You may have noticed news items that a company called Mortgage Resolution Partners (MRP) is proposing to have strapped localities use the public power of eminent domain to deal with the problem of underwater mortgages.
Officials of San Bernardino County, California, where one home in two is worth less than the value of the mortgage on it, are very interested in the idea. (San Bernardino has just voted to file for bankruptcy). The New York Times' Joe Nocera wrote a favorable column on the proposal, calling it the "last chance" to resolve the mortgage mess.
The idea is to have the county use its power of eminent domain to take these mortgages out of securitized packages of loans, purchase them at a steep discount, write them down to fair market value, and then create a new mortgage with a much reduced principal and monthly payment. MRP puts up the capital to make these purchases. Then MRP makes some money on the deal and the homeowner gets a break on the payments.
But if using eminent domain as a way to address crisis in underwater mortgages is a promising idea, this particular scheme is not. For starters, MRP, a for-profit company, is not proposing to acquire vacant homes or even homes where residents have stopped paying on their mortgages. It wants localities to use eminent domain so that it can acquire performing mortgages.
Who needs MRP as middleman? By skimming off only the best mortgages, it is taking almost none of the risk and stands to reap windfall profits for raising capital and shuffling paper. If the federal government got serious about this concept, it has plenty of resources through its feeble HAMP program to acquire distressed mortgages, reduce the principal to fair market value, and give the homeowner all of the break.
The Times has been treating the use of eminent domain as a new idea for solving the mortgage crisis, and crediting it to the vulture -- I mean venture -- capitalists at MRP.
But Professor Howell Jackson of Harvard Law School has been advocating this approach since 2008, and I urged creation of a new Home Owners Loan Corporation with eminent domain powers in my 2010 book, A Presidency in Peril.
Rep. Brad Miller of California proposed a version of the Home Owners Loan Corporation idea more than two years ago, without new financial industry middlemen. Miller recently criticized the securitization industry for trying to block the MRP proposal, but that doesn't make it the best way to proceed. For a smart technical discussion, see Yves Smith and David Dayen on Firedoglake.
There was money in the 2009 Recovery Act for local governments and non-profits to acquire abandoned and foreclosed homes. The last thing we need is for one more layer of entrepreneurs to skim off the most potentially lucrative layer of distressed mortgages.
A Homeowners Loan Corporation using eminent domain could be a full service solution. It could pull distressed mortgages out of securitized pools, provide principal reductions on both performing mortgages and ones where homeowners are behind on their payments. And it could purchase foreclosed homes at deep discount and convey them to nonprofit groups to be returned to the supply of affordable housing. (In the absence of adequate government action, that function is mostly being performed by speculators, too.) Even without legislation for a new HOLC, the government could use existing entities to perform this role.
Think about it. Once upon a time, in the era of It's A Wonderful Life, before the sharks ruined it for everybody, the business of supplying mortgages was simplicity itself. Nonprofit savings banks and savings and loans provided mortgages. Their money was replenished by the original Federal National Mortgage Association (FNMA) so that they could make mortgages. Very low down-payment mortgages could be had through the GI Bill and FHA. There was no for-profit securitization.
Then the wise guys invented securitization and subprime. At least five layers of middlemen took their cuts. The guy who originated the loan, the guy who took it off his hands, the guy who packaged it and sold mortgage-backed securities, the credit rating firm that gave the package a bogus triple-A rating, and other players who bought and sold the paper for profit. FNMA was privatized as one more dubious actor. And then the show went bust, taking the economy down with it.
How fitting, in this corrupted era, that the supposed savior is now yet another entrepreneur. When are we going to get smart enough to figure out that the whole thing works better when government does its job rather than being the enabler of financial middlemen?
Eminent domain is in the Constitution to serve public purposes. In the 5 to 4 Kelo v. City of New London decision of 2005, the Supreme Court held that a local government could lawfully use eminent domain to condemn a property and convey it to a private developer. But even if constitutional, the use of eminent domain for private profit isn't good policy--even less so when the public sector can do the job more fairly and efficiently.
Until government reclaims its proper role, financial middlemen will keep on creating crises--and then profiting from efforts to resolve them. It's a wonderful life.
Robert Kuttner is co-editor of The American Prospect and a senior fellow at Demos. His latest book is A Presidency in Peril.
The consequences of such a move are something I very much look forward to seeing these cities go through.
82 trillion + ASSETS : one time 20% duty ART 1 Sec 8 will pay off national
debt, leaving yearly interest currently paid available for the mortgage mess
When transportation is involved the study involved is based on a decision to serve the most based on traffic volumes, gravity flow modeling, soils, habitats, structural expenses, on site as well as off site considerations like noise, overflight areas for airports being planned, etc.
When cities become involved there is more tendency for elected officials to use their power to "get even with someone".
Using ED in housing finance is like bringing a gun to a knife fight no doubt. But what options to local governments have against a financial system rigged against public solutions? Even if it means bringing in for-profit entities to untangle the mess, the risk apparently is worth the pain of not doing anything.
Kuttner's warnings about MRP may be valid and deserves closer scrutiny, but that does not negate the excise of ED powers to solve this problem. In practical terms, it allows existing homeowners to stay put, houses continue to be occupied, tended to, local infrastructure maintained, and communities preserved. It still leaves the financial mess to be cleaned out. That's a given no matter what. But under ED powers, people are not put out on streets while empty houses rot. Its a way out of this crisis for all communities across the country, not just in California.
Should municipalities start using eminent domain law to seize homes where the owner is paying, only to pay the lender less money that the outstanding debt, that's a risk that will have to be priced into future mortgages. Does giving a break to a handful of existing homeowners - who can already pay back on the current terms - really warrant jacking up the rate that every single future homebuyer (i.e., our kids) will have to pay?
I don't want to say there isn't a case to be made there, but in my mind it's very weak. There's no such thing as a free lunch, and that's how this particular plan gets paid for.
Your comment is just confusing.
However, eminent domain would seem to be little more than a convenient workaround to the problem of people who haven't been foreclosed on paying more than their property is worth, and as you note, no doubt has unforeseen consequences (though I doubt it would be directly related to increased mortgage rates, which will happen when the market recovers anyway). Mainly, the tax payer would be buying property which would then be immediately resold to the original owner, and with property values being so centered to certain localities, the average return on that investment would likely be too small to warrant the unforeseen negative costs.
Better to use eminent domain on vacant foreclosures to, at minimum, maintain the properties for resale. Better yet, re-purpose the vacant properties for public use to shore up existing property values.
I'm also curious what it would do to overall property taxes. Tax assessors are loath to revalue property at a lower rate (due to the reduced revenue), but area usually forced to once enough property starts trading hands at a lower price. These transactions could end up reducing the valuation of more properties in the areas, bringing down taxes more. It's not a given, but it's a possibility. It's not like the private company doing the work cares, which is another reason to be suspect.
Better to use eminent domain to buy vacant properties and maintain/re-purpose them for public use. The added bonus of which would be additional capital to be lent, and lower loan qualifications, to open up more of the market to actually buy homes.
Underwater mortgages are only part of the problem. It is homeowners who are underwater on their incomes! Many just cannot afford to make their mortgage payments and other payments on loans such as "home equity" loans. Face the fact, far too many got into the easy money craze of the past decade and now the chickens are coming home to roost. These people, unless they have high paying jobs, probably could not afford to become recipients of their own "eminent domain" homes.
The real problem facing us is the lack of high paying jobs. That is the crux of the housing debacle. People today, just do not make enough money to cover their mortgages.
Again, the problem was and is easy money. Here the conservatives do have a point about stimulating the economy, but not as they would have it. Yes, spreading money about does increase spending and that is consumerism. I somehow think it would be better to have a society that increases wealth based on producing stuff, not just floating a few extra dollars around.
On the mortgage issue: this was collusion on a major scale that included licensed professionals: mortgage brokers, real estate brokers, real estate appraisers, real estate closing attorneys, and lending underwriters, in addition to banks/lenders. We depend on those professionals to adhere to the code of ethics replete in their licensing. We tread in waters typically beyond our own comprehension and are at the mercy of such professionals in much the same way we are at the mercy of medical professionals. However, due to the collusive and unethical behavior of the mortgage mess professionals, consumer trust has been compromised.
But there are two parts and two sides in each sale. The buyer who thinks they are getting a bargain, and the seller who thinks they are making a tidy profit. The buyer must be thinking long term and hope to resell the property at an appreciated value. Now in comes the real estate agents and banks who push fairy tales about rising home values and the greed begins. This is what happened in the housing bubble of the past decade. Tulip bulbs all over again.