roberge, tried to obtain a license in Connecticut for a new venture called InHome Capital, LLC. Suspicions arose that Mitch Heffernan was at home InHome. Possibly because he was in-house consultant. Whatever. In June, Connecticut's Department of Banking denied the license. Among other reasons, Banking Commissioner Howard F. Pitkin cited claims by Residential Funding re Roberge's role in dispensing funds during MLN's last days.

Come July, temperatures rose when Residential Funding asked the Delaware bankruptcy court to issue a protective order suspending discovery in an ongoing investigation of the relationship between MLN and Emax Financial in the Virgin Islands. This time, it was MLN's unsecured creditors who sizzled.

Finally, in sweet November, Mortgage Lenders Network USA settled with 4 of the 7 states that pulled its license in early 2007. MLN admitted wrongdoing and fines will be levied. Connecticut gets the lion's share. The $7.6 million originally threatened by state regulators (primarily for MLN leaving borrowers in the lurch) has dwindled to $845,000. The money will supposedly come from the bankruptcy settlement. Apres collapse, MLN sold $400 million worth of home loans and “transferred its $12 billion loan servicing portfolio”**. Hopefully a few bucks are left. MLN has until January 2nd, 2008 to file their plan for distributing the settlement. The plan will “spell out what fraction of recovery those with claims against the company stand to collect.” Secured creditors come first. The State of Connecticut isn't secured. And any money received by the state, will stay with the state.

As part of the proposed agreement (which the court still has to approve ) MLN's license won't be restored in Connecticut. But neither will the company face further state regulatory action. The state labor department says the charges against Mitch Heffernan will be pursued-- though no lost wages or commissions can be obtained via a criminal action. However, some think the specter of criminal charges helped convince MLN to settle. And Banking Commissioner Pitkin hopes the admission of wrongdoing will help unsecured creditors build court cases. In other words, aggrieved parties must civil suit up.

Meanwhile, back in New London, Fort Trumbull still awaits rebirth. Corcoran Jennison, the Boston-based developer set to do the do, is dragging their heels. (Again.) An 80 unit luxury housing development was supposed to be rising by now, on land once owned by the Naval Undersea Warfare Center. But financing for speculative projects is tough to obtain in these subprime times. The New London Development Corporation (poodle to Connecticut's Department of Economic and Community Development) controls the land and has given its OK for a 6 month delay. Albeit with stern provisos. Payments in lieu of taxes must be made. And should Corcoran Jennison not come up with financing, the ground lease will be terminated and a new developer sought. Which will mean more delay. But hey-- at least Fort Trumbull is free of those pesky ex-property owners who didn't understand the meaning of “public use”.

Carola Von Hoffmannstahl-Solomonoff

*Workstage sets the stage for sustainable employee-friendly campus, Team breaks ground on headquarters for Mortgage Lenders Network, 05/08/07, www.workstage.com

**Mortgage Lenders Network USA settles with state regulators, 11/07, www.thelegaldescription.com

Sources include but are not limited to:

"NLDC Ties Tough Terms To Extension For Developer," Elaine Stoll, The Day, 12/09/07

"Questions raised by parking proposal for ex-MLN building," George Moore, Record-Journal, 11/27/07

"Bankrupt Lender, Banking Regulators Settle," Kenneth R. Gosselin, Hartford Courant, 11/15/07

"Behind Bravado: Certain Doom," Kenneth R. Gosselin, Hartford Courant, 09/16/07

"Mortgage Lenders Network Creditors Get More Time," 07/27/07 bankruptcy-lawyers-dallas.com

"Connecticut nixes new venture by former MLN exec," Inman News, 06/15/07

Denial of First Mortgage Broker License, State of Connecticut Department of Banking, 06/13/07

"GMAC Unit wants Mortgage Lenders ex-CEO comments stricken," Peg Brickley, Dow Jones Newswires, 04/05/07

"Company's Former Employees Owed $3 Million," Eyewitness News 3, WFSB, 04/02/07

Docket Report, U.S. Bankruptcy Court, District of Delaware, Bankruptcy Petition #: 07-10146-PJW, Date Filed 02/05/07

"Mortgage Lenders Network Planting Roots, Growing Jobs in Connecticut," DECD's Business and Industry Digest, Connecticut Department of Economic and Community Development, 06/06

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Copyright (c) 2007 by Carola Von Hoffmannstahl-Solomonoff. This material may be freely distributed subject to the terms and conditions set forth in the Open Publication License. This license relieves the author of any liability or implication of warranty, grants others permission to use the Content in whole or in part, and insures that the original author will be properly credited when Content is used. It also grants others permission to modify and redistribute the Content if they clearly mark what changes have been made, when they were made, and who made them. Finally, the license insures that if someone else bases a work on this Content, that the resultant work will be made available under the Open Publication License as well.


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