But first: how is eminent domain justified in these cases? Even granting Kelo, what is the rationale for seizing property from private party A and give it to private party B?
At best, banks would discover that making home loans is far too risky a business, and leave the arena.
I've been practicing in the area of eminent domain exclusively since 1990, and this is the wildest scheme I've come across. I've given this one some thought - nothing wrong with buying mortgages - in my state government may acquire "land or interests in land" but you are dead right on the public purpose requirement is a snag. Here in New Jersey, the Court have upheld supermarkets in the inner city but balked at using eminent domain to build a parking lot for a casino. But acquisition of underwater mortgages?
At least I assume that's what's meant. In most states determination of value in eminent domain is a two step process. An offer must be made to the owner - here I guess it would be the mortgage That offer has to be based on fair market value - it needs to be supported by an appraisal. If negotiations fail, then the condemnor can acquire the property by condemnation, which is merely the act of litigation - a complaint if filed, a declaration of taking, the money that was offered in put in a court monitored trust fund, and the matter proceeds to litigation on value, first by appointed commissioners, then by jury trial, or by a judge depending on whether anyone wants a jury. It can take a year or more to go through the process - we usually estimate it at 18 months.
So now someone came up with the idea to use this process to save housing markets? How much is an underwater mortgage worth? Is it the value of the real estate itself or does the mortgage have some inherent value above that if the mortgagees have some equity in the property. And what do you do with that equity, if any? What about taxes - properties in foreclosure usually carry an obligation to pay taxes since the mortgagees stop paying once the the foreclosure action starts.
The whole idea sounds wacky. I can't describe it any better than that.
Would't a simple solution, like "As of 12/31/2014 Fannie and Freddie will be dissolved. As of that date, there will be no guarantees on any of the MBS. This would give the free market, and business innovation time to sell these *assets* in the free market. The market will figure our the true value of these assets in a hurry. Furthermore, raise the foreclosure filing court fee something that will cover the cost of the proceedings($10,000?), rather than the taxpayer footing the judicial fees. Lastly, in the event of a foreclosure, the investor gets the asset, but can't go after the homeowner for any additional funds. Set this all up to occur about 1-1.5 years out. Give the markets time to digest the new rules, and they will fiugre it out.
The bit about second mortgages being extinguished under the MRP debacle is looming. This was threatening for years to happen regardless of eminent domain: A mass writeoff by the banks to meet regulatory and solvency requirements, tendered with a block of long overdue foreclosure sales (the properties in question were already probably foreclosed)will fall hard and unequally among banks and investors.
MRP will only add to the inequity by putting itself at the front of the line. Since it is somehow trying to put itself at the service of local governments (how is not clear in the media), you have yet another public-private partnership connivance, to buy political favoritism. And the favoritism will probably take the form of special and arcane legislation to benefit a handful of connected parties.
Ironically, Fannie Mae could have provided a way out. With its influence over pools of mortgages within CMO's, all banks could have been forced to swap and repool all mortgages until the burden of second mortgages was shared equally between them. To do this would require some vast exercise of bankruptcy court power and some arbitrage of CMO trades under new SEC rulings, to force this burden sharing.
I would suggest that any aggreived investors make their case in bankruptcy court as soon as possible, so as to contemplate a derivative lawsuit against MRP and other self-enriching parties, and force the hand of some big banks. By that, I mean let the big wigs open their books. Preemptive bankruptcy is now a fact. It may be the only way to use mortgage writeoffs in a manner that makes sense and preserves some semblance of order and equitableness in banking.
Who, exactly, is MRP, and what's in it for them? How about some specificity? You know, like names of companies, or individuals, who comprise this group. Will MRP be supplying the private financing of these government seizures? If so, why? If not, who? Somebody will make out like a bandit under this scheme, but something tells me it won't be the homeowner, or the taxpayer, or the concept of private property.
All true but maybe the biggest problem is that eminent domain exists in order for government to be able to obtain the use of a unique resource for which there is no substitute--a particular piece of land that is essential to an important public purpose, and without which that purpose cannot be accomplished. Real property, which exists at a certain place.
It does NOT exist to seize financial assets for the convenience of the government or some third-part beneficiary. Down that path lies the end of property rights and the end of a rational economy.
This whole thing should be D.O.A. in any rational society, and the fact that people are taking this seriously is absolutely chilling. Especially as it's just another too-clever-by-half financial manipulation concocted by the same people wose past financial ideas have put us where we are, today.
A locality cannot seize a US Government owned mortgage because of the Supremacy Clause. But they can certainly grab a privately owned one.
Don't be surprised if Obama does an about-face right before the election and tells the Fed to use Eminent Domain to fix underwater mortgages owned by F/F and banks that refuse to restructure. It is a wonderful way to buy reelection.
Can government's do it? Yes. The US Supreme Court gave local governments carte blanche to decide what is a "public purpose" for exercising eminent domain. Several states have restricted the exercise of that power under their respective state constitutions. Are there additional issues? Yes, including the question whether or not the secruitized pools actually hold any of the loan notes. Freddy and Fannie have (or had) a policy instructing mortgage loan originators to "keep the paper". Without delivery of the loan notes, Freddie or Fannie or whomever could not fill the pools. So, in the end, investors own noting.
Does seem like a foolish proposal, but I don't see anything illegal in it, nor harmful to the investors now holding the mortgages. Const. says, "nor shall private property be taken for public use, without just compensation." As I understand it, "just compensation" usually means fair market value, so if an investor holds a $2 million mortgage that he can't unload on the market for more than $1 million, a local government could justifiably take it from him for $1 million. The investor would already have been harmed by the market, but the local government would not be adding to that harm. If the investor thought the value of the mortgage was about to increase, he still would not be harmed: just use the $1 million to buy the mortgage back when the local government puts it up for sale.
MRP says these eminent domain seizures would be financed by "privately funded" and not cost a dime for taxpayers? Have they been sniffing illicit drugs?
First, any 'private funds' would be gambling on the court outcome of price fixing, a high-risk endeavor. Second, these 'private funds', most likely composed of hedge funds and other unregulated entities, would probably generate a fair amount of public scrutiny (especially journalists looking for some sort of conspiracy/influence peddling story). What municipal/county council would want to put their political career on the line by being associated with unsavory stories?
The MRP idea is dead on arrival.
A long, slow, housing recovery ahead: http://modeltstocktrends.blogspot.com/2012/06/brick-by-brick-housing-recovery.html
The fact that Mortgage Resolution Partners' plan to encourage governments to, "to use the power of eminent domain to seize mortgages from existing investors" is "seductive" just shows how immoral our society has become.
Real estate economics for the rest of us! Thank you Nicole Gelinas!
When the government bailed out the banks they should have done it by buying down the banks inventory of Mortgages. Every million dollars given to the banks should have prepayed a million dollars of underwater mortgages. This would have bailed out the people, not the bamkers
"Moreover, Washington’s all-purpose answer to the housing crisis is to hope that house prices will somehow recover their magical bubble-era values....."
Whenever I hear the word "recover" as it relates to housing prices, I laugh.
I point out to my listeners that current prices are more in line with the true value of real estate than they were in 2006. In other words, there's nothing to "recover" to. That is to say, current prices are the "correct" prices. 2006 prices were pure fantasy.
But eveyone seems to think it's just a matter of time until prices "recover". Keep dreaming.