Again, I am perplexed by Lake Worth's comments. As David explicates, a plain reading of the article reflects why MRP's role in this scheme is the worst form of crony capitalism. If Richmond is to buy underwater properties at fair market value (which they admittedly are not - by design the offers are 20 percent under FMV), why is MRP needed? Aren't there any number of private mortgage companies/investors which could compete for this business? Haven't we yet learned about cronyism in the mortgage market? Fannie and Freddie - famous friends of Congress - were little more than politically connected scams (argue against it if you will, but they lost billions on billions, and were, by fiat, the only two public companies not required to follow SEC accounting rules). Why repeat the same mistakes? Again, Lake Worth, is it always about the narrative, as opposed to the facts?
In the end it will all come down to riingsk-vs-reward. As governments find ever more ways to bully lenders into accept unattractive offers, in the future lenders will originate new loans only if they are richly compensated for the perceived risks.
Which is to say, the cost of this nonsense is likely to persist for decades, as some potential lenders will simply refuse to lend, others will lend only to the most credity-worthy applicants and only then if they can get higher interest rates.
It's yet another case where the benefit (people kept in their homes) is seen, yet the costs are mostly unseen.
And if not enough lender are willing to lend at "affordable" rates, well perhaps good ol' government will charge in as the White Knight, providing "affordable" loans at taxpayer expense.
Had the banks refused to lend to mortgagors in Richmond, they would have violated the Community Reinvestment Act. So, they issued subprime mortgages on property of declining value to low income borrowers, consistent with HUD's requirement that 42% of the mortgages bought by Fannie Mae and Freddie Mac be issued to borrowers with incomes below the median for their area. Now the National Housing Law Project, the Housing and Economic Rights Advocates, Bay Area Legal Aid, the Law Foundation of Silicon Valley and the California Reinvestment Coalition are attacking the banks' injunction against the municipal confiscation of underwater mortgages. Since Richmond is only 1/3 white, they argue that opposition to the confiscation is racial discrimination and therefore illegal under the Fair Housing Act. And, if the banks refuse to lend further in Richmond after the confiscation, no doubt they will be accused of illegal redlining on racial grounds. It's a case of damned if you don't, damned if you do, and damned if you don't do it anymore.
These people are the worst kind of socialists, those who insist that everything they do is "good, and pure, and noble." They're right out of Atlas Shrugged. One truly wonders if some strange arbitrage from fiction to the modern altruistic farce hasn't occurred.
Seems to me that many (most?) of the comments here are missing the point of this article. (Not surprised that Lake Worth is using the article as a staging ground for his/her usual leftist rants.) Please go back and re-read Mr. Greenhut's piece. If you're too lazy to do so, let me summarize: the concept of eminent domain was never intended to allow government to seize private property for the purpose of then turning it over (or otherwise disposing of it) to a private party so that the private party who gets the property can make a tidy profit on it. Eminent domain is intended to allow government to obtain private property (at fair market value) for the purpose of putting it to some use that will benefit or otherwise be enjoyed by the public, as a whole. The Richmond-MRP scheme is no better than any of the nefarious acts complained of by the commenters (Wall Street bundling of mortgages into worthless securities; poor to non-existent screening policies by banks; friendly appraisals; robo-signing; etc.) This article makes it quite clear that the scheme Richmond is attempting benefits only MRP (Richmond's politicians already having had their pockets lined by MRP). Why this is so troubling to Lake Worth (and a few of the other commenters) only shows that basic reading comprehension is not one of his strong points. How is MRP any better than all of the other players who contributed to the housing crisis? The fact is, MRP is just as bad . . . and Richmond is MRP's government enabler.
The difference between "eminent domain" and RTC are big. Eminent domain usage is a last resort and usually used only for purposes to take private property with compensation. Blaming Wall Street for the mortgage melt down is misplaced because they did what was not only approved but encouraged by the government.
The city pursuing eminent domain process to take property can make them liable to compensate lenders. I can't see the city is ready to make that move.
If the property is foreclosed, the city/county will get its tax payments before the lender gets its. so, in this case, the officials would only shoot themselves if the foot if not their heads.
Oops. A misplaced "Finally", obviously.
I too would be curious to see data on gutting and burning of houses. But as someone with experience working in municipal government, I can tell you that it has presented major problems for cities to have a large inventroy of bank owned, vacant homes. Niether banks nor the investors who purchased many bundled mortgages are set-up to be property owners on that scale, and vacant buildings are almost always problem proeprties. I'm sure news stories out of cities like Detroit over the last decade plus could provide some insight in that regard.
Finally, I think Lake's larger point is the key. Policy played a role, but CRIMINAL behavior on the part of Wall Streeters played a much, much larger role.
And banks like Wells Fargo et al already made bundles off money off these mortgages. The reselling of the mortgages saw to that, and also happened to remove any incentive they may have had to screen borrowers and/or not actively push large mortgages on unqualified aspiring home owners.
While undoubtedly MRP stands to gain financially, they are at least seeking a solution that works for homeowners and communities. The lenders and mortgage-backed security owners who are fighting MRP are vultures, and they have fought every effort so far to hold them accountable for what they have done.
Lastly, it's not as if the homeowners are winning a lottery here. They have suffered plenty as a result of the collapse of a financial system at the hands of those who rigged it to begin with. My understanding is that TARP (remember that?) has been paid back, and Wall Street is having no trouble at all returning to profitability. Sadly, the same is not tru for many, many who lost their jobs in the aftermath of the housing collapse.
Have there been any criminal charges related to gutting and burning houses to keep home prices inflated? Is there at least evidence of this?
Are you also suggesting that shorting lenders is acceptable as long as it keeps foreclosures down?
"Today’s 'underwater-mortgage' problem was largely the creation of government policies that promoted easy lending practices on the one hand, while imposing strict land-use rules—thus reducing the affordable-housing supply—on the other."
It was fraud and everybody knows it. Faked "friendly appraisals" and faked/forged documents that restated mortgage terms to steal from mortgage borrowers and false numbers entered to the computer systems. Capitalism's greatest weakness is its vulnerability to organized crime. The mortgage explosion is a staggering example.
Robosigning, anyone? The total for these frauds came to $2.1-trillion. Organized crime vs. the citizenry.
Now, what Richmond and other municipalities are doing is applying eminent domain to prevent the mortgage holders from foreclosing properties, evicting residents, and then ABANDONING the properties to scavengers and arsonists. The munis are stopping the banks from destroying housing stock.
It's all about money. Banks hold large numbers of mortgages and they will do damn near anything to prevent market prices from going back to pre-2004 prices. So destroying post-eviction housing units has become a standard tactic all over the country. Scavengers are given lists of eviction sites and the plumbing, aluminum siding, bricks, wiring, insulation, and other assets are removed within hours of the bank clearing the property.
Richmond says "No!"
Greenhut says "Yes!" Or he has no idea what the practical economy of the United States has been up to. And never read "Freakonomics" to get a clue on analyzing criminal systems.
This would never be an issue if banks being tried to meet underwater owners and refinance with a principal reduction.
The writer is being absolutely dishonest in claiming underwater houses are taking care of themselves. Certainly not in NY where I'm meeting owners being served 10 day eviction notices from their lenders.
Subprime lenders are to blame for not budging and actually eroding communities. Only visible loser in eminent domain are these banks that actually profited through the market crisis and federal government bailout
My understanding is that under California law (unlike, say, NY law) lenders have to elect one of two remedies - either sue on the promissory note, or foreclose on the mortgage (called a deed of trust in California). They can't do both. Presumably mortgage rates in California (and other similar states) reflect the greater risk in making what are effectively non-recourse loans - loans secured solely by the specific property being financed where the lender has no recourse to the other assets or earning power of the borrower.
this is no different from the tarp program.
Typically in a short sell with recourse, the seller has to write the lender a check for the difference in the sold price.
Is there anything special about an ED proceeding that would exempt the borrower from such a requirement in this case? Could Wells Fargo, et.al. go after the home owners for the difference?