Nocera: It’s Time to Give Eminent Domain a Try

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Editor’s Note: At least academically the notion of solving the housing crisis through eminent domain is gaining a great deal of traction. Many people say they want less government and eminent domain has always been a point of contention. It is the process of taking private property away from private owners, paying them a fair market value, and then converting it to a better use for the community than what was there previously. There are not many constraints on eminent domain and there certainly are no constraints on using it to take mortgages away from their “owners.”

Ah! There is the rub — who do you pay when the other side won’t tell you whether the loan still exists or has been transformed into some other vehicle that has long since paid the original debt? If eminent domain is used, the largest risk is going to be for the banks and servicers who claim to own these “assets” which in truth do not exist and over which they never had any right of ownership. The 12 fold leverage of the loans will collapse when it is discovered the loans do not exist anymore or are already discounted by third party payments.

Thus the opposition from the banks will be to stop any thought of eminent domain and therefore stop any inquiry into the status or balance due on the loan, which in many cases is zero without the borrower being aware of it. The borrower MIGHT have a liability for contribution to third party payors but only if they did not expressly waive the right to press claims against the borrowers. The fact is that virtually all insurance contracts and all counterparty contracts on credit default swaps contain just such a provision. Hence the cost of eminent domain will be a zero sum game as soon as it begins.
As a stop gap the current plan, which in my opinion makes perfect sense, is to give the homeowner most but not all of the benefit of the write-down of principal, the rest to private investors who can be more confident that if the value of the collateral declines, it won’t be by much.

Under normal circumstances, eminent domain  would either be supported by the banks or unnecessary since “workouts” are or at least were the norm whenever a loan got into trouble but there was still value in maintaining the business or property as a going concern.

Here the banks are insisting on getting as little as possible just like insisted on funding loans that could not possibly succeed (where the “reset” was in excess of all  household income).

Here the banks and servicers are dealing with uncovering a huge lie that few people have grasped: the banks had no losses attributable to loan de faults because they were using the money of investors, who were the ones suffering the loss.

See my next blog on how pension funds bought these bogus mortgage bonds only to have the losses pitched over the fence at them after Wall Street collected for themselves the bailouts, insurance and proceeds of credit default swaps. As a result pension funds are going to get slashed because the funds are simply not there anymore. They are sitting in the pockets of Wall Street bankers.

Housing’s Last Chance?

By JOE NOCERA

There are few counties in America in as rough shape as San Bernardino County in California. During the housing bubble, the good times were very good. But then came the bust.

Today, San Bernardino County has one of the highest unemployment rates in the nation: 11.9 percent. Home prices have collapsed. Astonishingly, every second home is underwater, meaning the homeowner owes more on the mortgage than the house is worth. It is well documented that underwater mortgages have a high likelihood of defaulting — and, eventually, being foreclosed on. It has also been clear for some time that the best way to keep troubled homeowners in their homes is by reducing the principal on their mortgages, thus lowering their debt burden and more closely aligning their mortgage with the actual value of the home.

Which is why Greg Devereaux, the county’s chief executive officer, found himself listening intently when the folks from Mortgage Resolution Partners came knocking on his door. They had spent the previous year kicking around an intriguing idea: have localities buy underwater mortgages using their power of eminent domain — and then write the homeowner a new, reduced mortgage. It’s principal reduction using a stick instead of a carrot.

I know. When you first hear this idea, it sounds a little crazy. Eminent domain to take a mortgage? But the more closely you look at it, the more sense it starts to make. It would be a way to break the logjam that keeps mortgages in mortgage-backed bonds — securitizations — from being modified. It could prevent foreclosures. And it could finally stabilize housing prices.

The core issue that Mortgage Resolution Partners is trying to solve is what might be called the securitization problem. Bundling mortgages into securities and selling them to investors was, initially, a wonderful idea because it greatly expanded the amount of capital available for homeownership. But the people who wound up owning the mortgages — investors — were diffuse, often with conflicting interests, while the mortgages were managed by servicers or trustees who didn’t actually own them. And the securitization contracts never anticipated that people might need to modify. So it has been nearly impossible to modify mortgages stuck in securitizations.

It turns out, however, that there is nothing to prevent a government entity from using eminent domain to acquire a mortgage. “Eminent domain has existed for centuries,” said Robert Hockett, a law professor at Cornell who has served as an adviser to Mortgage Resolution Partners. “And it is applicable to any kind of property, including a mortgage.” What matters, Hockett continued, is two things: is the entity paying fair value for the property, and is it for a legitimate public purpose?

Can there be any doubt that keeping people in their homes constitutes a legitimate public purpose? “This is a yoke around the American economy,” said Steven Gluckstern, an entrepreneur with a varied career in insurance and finance who is the chairman of Mortgage Resolution Partners. “When people are underwater, their behavior changes. They stop spending. There are 12 million homes that are underwater,” he added. “Is the answer to really just let them get foreclosed on? Or wait for housing prices to rise?” According to Gluckstern, the fact that the foreclosure crisis is continuing is precisely why housing prices aren’t rising — despite some of the lowest interest rates in history.

As for fair value, since the home has dropped dramatically in value, the mortgage is worth a lot less than its face value. On Wall Street, in fact, traders are buying securitized mortgage bonds at a steep discount — reflecting the true value of the mortgages they’re buying. Yet the homeowner remains saddled with a mortgage that is unrealistically high. The plan calls for the county to buy mortgages at a steep, but fair, discount to its face value, and then to offer the homeowner a new mortgage that reflects much, though not all, of that discount. (Fees and costs would be paid for by the spread.) The money to buy the mortgages would come from investors; indeed, Mortgage Resolution Partners is in the process of raising money.

The securitization industry is up in arms about this proposal. In late June, after the plan was leaked to Reuters, some 18 organizations, including the Association of Mortgage Investors, wrote a threatening letter to the San Bernardino board of supervisors claiming that the plan would inflict “significant harm” to homeowners in the county. For his part, Devereaux insists that no final decision has been made. But, he says, “this is the first idea that anyone has approached us with that has the potential to have a real impact on our economy.” Other cities are watching closely to see what happens in San Bernardino.

We’re four years into a housing crisis. Nothing has yet worked to stem the terrible tide of foreclosures. It’s time to give eminent domain a try.

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25 Responses

  1. Nocera says: “…aligning their mortgage with the actual value of the home.” Homes sold since 2002 (specially new homes) probably sold 2-5 times their “actual value”. Nocera basically wants to deflate bubbles created by BanGsters (Bank Gangsters), and their co-criminal realtor/mortgage/title/county/city fraudsters who defrauded buyers into paying bubble prices.

  2. you must be careful who you get in bed with. If we agree to this for our own immediate gratification…I can guarantee you it will be used against us one day in a way that will make this mess seem like child’s play. Not for nothing, did I miss something or is this article treating securitization as something that was done legally and correctly??? Because if that is the beginning premise then it is a self-defeating one because as we all know that whole deal was and is a scam that never really happened. Well, tn doesn’t know it, but, I can live with that.

  3. The loan is written off period if a city uses this. This method is almost like a tax lien sale. The difference is that they are not really using eminent domain but taken a home in receivership. This method has been used in the mid 1800’s in many states. Some parks that states have today have been used in this matter. The city or state holds the liability and sells or gives the asset. Much like when the FDIC takes over a thrift.

    No homeowner would be on the hook for anything. The problem is banks would run to the federal courts on the account of states interfering in contracts. Now state can not do this but the federal government can. So the real question is why don’t the federal government just discharge these bad loans?

    Also for anybody who thinks federal government can not interfere with contracts your mind must forgot about the legal tender cases. For government stepped in and said you can use these bank notes instead of asking the person to pay you gold or silver as the contract states. Or forgot about the bankruptcy laws which changes contracts all the time. Great supreme court judges from Story to Marshall have extensive case law on this.

  4. […] Read more… Posted in Banks, MERS, News Around The Country, States « Pensions to Be Slashed By Fake Losses on Mortgage Bonds You can leave a response, or trackback from your own site. […]

  5. I don’t see Eminent Domain working, knowing what I’ve learned from reading twelve hours a day. Numerous problems arise; banks would have to take a haircut on the difference in what the “loan” amount was and the actual net property value, which will amount to significant $. Of course there was no real money involved, it was all a paper asset, but these greedy damn bankers are in control of our government, so what they want is what will be crammed down our throats unless we start the revolt this week. The next major problem is Title. They’re all clouded, it will take litigation to clear them, which is expensive and time consuming. Sorting out who owns what–that is an impossibility based on just the MERS mortgages alone, and if the banks could prove legally that they own anything, monkeys are going to fly out of my butt. They wouldn’t be robo-signing and lying their asses off if any legitimate documents proving ownership existed.
    The next issue is the involvement of government when Americans are already well aware of what happens when the government gets into it. The banks get the benefit and the “borrowers” are thrown under the bus, one way or another. Government could have stepped in five years ago and prevented millions of illegal foreclosures, but did they? Nope. There is no alignment between them and us as evidenced by their desire to save the banks instead of the taxpayers. By having a private company issue mortgages on a reduced principle, those of us who are still without JOBS are still at risk of default, even when the payments are reduced substantially. Only the segment who are now employed will be saved. The only real benefit I can see is that those of us who seethe when we have to give the bastards a check, will get a little satisfaction in not having to give the rotten, criminal banksters another dime–we’d get a new payee–which could only be good. And it’s not an austerity measure. Eminent Domain won’t benefit banks as far as I can see, but we don’t have all the facts yet. Before you start to believe they’re against it, consider that they got the Federal Reserve Act passed by coming out against that in newspaper articles.They are adept at shaping public opinion with psycho-baloney and reverse psychology.

  6. Nothing there – mortgages were converted to securities and the securties and bonds were charged off . See TARP (everthing goes to sale as short title ) There is nothing there for eminant domain in a recovery of abandoned title ….it’s already an adverse possession claim brought by civil forfiture that is convoluted by debt collectors . Nothing there (Joke) ID_accounting@yahoo.com

  7. Right on, jg….I hear ya.
    We should also prosecute people who are “modifying” false default debt—while trying to pass it off as if it was a real “mortgage”…ever.

    Get this—I just heard an ad on the radio for a seminar where you can learn how to:
    “Buy foreclosures that we have bought, fixed up, and put renters in already!! Income for life!! Yay!!”

    I’m sure the contract says in tiny letters: “deed restrictions may apply…”

  8. John, Retirement Investors go back to investing in stock at a local credit union or bank. It will be like it was before securtization. One creditor! I dont think you understand that as part of the PSA’s the retirement savers/ investors were supposed to get the notes and title. THEY NEVER GOT THE NOTEs! AND THE TITLE WAS PUT INTO MERS FOR them the i real funder of the loan INVESTOR. The investors can not FC because THEY DID NOT AND DO NOT HAVE THE NOTES only the title., but the big boys managed to mess that up to. Eminint Domain clears title, gets homeowner a lower payment and lower property taxes. We go back to how it was before securitization. I whole heartedly agree we must continue with legislation to make sure this never happens again. But we must also must push for prosecutions. There must be real consequences if we are to let them know we will not tolerate this type of behavior…THERE IS NO EXCUSE FOR IT!

  9. “But the people who wound up owning the mortgages – the investors – …..” Harrumpph! This idea is going to have some of the same pitfalls currently faced for modification, say, knowing with certainty who owns the loan (buy it from party “X”?) plus the one tnharry id’d. Shall we just create a generic escrow pool, throw some money in there, and say let them all figure it out ? Hey, does that sound familiar?
    Homeownership is (was?) part and parcel of the American dream. It’s a right and a privilege as well, I suppose. No poison carrot rotten with fraud should have been dangled and we should not have been involved in any of this bull. We’re more educated, surely, but we still need protection and if that has to come in legislation, than so be it, and those of us capable should demand it. Anyone standing in an ivory tower in a position to contribute should do so. You are the ones with the knowledge and ability to lead the way in returning our country to a land of law and justice. Disspell yourself of the notion it isn’t your duty. Collectively, a hundred of you could be louder than 10,000 of us, altho if this creek does continuing rising, that statement may become outdated in short order. “Balancing the equities”, even globally, can’t be done at the expense of an entire class of peoples – generally the working class, as well as everything a country stands for. HAMP, etc., the give-a dog-a-bone pacifier for the masses, the utterly unreliable headline fluff. This dog doesn’t want the bone, even if the dog could get one: we need a complete return to the law of the land. To do that, we have to be willing ourselves to accept the consequences. Are we? Do we talk the talk as long as it appears to be to our advantage? Will we walk the walk if it hurts, if the doomsday prophecies of bank collapses were shown to be true?
    Never mind speculating about the doomsday prophecy; would we still walk the walk if they WERE shown to be true?

    We don’t need securitization. If there are X amt of funds available for home loans, then so be that, also. Ban free enterprise, you say?
    It wasn’t free. It isn’t free. It has come at one of the largest costs in history for many if not all first world countries, whether from incompetence, rampant speculation, greed, fraud, or all the above: that’s been the cost of unbridled “free” enterprise.
    And we don’t need MERS.
    I’m gonna hit send before the coward in me takes control.

  10. @tnharry, … after Eminent Domain it becomes unsecured debt to the homeowner not a deficiency… 🙂

  11. Tn,

    What do you mean about not talking about deficiency? That’s what it looks like to me.

  12. @ws: hmmmmm….

  13. @kc – not true that nonjudicial states don’t allow deficiencies. and we’re not technically talking about a deficiency here anyway.

  14. Your absalutly right Enraged! In non-judicial states.. its gone anyway. We have a solution for that in Judicial States to … not as neat as non-judicial states but still just as effective.

  15. Your Silly tnharry. You know the answer. But if you want me to say it I will. ….If “It” is going to push us all in to BK, we should work together and squeeze that “Big Fat Marshmellow” right back to Wall Street… And the Answer is … “BK” What are they going to take the House? the Pensions? the 401k? hahaha … Farmgirl Style Justice!

  16. @Tn,

    Actually, your question makes a lot of sense but… isn’t CA a state where, once you’re foreclosed on, you just walk away and you’re not liable for the unpaid balance, unlike a number of judicial states. I know there are a few of those states and i really seem to recall that CA is one of them.

  17. @kc – but it’s the homeowner on the hook on the note, not the city

  18. @tnharry … thats the Best Part! Use pensions funds for the transaction. And this time actually give the pensions investors the Note and the lien onTitle. The cities then can file “BK , many are being forced into it anyway … No skin off my nose …. if you get my drift.

  19. one thing i’ve not seen addressed is what happens to the “unsecured” amount of the loan? in the example – loan of $300k, value of $200k, city seizes the loan for $200k. there’s no provision for the discharge of the remaining $100k. or have I missed some crucial piece of the concept?

  20. If we re-directed our pension contributations from Wall Street and back into our Communities … wall street banks would colapse and our local banks, credit unions and communities would thrive. Thats a no brainer.

  21. Oh, sure—just re-boot the manufactured false default debt into ANOTHER scam—brilliant!! More “back door and sneaky”, like @Winston said.

  22. Wonderful. Save the homeowners who are underwater. And be sure and pay the thieving banks and Servicers while you’re at it. All with taxpayer funds. More and more taxpayer funds to enrich the fraudsters

    And of course ignore homeowners whose homes were already stolen. Why not?

    The American way of justice. Selective remedies abound

  23. It seems that this possibility has panicked the banksters. The ABA and several other forums have written about it, and Wall Street’s immediate response appears to be a lockout of mortgage lending in the future by Wall Street banks, in areas where ED gets implemented. That certainly wouldn’t be a deterrent to me, and I’m sure plenty more folks who have a bad taste in their mouths from doing business with the crime bosses on Wall Street. Will there ever be a need for funding from these criminals, who haven’t lent anything anyway?

    http://readersupportednews.org/opinion2/279-82/12539-a-serious-challenge-to-wall-street

  24. If you think this proposal through you find;
    Another bank bailout.Backdoor and sneaky.
    Will also mitigate the MERS land registry problems for the banks.
    Helps the Fed Res(owned by the banks)by clearing some
    of useless paper on its balance sheets.
    SCAM.

  25. i am not buying what they are selling (pun intended)

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