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Eminent-Domain 'Transfer Of Wealth'-Program Challenges Remain
The debate around San Bernardino County’s proposed program to use eminent domain rights to seize ownership of underwater mortgages has continued to heat up since we first wrote about it here last week. As Barclays notes, the county (along with two other cities in the area) has formed a joint powers authority, which would not need permission from the respective city councils unless they need public money. There are conflicting reports of the path that such an authority would take and the role of private investors. However, the most likely path seems to be that the authority is funded by private investors and it uses this money to buy current loans that are underwater at a "fair price" and then refi the borrower into a new private or more likely into an FHA mortgage. So, this program, if implemented, is likely to be a transfer of wealth from existing investors in these loans to the city governments and the newer investors led by venture-capital firms. Barclays does note though that there are many challenges to such a program including the legal issue of whether eminent domain can be used to seize financial assets in this fashion, especially if the primary beneficiaries are private investors at the expense of existing investors, which include, among others, pension funds and mutual funds and the fact that new mortgage origination is likely to suffer with new mortgagees
bearing the costs of such a program in the form of higher mortgage
rates/less credit availability.
Barclays: Eminent domain debate heats up
The debate around San Bernardino County’s proposed program to use eminent domain rights to seize ownership of underwater mortgages has continued to heat up since we first wrote about it. The county (along with two other cities in the area) has formed a joint powers authority, which would not need permission from the respective city councils unless they need public money.
Possible mechanics
There are conflicting reports of the path that such an authority would take and the role of private investors. However, the most likely path seems to be that the authority is funded by private investors and it uses this money to buy current loans that are underwater at a "fair price". The next step would be to refinance the borrower into a new private or more likely into an FHA mortgage (at, for example, 97% LTV of the currently appraised value). For the investors funding this program to make money, this implies that the "fair price" must be at a discount from the property’s worth (assuming that the new mortgage is at most a 97% LTV FHA loan). With this discount, the price paid for the loan is likely to be much lower than the value of the lifetime cash flows expected to be paid on such a current loan. So, this program, if implemented, is likely to be a transfer of wealth from existing investors in these loans to the city governments and the newer investors led by venture-capital firms, such as Mortgage Resolution Partners. Based on our limited understanding, it appears to us that the effect will be very similar to doing a FHA short refi with current investors taking a slightly higher loss (than a short refi) and the difference going to the city governments and the new investors.
A host of challenges likely
There are many challenges to such a program. First, there is the legal issue of whether eminent domain can be used to seize financial assets in this fashion, especially if the primary beneficiaries are private investors at the expense of existing investors, which include, among others, pension funds and mutual funds. Next, the plan appears to be exclusively targeted at mortgages in MBS that are not backed by the GSEs/GNMA. These mortgages form less than 10% of all mortgages in the country. The use of eminent domain requires the counties to show that the property seizure is for public use. If the program targets less than 10% of all mortgages, it would be hard to justify this as being for public use. Finally, new mortgage origination is likely to suffer with new mortgagees bearing the costs of such a program in the form of higher mortgage rates/less credit availability. Given this new uncertainty, which effectively subordinates a first-lien mortgage to the local governments, private lenders are likely to demand compensation for this in the form of higher interest rates and higher down payment requirements. This is likely to increase the burden on the taxpayer as more and more mortgages will have to be backed by the GSEs/FHA. In an environment where Congress is calling for efforts to revive private lending and to wean the mortgage market off of taxpayer assistance, such a move would be highly short-sighted and counter-productive, in our view.
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Lets try a new position Bitchezz!!
I'm so demoralized that I'm about to say fuck the whole damn thing. They want fascism? Let's give them fascism.
Rub your eyes: you've had it for 10+ years.
this is what happens when the rule of law breaks down. think mfg...liborgate...pfg to name only a fraction of the corruption. mortgage fraud...hell you would think it never happened...what with all trials and guilty verdicts. the system is now feeding on itself...every city...county and state desperate for monies. look at the joke state settlement with the banks for mortgage fraud. companies now feeding off their customers' lawful money. this after some 23 trillion dollars created to cure the problem....23 trillion feeding banks...not one penny lent into economy for growth. all this and probably all of six voices in the media and one elected offical sticking his neck out so far that even the blind executioner couldn't miss. and people want to know why i say i wish i had been born in another generation....fuck my fellow baby boomers.
p.s. now am reading about the tb outbreak in florida where up 3,000 people came into contact with the infected. but here is where it gets really good...the jackass gov. of fla. trickey rickey scott has closed the state hospital that has treated the worst cases of tb for sixty years....but wait...the hospital board fast tracked the closure by an early six months....you just can't make this shit up!!!! however i am sure that florida has a program studying why manatees shit in the water!!!!!!
I am struggling with a definitional problem. An underwater mortgage is one in which the house is worth more than the underlying debt. Do they mean mortgages that are in some form of default? I don't see how one can use eminent domain to confiscate anything in which the contractual arrangements are fully intact.
Hi Thomas
An underwater mortgage is one where the market value of the house is less than the underlying debt.
And typically, although a city/county/state is supposed to pay fair market value when using Eminent Domain, they don't; they usually pay less than fair market value.
Still, for the city/county of San Bernardino to get into the housing market via Eminent Domain is pure insanity - both SB city/county are broke.
But if the city/county pays $0.10 on the dollar, maybe there's a revenue stream there.
It is my understanding this applies even if you are current on your payments.
Correct - governments can use eminent domain to take your property at any time. It used to be that it had to be for "the good of the community" (i.e. for roads, road expansion, etc) but recent court rulings (setting case precedent) now make it possible to take property for any or no reason. Totally FUBAR.
"I'm so demoralized that I'm about to say fuck the whole damn thing."
The violence of my own thoughts increases monotonically with each passing month. I am increasingly convinced that violence is the end game.
Setting aside the fact that eminent domain "fair value" tends to be a low-ball figure, if the banks had these assets at fair value on their books, then there wouldn't be any issue.
It's the mark-to-unicorn's ballsack accounting that makes this a threat.
Yeah. I do not know why this would be a surprise... in fact, expected. These shark-infested waters have new predators in them. Some outright corrupt, some idealistically corrupt. The old rules are corrupted and disregarded. The new rules are being made up to keep the fish from being completely eaten (thus destroying the food-base).
Bond holders, banksters and other investors took the risk that Bernanke's put was forever and amen.
Whoops.
Better give the borrowers a snorkel. What is Einstein's definition of insanity?
This would represent an unbelievable change in the US towards a Marxist government where property seizures is down on a whim.
Some law professor at my own law school attacked me about this issue. My reply was "What don't you understand about investor rights?"
http://confoundedinterest.wordpress.com/2012/06/29/trust-investor-rights...
All your properties are belong to us...good ting that TJ didn't get his original version approved of "life, liberty, and property."
Isn't this just a case of the schoolyard bully trying to take the amrt kids' lunch money, taken to an adult version. It seems that govco wants to be the holder of all property debts in the US. Now why would that be??? Hmm.....
You might want to ask the GM bondholders about investor's rights.
If it was a "fair price" they wouldn't need Eminent-Domain now would they? Theft by any other name.
Don't worry... stick a tax on it and it will be legal!!!
Something doesn't sound right about this. Even with eminent domain they are supposed to pay fair market value. The property owner gets a trial and jury (and the city pays his lawyer fees) to determine the value. They can't just seize it, they have to pay what it's worth. It's the Fifth Amendment to the Constitution.
Are you kidding me? We have been watching the constitution get shredded over the last few years. What makes you think they won't continue tearing it apart?
And then came Kelo.
Eminent domain is whatever the Supreme Clowns, errr Court, choose to define it as. What's the Consititution have to do with it, have to do with it? What's the Constitution, but a simple piece of paper?
It's theft.
I won't have it.
But all the other stuff is ok, right?
I just read a story where some guy in Arizona is going to jail for having Bible study groups in his house. I saw a story where Federal agents dressed in combat fatigues busted up a shop where the guy was selling milk. Of course the illegal wars are ok. The mother of them all, a tax on my income, that's ok, you stood there during all those, and they were ok. You stood there while they did eminent domain seizures and gave the land to private companies.
During all those things, you were ok.
But this - this one, is theft. And this one you won't have.
You are an asshole.
Chill out. Nobody said he was OK with the rest of it.
I'm seeing a lot of lashing out in random directions lately.
Save your ammo for where it's needed.
I heard this story on NPR and knew there was a fuckin' in it somewhere... I didn't have time to think about it and figure it out.
It was another one of those NPR stories where they tell you something like this in an "oh, that makes sense" tone of voice and expect you to just go along. So I knew it was bullshit.
Thanks for spreading the word and the explanation.
NPR - Where the PTB throw shit at the wall to see what sticks.
Did not used to be so. BBC, NPR... gone with the dream...
I know. That's why it's so disgusting and sad...
GSEs would be bailed out, Ginnie Maes have explicit .gov guarantee. That leaves the private sector to get raped.
- Ned
If you can't hold it, you don't own it. If they can grab it, you don't own it.
I absolutely love it.
Bring it on.
By the way, the Supreme Court already decided that it's "Constitutional" for a private firm to seize your home if it's for the public good. (Don't worry they also just decided you can be forced to buy insurance too!)
So I don't see any problem at all with seizure of a mortgage out from under the parties involved.
the basic concept of this does make sense....to have mortgagee able to get market prices. if a persons 300k mortgage is trading at 50cents, ideally, the mortgagee could refinance into the market value....sort of like paying off the mortgage based on current prices--or buying the mortgage himself and allowing himself to 'payoff' the mortgage to himself...if he had the cash to do so and the current owner of the mortgage debt would sell. if a current homwoner who pays 5% on 300k, could refi and pay 8% on 150k...they would line up for this as lower principle in the medium and long term far outweighs the interest rate. it would go a long way to making the r/e market operate again.
I believe in denmark they have a mortgage debt market that does operate in some way like this.
the unfortunate part of the plan is that 'they' want to force it from current mortgage investors. this is not what occurs in a free market. the markets have not been free for several years at a minimum. we cannot have further and further govt intervention. if investors do not want to get out at 50/75 cents onthe dollar they bear the further risk of it going to 15cents which is what will occur via foreclosure on a large scale...which is quite possible considering the amount of underwater people in CA FL NV AZ. since we are entering another recession, employment will decrease and make the hoping of current mbs holders of u/water loans futile.
if you support cutting deals , you support the banks.
The precondtion to any hostage scenario is that you don't want the hostage killed.
The hostage cannot be killed , so you don't have to worry . the hostage is society at large, not the homeowner.
If the hostage cannot be killed, than you KILL the kidnapper so that he cannot perpetuate the farce.
You cannot negotiate with the banks through your government. First the banks must be destroyed. then when there are no powerful american banks to speak of because they are all on their knees like in 2008, then you negotiate with government to liquidate the banks in return for public equity in a reformed private banking system.
Eminent Domain is a HORRIBLE PRECEDENT. Don't let these banks think they can get these mortgages off their books and don't help them. If they are going to try and kick out the homeowner, let them try. this is how it must go down in order to begin building resistance.
Posts with leading italics kill the [javascript?] script that operates the voting widget.
Can't vote up or down.
I would have voted yours up.
I think this is a great idea, in response to the class warfare that is obvisously being waged by the 1%.
Tax the rich!
This leaves every payroll slave in HMS Kaliforni who earns more than average income looking for work out of state.
WHEN IN FUCK HAS EMINENT DOMAIN BEEN USED TO HELP PEOPLE? YEA---THE GOVERNMENT TAKING PRIVATE PROPERTY TO HELP THE 'PEOPLE.
no, the government will be taking private property to help the banks. you have to be a FOOL to trust the pretenses of what and who they 'say' they will be helping.
Utter bullshit. the government will ONLY do things that help banking interests. If those things can be 'sold' as helping the people than that is how the fools get tricked. look at the entire college education industry over the past 20 years since clinton got involved.
EMINIENT DOMAIN IS A TERRIBLE THING BECAUSE IT SERVES THE CORPORATE INTERESTS AT A TIME WHEN THEY ARE BECOMING INCREASINGLY DESPERATE.
Sounds like a land grab to me. The houses will end up being torn down and the land "sold" to developers.
For the banks who lent too much and those who borrowed too much? I will leave the word to the 'ever wise' Johnny Rotten.It seems the hedge funds are now teaching the banks that two can play this game.
Enjoy, because the words sum it up
http://youtu.be/f8Ne9sRcSrM
I saw the presentation that MRP gave on this idea - they are showing investors 15,000% risk free returns. This whole idea is a scam. You can bet the local officials are in on the take as well.
I don't buy the "they're only targeting non-gsa loans", why leave all theat cash on the table when you can churn it over and over and over again?
Eminent Domain. In 1972 my grandfather, 94 years old, lived in a house in Hopkins, MN his whole life, before it had electricity, and at age 94 the government of MN took his house that was not for sale, the he was STILL living in, still supporting himslef, all taxes paid, and razed it for the expanding parking for the downtown Hopkins area. I have hated the gov. ever since.
Eminent Domain. In 1972 my grandfather, 94 years old, lived in a house in Hopkins, MN his whole life, before it had electricity, and at age 94 the government of MN took his house that was not for sale, the he was STILL living in, still supporting himslef, all taxes paid, and razed it for the expanding parking for the downtown Hopkins area. I have hated the gov. ever since.
I thought this was to be used in the case of blight, which still is nuts.
Here in Michigan they evicted a whole neghborhood for an industry, then the industry failed to materialze.