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Dean Baker has a generally positive story out about the proposal in San Bernardino County, California to use eminent domain to condemn, write down and return to the owner a lower-cost mortgage that is no longer underwater. I have discussed with Rep. Brad Miller the concept of an eminent domain-based mortgage debt relief plan and the specifics of the Mortgage Resolution Partners proposal. Baker is much more credulous about MRP’s plans:
MRP’s plan is to have the county condemn underwater mortgages in private mortgage pools. The logic is that these underwater mortgages are causing serious harm to the community. When people are seriously underwater in their homes, they are likely to lack both the means and the incentive to properly maintain their homes. Of course, the monthly payment on a mortgage that might exceed the current value of a home by 50 percent or more (and carry a high interest rate) is a huge drain on the purchasing power of homeowners.
The case for focusing on mortgages in private mortgage pools is that it is generally quite difficult to sell these mortgages out of the pool. This means that even if, in principle, it might be advantageous for both the investors and the homeowners to have pools sell underwater mortgages to third parties like MRP who would rewrite the terms, the rules of the mortgage pools makes it unlikely that the mortgage will be sold.
This is exactly the sort of situation where public action like condemnation is appropriate. The public action allows for a solution that can benefit all the parties but is obstructed by bureaucratic rules that were written to cover a different set of circumstances. (It is important to remember that investors can contest in court the compensation they are provided for condemned mortgages to ensure that they get fair market value.)
Baker doesn’t note that MRP is only planning to go after performing mortgages, meaning that all the delinquent borrowers in San Bernardino County would wait in line behind people with an ability to pay, who would get all the relief. He also doesn’t go into the problem of second liens, typically owned by banks and not used in private-label securities, and the legal problems with finding a proper price on them. The fear is that the municipality gets stuck with all the costs of the enterprise and none of the benefits. Again, this is a tantalizing idea in theory, but this particular concept, especially with its shroud of secrecy, does not strike me as a good way to prove the concept.
A sounder concept that Los Angeles has taken the lead on putting into practice is to make the post-foreclosure process so harrowing that lenders will think twice about the financial incentives. The city attorney, Carmen Trutanich, has sued another mortgage trustee over blighted and abandoned homes and the costs of them, typically borne by the local taxpayer.
On Monday, Los Angeles officials accused US Bank of illegally allowing the Abner Street home and many others to deteriorate into slums. The civil allegations found problems in the way US Bank handled 1,500 home foreclosures and cited more than 150 homes that had fallen into disrepair. The city is demanding that the bank clean up vacant properties and improve conditions for families living in others.
The lawsuit marks the second time the city has accused a major bank of being a slumlord, part of an aggressive attempt to deal with the urban decay caused by the housing crash [...]
City officials say they want to hold banks that helped fuel the housing boom responsible for the blight that rippled through the city after those loans went bad. Large financial institutions such as Deutsche Bank, which the city has previously sued, and US Bank serve as trustees for pools of loans that were turned into securities and sold to investors.
Los Angeles has gone after the trustees, who then blame-shift to the servicers, whom they hold responsible for the management of the properties. But this could serve to change behavior among those responsible for keeping shadow REO off the market. If it becomes cost-prohibitive to foreclose and leave the property to rot, maybe the trustee leans on the servicer to keep the individual in the home, through a principal reduction if necessary.
This is a bank shot, but perhaps less of one than a badly designed eminent domain proposal. And even at the surface level, banks should pay for any destruction they have wreaked on communities.
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I feel almost prophetic. I was talking with my wife this morning, and said that I think it’ll be up to individual cities or maybe counties to find solutions to having a large number of houses sit vacant and off the market.
FWIW, doing both of these things in tandem seems like the way to go. On the eminent domain route, wouldn’t having up to date but underwater mortgage be taken out of their hands be some kind of incentive to the banks to work with the ones that are simply a little bit late on payments? Or at least, it would be, if the bank found itself looking at some substantial upkeep costs if the house went into foreclosure.
I was also wondering, would it be at all feasible for cities/counties/etc to mandate that only some small percentage of foreclosed properties could be kept out of a regular auction cycle? If so, it seems like that would potentially free up a lot of foreclosed/repo’d homes, while still allowing the bank to hold on to some that they felt might actually turn a profit through regular sales.
OT….
Been married 42 years. Was she listening to you?
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tell me your secret. :-)
Simplex transmission, not collision mode half duplex.
The Cities have the power to condemn, take the property and then re sell it to a potential home owner (owner occupied).
No point in suing the Banks, servicers, trustees, or whomsoever. The Cities can claim the chain of title is so damaged they cannot determine the correct property owner /s.
Nothing like a complete loss to focus the Banks correctly.
This will never work. It will be a legal nightmare for the cities. It essentially amounts to theft of private property. Time to stop giving these deadbeat defaulters a free ride.
Do you understand Sovereign Rights? Or were you asleep again during that class?
Allowing expansion of the use of eminent domain is just a bad idea. Back when railroads and highways were being build it made sense to stop the speculators with inside information from gobbling up the land and then asking an exorbitant price from the government. Lately it’s just been abused to increase the taxable property value or help out and industry.
The bankruptcy law needs to be changed to allow private persons the same rights as corporate persons. Allow the judges to cram-down a mortgage, the investors? make them prove they actually hold an interest in the property.
Good piece. Eminent Domain is a dangerous weapon and the proposed alliance between private equity and local government is a non-starter. But used to address the shadow inventory that every locality has at least some of–that’s a different story. Even if the property is being mowed and the taxes are being paid (which is not usually the case) towns could argue that the community is being harmed by housing being left empty for months and years at a time when people desperately want to move into it. The banks damaged communities all the way up the bubble and are damaging them all the way down. Enough is enough.