Local Governments Weigh Eminent Domain to Stop Foreclosures

Posted on July 18, 2012 by Neil Garfield

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Editor’s Comment:  

Picking up on a thought from Schiller, San Bernardino County is taking a long hard look at invoking the government’s power of eminent domain to seize mortgages, sell them to investors at market value and provide a basis for the homeowners to stay in the home based upon the reality of the marketplace without the corruption of data created by the Wall Street banks.

I did a little research on this idea and while it is a bit of a stretch it does not appear to be excluded from the power of eminent domain to claim the right to purchase the loans at fair market value and resell them to investors. Many properties have been seized by local government only to allow private developers to build highrise luxury towers on the same property.

All this does is force the issue of an open fair free market system and take away the power of the banks to manipulate the market for mortgages and housing. As it stands, these mortgages are blighting hundreds of neighborhoods in hundreds of cities. The basis of invoking the power is classic and permissible. Whether it can be or will be allowed by the courts is another matter.

One way of looking at it is to presume to know the defense: that eminent domain is not used for mortgages and then split hairs as to whether a mortgage is an interest in property that could be subject to eminent domain. That fails because nearly all properties taken by eminent domain have mortgages on them and the mortgages get paid in the same way — fair market value. What happens to the rest of the mortgage balance claimed by the lender? Well that remains to be seen.

If many local governments start invoking this power, it will gain momentum.

San Bernardino County Weighs Eminent Domain to Fight Foreclosures

The county, along with Ontario and Fontana, wants to use eminent domain to seize underwater mortgages from investors and restructure them to help borrowers keep the homes.

By Alejandro Lazo

A plan by San Bernardino County to seize mortgages and restructure them for underwater homeowners using eminent domain is perhaps the most aggressive example of how local governments are seeking new ways to combat foreclosure.

The cities of Ontario and Fontana are partnering with the county to create a Homeownership Protection Program that would use private funds to acquire underwater mortgages from investors. The county and the two cities have created a joint authority to explore and possibly enact the plan, and the first public meeting of that authority will be held next week.

David Wert, a spokesman for the county, said the program is worth exploring because it could offer a solution to one of the region’s most entrenched problems: the vast number of loans that are stuck underwater, with more money owed than the property is worth. If the program were to go countywide, it could benefit 20,000 to 30,000 homeowners, he said.

“The only thing we are doing at this point is conducting a conversation,” Wert said. “But the reason the county is interested in talking about this is because this is a proposal that could — if everything checks out — address the problem on a fairly large scale.”

Although still in its initial stages, the aggressive proposal has attracted controversy. A number of banking, financial and business groups oppose it, contending that seizing mortgages would raise constitutional issues and could increase lending costs in those cities.

The California Mortgage Bankers Assn., the American Bankers Assn. and the American Securitziation Forum, along with several other financial groups, sent a letter of opposition to the county and the two cities.

“We believe that the contemplated use of eminent domain raises very serious legal and constitutional issues,” the letter read. “It would also be immensely destructive to U.S. mortgage markets by undermining the sanctity of the contractual relationship between a borrower and creditor, and similarly undermining existing securitization transactions.”

Dustin Hobbs, a spokesman for the California Mortgage Bankers Assn., said the program also could hurt the local housing market.

“It could be devastating,” Hobbs said. “If investors are unsure as to the disposition of mortgages in San Bernardino County and in Fontana and Ontario, it could really curtail lending in the area, and if not curtail, certainly increase costs for new loans.”

San Bernardino County’s plan is the latest of several measures by local governments to fight foreclosures and the problems often associated with resulting neglect: crime and blight.

Chicago passed an ordinance last year that requires banks and other financial institutions to maintain vacant properties that have been foreclosed upon.

Oakland has instituted a blight program that would require banks to register, inspect and maintain homes that are in foreclosure. Cleveland has been using a land bank program to tear down foreclosed homes.

Legal experts said the San Bernardino County proposal was one of the first initiatives to try to strike at the problem before a home is in the foreclosure process.

At this point in the planning, only homeowners who are current on their mortgage payments would be allowed to participate in the program, which would target mortgages that have been securitized and sold to private investors. That would exclude loans owned or backed by mortgage titans Fannie Mae and Freddie Mac. The acquired loans would be restructured, lowering the amount owed, with the intent of helping the owner keep the home.

The plan was first proposed to the county by a San Francisco firm named Mortgage Resolution Partners. The firm has employed investment banks Evercore Partners and Westwood Capital to raise money for the initiative from private investors.

Kurt Eggert, a professor of law at Chapman University, said a sticking point could be whether the investors are able to make a profit on the transactions. He said he liked that the plan, unlike efforts elsewhere, was an attempt to get ahead of the problem.

“The alternatives too often are just cities cleaning up afterward, and getting stuck with the mess, and getting stuck with the foreclosures and the abandoned buildings,” he said. “It is good to see cities trying to do something proactive.”

Cornell Law Professor Robert C. Hockett advised Mortgage Resolution Partners on the design of the proposal. The initiative should pass muster in courts because they have had a long tradition of upholding cities’ eminent domain powers as long as the valuation methods used to acquire properties are sound, Hockett said.

It particularly makes sense to use eminent domain to seize underwater mortgages that have been securitized, he said, because often those mortgages can’t be sold at market value for legal reasons. Often, those loans must be sold at face value — a higher price — because of the contracts governing them, he said.

“The fact they can’t be marketed is the reason we are using eminent domain,” Hockett said. “This is actually a pro-market solution.”


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SHILLER: Principal Must be Written Down for Economic Recovery

Posted on June 26, 2012 by Neil Garfield

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Editor’s Comment:  

We are looking into the abyss of economic failure. For economists, the people who know the facts, the ONLY answer left on the table is principal correction or principal reduction. We have tried everything else.

The reason is very simple. The Banks created a market where prices soared above values and like any other situation where there is a false spike in prices over values, the correction needs to be made. The free market has already arrived at the same conclusion —- nobody wants those mortgages even if they were valid and enforceable. The refusal to rush toward principal reduction is putting the banks in an all or nothing position. The market and the economists have spoken — if that is the choice the banks will get nothing.

But the word from the banks is that we can’t have principal reduction. The real reason is that their balance sheets will be wrecked by forcing them to admit that those assets they are reporting are pure fiction — an inevitable consequence of bank excess finally recognized by the rating agencies last week. But the banks are spinning the myth that if principal reduction (in other words REALITY) prevails then everyone will want to do it. Assuming that is true, why not?  Shouldn’t everyone want reality? The Banks have had their windfall, they have been paid enough to pay back the investor lenders, and they are driving the economy into a ditch with their unrelenting death grip on the purse strings. 

Americans must decide between the Iceland model in which their economy quickly recovered, and the American model where we continue to languish with no real prospects for recovery. The European attempt at austerity drove them further over the brink. In fact, every policy is now debunked that ignores the realities of the market place and the reality of the importance of the housing market in ANY economic recovery. There is only one thing left. It is the right thing to do.

We have exhausted every idea except for doing the right thing. Restore homes to people who were unlawfully and fraudulently induced into signing papers that never even recited the terms of repayment as it was recited to the real lenders and which never disclosed the multiple borrowers on each loan, most of whom were hidden from the borrowers. Write down the mortgages just as the banks have already done, as confirmed by trading in the marketplace. What is so difficult to accept here?

People get windfalls all the time when bullies take over markets. And yes many homeowners will want the benefits of a write-down that the rest of the world already accepts as true and necessary. The result will restore wealth and power to the middle class, revive the economy and restore our prospects. We will have the resources to repair our ailing infrastructure (an embarrassment to world traveling Americans), invest in education and job training, invest in innovation and get back some of that pride we once had in America.

The only people stopping this are those who are pandering to extremists who would rather see the Country collapse than to allow a “handout” to those undeserving deadbeat homeowners. The facts and reality leave them unpersuaded because fanning the flames of ideology is how many politicians achieve power and maintain it.

Like I said last week. It comes down to this: country or chaos. What is your choice?

Robert Shiller: Lenders Need To Write Down Mortgages To Solve America’s Housing Problem

By Mamta Badkar

Yale economist Robert Shiller says the housing crisis is a collective action problem.

This means, he argues in a New York Times editorial, that if all mortgage lenders were to act collectively and write down what was owed to them by individual homeowners everyone would be better off.

Shiller offers a few types of collective action to write down mortgage principles. One involves giving “community-based, government-appointed trustees a central role” in writing down mortgages, any idea proposed by Yale economist John Geanakoplos and Boston University law professor Susan P. Koniak.

Another proposed by Robert C. Hockett involves “eminent domain” which allows government to seize property with fair compensation to owners when it is done in public interest—and could apply to mortgages:

Professor Hockett argues that a government, whether federal, state or local, can start doing just this right now, using large databases of information about mortgage pools and homeowner credit scores. After a market analysis, it seizes the mortgages. Then it can pay them off at fair value, or a little over that, with money from new investors, issuing new mortgages with smaller balances to the homeowners. Taxpayers are not involved, and no government deficit is incurred. Since homeowners are no longer underwater and have good credit, they are unlikely to default, so the new investors can expect to be repaid.”

People are more likely to default on their mortgage when it is underwater i.e. when their homes are worth less than their mortgage. And  lenders lose money on foreclosures because of lower home values and legal costs. So it would be in everyone’s best interest according to Shiller if mortgage lenders were to take some such collective action.

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