The bid by the private company Mortgage Resolution Partners to team with municipalities and use eminent domain laws to purchase underwater mortgages and then refinance them at a discount to the borrower has generated lots of attention at the wonk level. Now the White House has weighed in, and expressed skepticism:
The Obama administration has concerns with a proposal—backed by a one-time major fundraiser to President Barack Obama—that would use eminent domain to seize and restructure mortgages, according to a White House official [...]
While the administration believes the issue is a local one, it nonetheless has concerns with this approach, said the White House official. (Treasury Secretary Timothy Geithner had dismissed calls from congressional Democrats for such an initiative two years ago).
The article is actually pretty thin on details of the White House’s reaction; mostly it profiles Steven Gluckstern, the former Obama bundler and chairman of Mortgage Resolution Partners. MRP has a lot of political muscle behind it, including investors like former longtime California Assembly Speaker Willie Brown and political operative Peter Ragone. So I don’t think the relatively muted tut-tut from the White House will matter on a political level to San Bernardino County, in making their decision to go along with the eminent domain plan.
The 2010 letter that Nick Timiraos digs up is worth reading, however. Tim Geithner writes to Rep. Brad Miller, with whom I discussed the concept of using eminent domain as a foreclosure mitigation and debt relief strategy. Miller nailed this concept back in 2010, and wanted the Treasury Department to use existing TARP resources for the purpose, providing the capital to buy the mortgages that would be resold at a discount. At the time, Geithner opposed the idea. Here’s the key quote.
Even if this barrier to the potential success of the program could be overcome through the use of eminent domain as you suggest, that could require complex and lengthy proceedings. We would also need to consider the consequences of the program under accounting and regulatory requirements that did not exist at the time the original HOLC program was implemented. In addition, we would need a process for determining what taxpayers should pay for a mortgage. If Treasury were to pay a price higher than fair market value, taxpayers would be exposed to a high risk of loss and banks and investors would receive a windfall.
Basically, Geithner grabbed at whatever straw possible to avoid this kind of plan. The difficulty in determining fair market value is a red herring; homes are sold at auction all the time. Eminent domain is a complex process, but at a time when homes were being lost to foreclosure at a rapid rate, it’s better than the alphabet soup of programs Geithner touted in this memo, things like HAMP and HARP.
I think the MRP proposal is faulty on the specifics. Geithner clearly thinks eminent domain as a concept to fight foreclosures is faulty, because banks might have to take a loss for a change.