"Eminent Domain" Back On Table Following Fed's Latest Bailout Proposal

Tyler Durden's picture

We first discussed the possibility of state and local governments using eminent domain to 'save us' from further housing issues a year ago but now the NY Fed has gone one step further with an academic-based justification for why this process is not a "zero-sum-game" and will render all stakeholders better off. We can hear echoes of "trust us" in this commentary as the authors explain how multiple valuation methods will be used to ascertain "fair-value" - which has always worked so well in the past -  and that we have "little to fear" from the  resultant long-term contraction in liquidity or credit as bubbles can only inflate during times of easy credit availability (and that will never happen!)

 Paying for all this? Don't worry - resources to fund purchases of loans/liens can be raised from public, private sources or a combination of the two.

It seems to us that MBS holders will not be happy, consumers hurt as mortgage costs would rise (this 'risk' has to be priced in), and taxpayers unhappy as this is yet another transfer payment scheme to bailout underwater loans.

Oh and if that didn't worry you - remember back just a few short hours ago when we discussed the French socialist government's efforts at 'helping'!!

Some headlines from the report that caught our eye (via Bloomberg):

Underwater homeowners therefore are not to blame for current situation


Moral hazard can be prevented as it is “easy to formulate” criteria that doesn’t encourage strategic defaults


“Little need to fear” resultant long-term contraction in liquidity or credit as bubbles can only inflate during times of easy credit availability; we want “credit-caution” going forward


Eminent domain proceedings are not “zero sum game” and will render all stakeholders better off


Political authorities can use eminent domain to seize second-liens, too, “if need be”; can be used to “bring recalcitrant” creditors to the table


Via The NY Fed:

With more than 11 million homes still “underwater,” the mortgage debt overhang caused by the housing bubble remains an impediment to economic growth and a burden on communities across the country.  One possible solution to this problem is for state and municipal governments to use their eminent domain authority to purchase and restructure underwater mortgages.  This novel solution is proposed in a new report from the Federal Reserve Bank of New York.


Many analysts agree that principal reductions are the best way to assist underwater homeowners—those who owe more on their mortgages than their houses are worth.  Such write-downs can be difficult to achieve, however, when the underlying mortgages are securitized and held by private-label securitization trusts.  Specifically, such loans are subject to pooling and servicing agreements that require collective action by a large majority of security holders before a loan can be modified.  As a result, carrying out write-downs is challenging and sometimes impossible.


In “Paying Paul and Robbing No One: An Eminent Domain Solution for Underwater Mortgage Debt,” author Robert Hockett argues that one possible way to sidestep this problem is by having governments buy and restructure underwater mortgages.  By utilizing their eminent domain authority, state and municipal governments could bypass the coordination problems posed by the pooling and servicing agreements.  They could then reduce the principal on underwater loans, lowering the amount owed by borrowers and thereby reducing the risk of default.



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grunk's picture

Unless you get valuation fights. Then you need to factor in attorney fees, expert witness and court delays.

It's my understanding that there are two types of valuations: arms-length transactions and distressed sales (foreclosures). 

pitz's picture

Only in the minds of Realtors.  The real world uses the lower of the two, ie: if a foreclosure can be purchased for less than a non-foreclosure, then the true market price is that of the foreclosure.  Trying to pretend there's two markets, or a bifurcated market, is part of what created the big problem in the first place. 

Never One Roach's picture

Check out the Zillow valuations versus the list prices for house. The valuations are about 20-30% less for most locations. So I talked to my ol' buddy realtor who said that's true. She said the market has slowed alot with the higher mortgage rate and the actual final sales are about 25-30% less then the list price/asking price (which matches Zillows valuation prices).

Even in "hot areas" such as San Clemente (where my uncle lives) and Sugar Land Texas (where my sister lives) actual sales of houses are abotu 20-30% lower they both said.


People have soured on the overpriced housing market at this point...frustration...loss of interest...job insecurity/losses...and so on are part of it. I'm not sure how much more the Fed can do to fight market forces.

otto skorzeny's picture

The Fed is blinded by their hubris.

asteroids's picture

Fear not, the FED and other morons will be blinded by bullets soon enough if they pull stunts like this. I'm amazed that Greeks and Cypriots haven't taken to real violence.


HulkHogan's picture

If they are watching the Turks, maybe they'll soon follow suit.

SMG's picture

Can we start hanging traitors in the US soon?  I'm getting kind of impatient.

Urban Roman's picture

Which ones are the traitors? I have heard conflicting opinions. 

de3de8's picture

One thing for sure, there are a lot of them.

otto skorzeny's picture

The turks did cut right to the chase. A few months ago Turkey was being touted as the next great nation to do business in.

fonzannoon's picture

They were just upgraded to investment grade lol.

otto skorzeny's picture

I should have known when it was the blowhards on CNBC doing the touting.

SemperFord's picture

For a second there I thought you were implying Simon Black said Turkey was next nation to invest in...

Urban Roman's picture

I think he's over there in Whatsis Square right now, looking for young nubile Turks to 'invest' in...

Stay tuned for the report here on ZH.

Freddie's picture

Funny how that worked.  Install one of Stasi O's fellow islamist puppets and hope the locals did not notice. 

Went from the best advanced emerging market to another hell hole with very pissed off citizens in a few months.  Those people have a lot of guts like the Egyptians.  They don't like O's islamist puppet pals.

otto skorzeny's picture

Try using the sales price of foreclosures to get a reduced valuation for real estate purposes at the tax assessor's office- the assholes look at you like you asked for their first-born. A lot of the reason the govt is forcing the banks to keep these foreclosures off the market is so the state/muni property tax base does not totally collapse.

SmallerGovNow2's picture

spot on otto.  they need us top 20 percenters to milk and to continue their fucking game until nothing is left....

glenlloyd's picture

where do these crazy people come from that propose this crap? Did someone leave a door unlocked at Belvue?

this is just getting crazy....and again, for people who didn't borrow more than they should have and live beyond their means there's squat...zip, zilch...so it's not remotely equitable.

this sucks....these asses can suck my wang

otto skorzeny's picture

Like I tell my wife- we'd be better off running up debt and living high on the hog on borrowed $- but I just can't bring myself to do it.

LawsofPhysics's picture

Likewise. These paperpushers can't find any more suckers or more fast enough to keep the paper games going. Fuck em. Unfortunately, the state governments seem to always be ready to step in (depending on what state you live in).

Meat Hammer's picture

Central planning used to fix* the disasters caused by central planning.




*fix = create more disasters

Freddie's picture

Local property tax assessors office does not want to cut your taxes because it might harm their golden pension at age 45 so they can get rehired the next day to double dip.

They treat the citizens like mobsters treated brokers in boiler rooms when the sucker customers wants to sell their crap penny stocks. The mobsters beat the brokers up.  "No sales!" "Yes Guido."

otto skorzeny's picture

Freddie-I saw a new movie you might like to see-"White House Down"- Hollywood even put that racist Jamie Foxx in as our nee-groe prez.

Kirk2NCC1701's picture

That's why Detroit is beoke: greed, incompetence, corruption, entitlement. Let 'em bankrupt and start fresh - just like GM. Fuck the City Hall parasites.

ncdirtdigger's picture

'just like GM'? What kind of dumbass statement is that? Do you have any clue as to how govco screwed GMs creditors so that the same dumbasses who couldn't assemble a cardboard box could keep their union jobs (along with their demorat party contributions)?

screw face's picture




SafelyGraze's picture

we must nationalize all real estate.

and we must do so *now*.

Kirk2NCC1701's picture

I'm happy to let Obama nationalize my inner city sec.8 prop's, They can deal with the delinquency (on10-20% of their rent portion) and attitude/entitlement on top of all that.

They're guaranteed to vote Dem -- as if they don't already.

Urban Redneck's picture

But they are not proposing to nationalize distressed real-estate, they are proposing bailing out the banks (again) with debt serf kicker to make the banker bailout more palatable to their minions.  The banks will take tax write-offs at taxpayer expense and the homeowners will receive write-downs at taxpayer expense, and there will be NO PUBLIC BENEFIT.  

Meat Hammer's picture

Bingo!  How are they going to pay for this?  Uh...maybe taxes on the productive class.

All I saw in this article was bail out....blah blah blah...bail out.  

I'm not under water in my house but I'll get to pay for my neighbor who decided to buy at the top.  Choices no longer have consequences, unless they're good choices.

Sounds fair.  

tip e. canoe's picture

got to pay off those loans to the FedRes somehow

boooyaaaah's picture

Could this have been the long term plan?

Subprime. variable interest rate. Artificially low interest rate. Nothing down . No proof of income. Mutiple property loans. 

All this combined with GSach soliciting loans to slice and dice and resell. To the world. All under the watchful eye of Frannie and Freddy. And the great and all powerful Oz err

I mean all powerful FED. Who's function other than insuring full employment and low inflation is the regulation of banksters.

Could the suprise surprise final solution of eminent domain and government ownership of private poperty have been the motivation for all of this bs

I mean really is writing a loan that has a reasonable chance of being paid back. Is this new? Is this rocket science? Hasnt this been done since at least the Time of Jimmy Stewart and Pottersville?

Panafrican Funktron Robot's picture

"Could this have been the long term plan?"

I'm looking at PE firms gobbling up distressed RE to rent, and I'm looking at the Fed buying up pretty much all available MBS, and I'm seeing where private ownership is already being massively consolidated into the oligharchy.  I see another housing crash coming, they swoop in to "help distressed homeowners", grab another large chunk of RE, and continue the game.  

Given that growth is dead, what is there left to do other than cannibalize wealth held by the plebs?

PTR's picture

Funny- my 30yr was with Chase, 3 months later, I got notice that Chase sold it to Fannie Mae (but will continue to process the payments and servicing -of course-.) To add to it, we were 20% down, too.


Phuck me.

One And Only's picture

Fuck loans.

Free shit for everyone is fair.

Meme Iamfurst's picture



So the white area means NO LOAN is deliquent?  Looks like the DC area is doing just fine.

Esso's picture

I just kinda figered the white areas were already federal property.

americanspirit's picture

A lot of the white areas are Native American tribal lands. Not all, but quite a bit. No mortgages on Tribal Lands? Interesting that the entire state of South Dakota apparently has zero.

NoDebt's picture

Oh, Jesus.  I don't know what to say about this.  What a clusterfuck.

Fuck Ben Bernanke is all I can come up with in my weakened state.

SmallerGovNow2's picture

whomever junked you is an ass whipe...

NoDebt's picture

Spitballs against a battleship, my friend.  No impact at all.

A little trick I learned from the BLS:  Just don't count the down arrows.


Mr. Magoo's picture

WOW, that map looks eerily similar to the agenda 21 map. Any connection to the Govt takeover of all mortgages??? nah that's just a conspiracy theory

Kirk2NCC1701's picture

Not to be difficult, but to get understanding...

You're opposed to the breeding parasites being subsidized, but also from being... filtered out of the gene pool?

fonzannoon's picture

Looking at that chart I finally found something good about Long Island.

whoopsing's picture

Its not so bad Fonz, lots of good people and good places. Dont play the keeping up with the jones game,it'll make you old fast

fonzannoon's picture

you have been on here longer than I have. It's nice to meet you.


whoopsing's picture

Same here Fonz , I'm glad you are around, I like your posts, you offer much insight

Dave Thomas's picture

Otto I can sing the Panzerleid, and I would welcome Fonz.