Guest Post: The Eminent Domain Mortgage Heist

Tyler Durden's picture

Submitted by John Aziz of Azizonomics

The Eminent Domain Mortgage Heist

Matt Taibbi:

Something very interesting is happening.

 

There’s been so much corruption on Wall Street in recent years, and the federal government has appeared to be so deeply complicit in many of the problems, that many people have experienced something very like despair over the question of what to do about it all. 

 

But there’s something brewing that looks like it might be a blueprint to effectively take on the financial services industry: a plan to allow local governments to take on the problem of neighborhoods blighted by toxic home loans and foreclosures through the use of eminent domain. I can’t speak for how well the program will work, but it’s certaily been effective in scaring the hell out of Wall Street. 

 

Under the proposal, towns would essentially be seizing and condemning the man-made mess resulting from the housing bubble.

I approach the issue and constitutionality of eminent domain — government seizing of property in exchange for whatever the government defines as just compensation — very suspiciously. While I am altogether hostile to the idea of government being able to declare that what is yours is not yours, it has recently become a device for government to transfer private property from one private owner to another.

In Kelo v. City of New London (2005), the use of eminent domain to transfer land from one private owner to another private owner to further economic development was deemed to be constitutional. In a 5–4 decision, the Court held that the general benefits a community enjoyed from economic growth qualified private redevelopment plans as a permissible public use under the Takings Clause of the Fifth Amendment.

While seizing land with compensation to build a highway for public use is one thing, seizing property for the private profit of others is quite another. Yet many like Taibbi are heralding the potential of seizing underwater mortgages. I will consider any initiative to reduce total debt and deleveraging costs, as I believe that excessive total debt is the largest cause of today’s depression. But given the history, I have every right to be cautious and even suspicious.

Taibbi:

The plan is being put forward by a company called Mortgage Resolution Partners, run by a venture capitalist named Steven Gluckstern.

 

Here’s how it works: Mortgage Resolution Partners helps raise the capital a town or a county would need to essentially “buy” seized home loans from the banks and the bondholders (remember, to use eminent domain to seize property, governments must give the owners “reasonable compensation,” often interpreted as fair current market value).

 

Once the town or county seizes the loan, it would then be owned by a legal entity set up by the local government – San Bernardino, for instance, has set up a JPA, or Joint Powers Authority, to manage the loans. 

 

At that point, the JPA [i.e. the taxpayer!] is simply the new owner of the loan. It would then approach the homeowner with a choice. If, for some crazy reason, the homeowner likes the current situation, he can simply keep making his same inflated payments to the JPA. Not that this is likely, but the idea here is that nobody would force homeowners to do anything.

 

On the other hand, the town can also offer to help the homeowner find new financing. In conjunction with companies like MRP (and the copycat firms like it that would inevitably spring up), the counties and towns would arrange for private lenders to enter the picture, and help homeowners essentially buy back his own house, only at a current market price. Just like that, the homeowner is no longer underwater and threatened with foreclosure.

First — why municipalities? Why not states? The answer is that while all states other than Vermont have some form of balanced budget amendment, and cannot so easily take on debt, municipalities can freely take on debt. How much? Well, it’s almost certain to be open to legal challenges by current mortgage-holders, and courts may end up forcing municipalities to pay far more than municipalities initially stipulate. But at whatever values the mortgages are seized at, there is no doubt that the taxpayer will end up holding a lot of new debt.

The biggest problem though, is surely the danger of corruption. How many municipalities will end up using these opaque procedures to enrich well-connected insiders? How many will buy junk at inflated prices, or seize and sell to a well-connected insider at far below value? Who polices such transactions? Where is the transparency? How do we make sure that this is not just an excuse for bad lenders to offload junk to the taxpayer at inflated prices and cream a profit when they were set to reap a loss?

Matt Taibbi admits:

MRP absolutely has a profit motive in the plan, and much is likely to be made of that in the press as this story develops. But I doubt this ends up being entirely about money.

 

“What happened is, a bunch of us got together and asked ourselves what a fix of the housing/foreclosure problem would look like,” Gluckstern. “Then we asked, is there a way to fix it and make money, too. I mean, we’re businessmen. Obviously, if there wasn’t a financial motive for anybody, it wouldn’t happen.”

And you can restructure all you like, but many underwater homeowners with a serious income shortfall will still not be able to pay their mortgages. Who carries the can? If the mortgage has been  sold on then the loss will be on the new owner. In reality this is far more likely to be the taxpayer. Simply, the taxpayer may well end up carrying the can for a whole lot of bust mortgages.

What Taibbi — who usually has a very good sense of moral hazard — and MRP effectively seem to be considering is not only the continuation and expansion of Kelo, but also potentially the transfer of liability from bust irresponsible lenders to the taxpayer. While this is sure to enrich the bureaucracy and well-connected insiders — and admittedly, while it may help some underwater homeowners — it seems incredibly risky for the taxpayer.

While debt-forgiveness is one way out of the debt trap, we should be careful and recognise that many so-called debt-forgiveness schemes may instead be dressed-up scams and frauds that end up enriching special interests while putting the taxpayer deeper into a hole.

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
buzzsaw99's picture

The big banks have been stealing from municipalities for decades. Let the looting of the banks by municipalities begin and let some other corrupt people have their chance too.

Bobbyrib's picture

Read the article, there are downsides to this plan.

Ray1968's picture

How do we make sure that this is not just an excuse for bad lenders to offload junk to the taxpayer at inflated prices and cream a profit when they were set to reap a loss?

 

And there you have it... crooks bailing out crooks, again. That's all anyone needs to know about this plan. PERIOD.

The Big Ching-aso's picture

 

 

Munderwater mortgages.   

francis_sawyer's picture

 "MAY instead be"?... (you're too kind)

Thomas's picture

I'm still not sure who is taking what from whom. Are they commandeering the mortgages from lenders, paying some arbitrary price, and then reselling them for (a) a loss, meaning it's municipality subsidized, or (b) at a profit, meaning it's just pure theft? Do I have that right? This is a total clusterfuck. This is fascism. 

It turns out one of my colleagues in the law school at Cornell has been supporting this idea. I was going to send a cross campus email to find out what is in the local water supply (and start buying bottled water.) 

BTW-John: I communicate over at Twitter under my real name and we are mutually followed (initials dbc). I simply stay with my semi-anonymous screen name at zero hedge so that I can suggest that we euthanize bankers and used phrases like clusterfuck without worrying about embarrassing my employer. (I personally am not easily embarrassed.)

Aziz's picture

Both (a) and (b) are possible — and both are potentially extremely corruptible. Municipalities can choose who to screw and who to benefit as fits their own agendas. Another possibility is that the municipality just hold on, adding another potential dimension of insanity wherein municipalities end up holding a load of toxic mortgages and owing a lot of debt, and perhaps if housing takes a turn for the worse spiralling into complete insolvency.

Clusterfuck.

P.S. is Hockett the Cornell professor you're talking about? He is working for the people promoting the idea. I was tipped off about this a few days ago by someone who sent me this interview:

http://www.youtube.com/watch?v=AhiXVLTHdUs&feature=youtu.be 

I didn't fully start to think through the consequences until yesterday when I saw Taibbi's article.

Thomas's picture

Yes. It is Hockett. I don't doubt that mortgages are possible targets of eminent domain, but I very much doubt that the other requirements for eminent domain are fulfilled. I simply cannot wrap my brain around this idea, and I don't think I am stupid. 

As an aside, based on timing I think you can make the case that OConnor resigned from the court over the Connecticutt case.

Aziz's picture

Yeah. You can't sanely square this with the "public use" requirement under the 5th Amendment. But the post-Kelo world isn't sane. Handing the land over to Pfizer wasn't "public use" either. 

I have a much better idea to help homeowners.

Jail corrupt bankers.

Thomas's picture

The Pfizer case really was an abomination. Supreme court decided they were economists. I asked a constitutional lawyer (one of our own again) and former Ginsberg clerk if the SCOTUS ever knowingly ignored the Constitution and he said not that they would ever admit. I asked about the gold standard, and he said, "Yeah. That's the classic case, but we were in a depression." My response was, "So these guys decided they were qualified to make economic arguments to override the Constitution. Point seemed to be well taken.

unununium's picture

All the govt has to do is hold the auction before it seizes the loan.  Bingo, no problem determining fair value.

 

Urban Roman's picture

Did robosigning just go away? I would think these municipalities could simply take the banks to the woodshed over that. If the bank doesn't even have a clear title, it wouldn't be unreasonable to sever them from the property.

On the other hand, if they're just planning to steal people's houses wholesale, and then sell them back to the victims, it is nothing but theft. Will the new loans be recourse or non-recourse? Prinicipal reduced? At LIBOR interest rates?

DeadFred's picture

Let's see, the mortgage owners give up their property or they send in guys with guns to take it. Our public servants divvy up the good from the bad in the back rooms and the bad properties end up in public housing projects. What can possibly go wrong?

Waterfallsparkles's picture

That would be my worry.  Is that many of the Houses in really good neighborhoods are turned into Section 8 slums.

I would rather live next to a Foreclosure than have a Section 8 House on each side of me.

Never One Roach's picture

Suburbs to Section 8 slums...I sold my house on the golf course four years ago...the new owners, an investment company, rents it out to section 8 folks surprising the other residents and sinking their property values.

 

Just another reason not to buy now...wait until the dust settles, in 5-to-10 years.

 

18 Cities Where The Suburbs Are Rapidly Turning Into Slums


Read more: http://www.businessinsider.com/american-slums-2011-4?op=1#ixzz21MnjMzFT
DeadFred's picture

It would seem that you are not stupid. I used to think I had some good tennant-from-hell horror stories until I talked to people with Section 8 rentals. The best I've heard is the tennant who always wanted a fireplace and used a chain saw to make the firepit in the living room and a hole through the roof for the smoke to get out. I gladly conceded defeat in the my story is better than yours contest.

neidermeyer's picture

So the banks will get market price for homes they foreclosed on when they could show no  legal ownership at trial? ... I am expected to help them convert their theft to profits? Screw that ... lets keep plugging away in the courts ,, maybe someday Dimon will have to pay off the investors that put up the money and actually have a stake in the outcome.

andrewp111's picture

There are big problems with this plan. States and localities do not have the authority to seize Federal property be eminent domain. 95% of all mortgages are federal property through the FHA, Fannie and Freddie. The best solution is to amend the Federal bankruptcy code to abolish deficiency judgements for secured loans. Let the borrowers simply walk away. However, the Feds have been pursuing a totally contrary policy - they are actively discouraging walk-aways and doing everything in their power to prevent it. The Fed owns a trillion in mortgages and does not want losses. The Government is conspiring with the banks to slowly leak foreclosed property onto the market in order to preserve asset values.These localities are simply rebelling against bad fedreal policy.

Id fight Gandhi's picture

Doesnt work that way. People own a house when they have a mortgage. When the foreclosure happens and completed they lose that ownership.

Ray1968's picture

Good point. Don't forget about all the VA loans as well. Now that I think about it, the Feds won't stand for locals to steal... Unless there is something in it for Obama. Then all bets are off.

Fox Moulder's picture

How many MBS's are still out there? Many if not most of these were sold to pension funds, so they would be getting shafted. Oh and if they are public employee funds then it's yet another burden on the taxpayers.

 

*Waiting for CalPERS vs. City of San Bernadino, MRP, et al to reach the USSC*

MachoMan's picture

Why wouldn't this fall under local police/health/sanitation powers?  Sure, you can't (or might not want to) confiscate it per se, but you can bulldoze it...  levy fines against it...  etc. depending on its condition.  If you'll remember the posting recently regarding a lawsuit against Freddie for not being exempt from transfer taxes on properties (despite claiming to be so), then likewise it shouldn't be afforded federal protection...  this is the government's vise...  either put all the risk/loss on the books, or stfu when we tax the shit out of your quasi governmental entities.

cejack's picture

"The best solution is to amend the Federal bankruptcy code to abolish deficiency judgements for secured loans."

If you declare bankruptcy, there is discharge of the debt and there would be no deficiency if the debt is discharged.   The slate is wiped clean.  They cannot pursue you for a deficiency on the loan if the debt is discharged.  I work in a business that deals with tons of deficiency and bankruptcy situations.  I live in Vegas.  I know.  :-)  

Generally they are mutually exclusive.  (i.e., you declare bankruptcy, the deficiency disappears in Chapter 7 other than non-dischargeable debts - student loans, etc. - or if you go Chapter 13 and reorganize some personal debt.)

I think what you mean to say is to allow mortgage cram-downs to the current market value of the underwater home.  To that, I would tend to agree.  And my politics are right of Attila the Hun.  But we're 4-5 years into this already and we're nowhere near the end of this thing.  If you want to pull the band-aid off and let the wound actually "air-heal" you need bankruptcy cram-downs on primary occupancy first trust deeds.  

And you need it now.   You needed this three-four years ago.  There is no moral hazard. Strategic defaulters will be scared off by bankruptcy.  Nobody wants to go through bankruptcy that absolutely doesn't have to go through it.  But for folks that have lost 60-70% of their value in their home - they would benefit from this and the market would heal quicker.  

Buck Johnson's picture

This does have alot of bad side to it.  I already see how local insiders will be making a killing doing this.

Popo's picture

Because this "looting" screws those who don't have mortgages (or houses) and helps the two parties that are somewhat to blame: The elites and the deadbeats.

Mortgage forgiveness is ultimately a move to preserve asset values. What we need is for houses to return to the open market and let market rates set the value. What will happen of course, given the massive oversupply of houses returning to the market, is that the price of housing will collapse: which is a good thing.

Remember that the so-called "crisis" is really about the collapse in value. And the collapse in value is considered a "bad thing" only by homeowners -- all of whom have overvalued assets.

A decline in housing prices is a good thing. Sorry if your speculation on real estate prices didn't work out. Them's the breaks. The market simply cannot sustain these values, and concealing inventory, restructuring debt or selectively forgiving mortgages are all just ways of attempting to preserve sticker-prices which are grossly, grossly overvalued.

If you live in a home and can't pay your mortgage, you aren't going to "lose your home" because the home you're living in quite frankly isn't yours. But you are going to have to move. What's wrong with that? Renters live with that reality every day.

I look forward to living in your house for 30% of the price you paid, bagholders. Welcome to adulthood. Don't sink yourself in a lifetime of debt for a place to sleep next time. Houses are shitty investments. Now you know.

Bobbyrib's picture

"Because this "looting" screws those who don't have mortgages (or houses) and helps the two parties that are somewhat to blame: The elites and the deadbeats."

As a non-homeowner I won't be as screwed as the homeowners in the municipality. Where do you think those tax dollars to buy the property will be coming from?

Umh's picture

They aren't buying them. They are stealing them, since they get to set a "fair price".

Another Texan's picture

I agree. 

If people would view housing as a expense rather than an investment, most would not be in this situation.  What is an investment is the land your house sits on.(Scarcity) The acutal improvement is a depreciating asset.  The average house can be built for $75 per foot, not including the value for local utility service or land value.  The improvement will depreciate over time, not appreciate.  Do the math and see what your potential downside is.  (Note: in the Great Depression, housing prices dropped in value to less than what you could build one for.)

A uninformed populace keeps perpetuatuing the myth of ever incresing home values. 

While I understand a potential home buyer in these areas are forced somewhat to particiapte in these dangerious markets, they can always choose to build in lieu of buying.  There is always the option of moving to a less inflated market.

 

 

Jumbotron's picture

Because this "looting" screws those who don't have mortgages (or houses) and helps the two parties that are somewhat to blame: The elites and the deadbeats.

Mortgage forgiveness is ultimately a move to preserve asset values. What we need is for houses to return to the open market and let market rates set the value.

Absolutely spot on.  Anything....any plan....no matter how well intentioned....is simply a scam if it is intended on propping up assest prices and/or not allowing asset prices to fall to what they should be...(even if that means for a time they are underpriced vis a vis the way the pendulum swings looking for equilibrium)

This housing bubble started in 1995.  Although I am not saying that all mortgages should be reset and revalued to that time...(you have to take into account what was the normal, at the time, increase in value of around 3% per year and project that out to see what they should be at now)....but A LOT of mortgages should at least touch that point on their way to being reset to fair market value.

Then again....at any given time....fair market value is simply what one is willing to pay for it.   That....in many cases....maybe the majority now....is MUCH lower than what houses were worth in 1995.

Emminent Domain is simply another scam by the state to forestall the inevitable and the corrupt vultures are already circling overhead.  Plus it sets up a dangerous precedent for the state (the state being any and all bureaucracy) to extend their power to abuse your private property rights.

But that really is a moot point now isn't it.  There really is NO private property in America.  As long as any of you pay property tax...you simply rent to the state even if you own your home outright.  The state will always have the opportunity to take your so called private property away for whatever reason.  And it looks like there will be an additional reason coming up very soon.

RiverRoad's picture

And while they're taking those houses, exactly WHO will be paying those property taxes?????

post turtle saver's picture

"In order to save the tax base, we had to bankrupt the tax base"

Jumbotron's picture

The new owner....case on point....houses in Groton and New London Connecticut.

BigDeuceLittleToilet's picture

Housing bubble was like a big deuce in a little toilet

Benjamin Glutton's picture

<Remember that the so-called "crisis" is really about the collapse in value. And the collapse in value is considered a "bad thing" only by homeowners -- all of whom have overvalued assets.>

Dear Popo,

The so called crisis was caused by a criminally immoral alliance between formerly safe banking, Fed Res policy and a GOP Administration who intentionally substituted a housing bubble for a sound economy. The Administration did everything they could to enable the disaster and fought every State that tried to do something about it. The Dem played their part on many levels as well.

Oddly there is no protest from you regarding the future taxes you will be paying to cover bailouts of industry bad actors as you heap contempt on average Americans. BTW it is unlikely that only homeowners consider falling(collapsing) home prices a bad thing.

Too bad you missed the Friday midnight showing of Batman in Aurora...please step in front of a bus(financial) at your  earliest convenience.

TIA

 

 

John_Coltrane's picture

You don't get it so here's a simple example.  If I own something I want it to increase in value.  If I want to buy it I want it go down.  A specific example:  I want to buy call options in KMB because I think it will go up in value-so I'm vastly underbidding the current market price-waitint to be filled.  I'm short ANR, FSLR, JCP, MS, TSLA etc because I anticipate they not only will go down in value but might go to zero, i.e. BK.  That psychology never changes.  We overvalue things we own and undervalue those owned by others. 

POPO is spot on and I am a homeowner (mulitple homes all paid off).  Houseing prices need to be set by the market, not propped up by government-I believe they are still artificially high due to price fixing schemes as outlined in the excellent article.  I know that theoretically hurts my asset position but I also understand human psychology including my own. 

rayduh4life's picture

Didn't R. Kiyosaki write about 25 - 30 years ago that houses are not assets?  Crazy stuff.  I live in the sticks where prices never really moved up much yet they still have managed to fail precipitously.  We're back to late 1990's price levels here. 

banksterhater's picture

NOT A CHANCE IN HELL, THIS IS BULL.

steve from virginia's picture

 

Punt!

 

Everyone is looking for that easy solution, here is another one.

 

None of them work, none of them have worked since 2007. Before then, the easy solutions were called 'expedients' and they were only supposed to work for a short time.

Expedients, kick the can, extend-and-pretend ... we are at the end of the road, the future is now. What cannot be paid cannot be, the municipalities are broke,

The only (hard) solution is physical restructuring, abandonment, demolition and rebuilding over time (maybe centuries) without the 'modern' toys that we cannot afford.

That we never could afford.

insanelysane's picture

Exactly.  Individual citizens can't afford their loans but somehow, governments, comprised of the same individual citizens, can afford the loans.

Id fight Gandhi's picture

Nobody can afford anything and money, the dollar, is as crooked as anything else.

Offthebeach's picture

Have fedgov borrow( more ) and future generation can pay for your vinyl clad, ni**erboard sheathing, Chinese drywalled, cat pissed carpeted shelter.
As soon as the kids thingamagig/whatchamacallit boom takes off under Fed Chair Shlomo Bernanke II, they'll be rich!

Offthebeach's picture

You can trust the banks, pols this time. It will be different.
(/s)

FeralSerf's picture

Actually, you really can trust the banks and politicians.  You can trust them to steal as much as they can get away with and keep testing the limits of what they can get away with.  They are testing as we speak and it should be clear that they haven't found their limits yet.  Until those limits are defined, there is no way to predict how much this debacle will cost.  Right now it appears it will cost us everything including our freedom.

post turtle saver's picture

"None of us is as stupid as all of us"

JamesBond's picture

put all defaulted mortgaged homes up for sale beginning at one dollar.

you'll see

 

jb