The First Rule Of Lifesaving
A reader suggested a topic on eminent domain. “Several California cities (most recently Richmond, CA.) have proposed using eminent domain to seize and restructure blocks of underwater houses then sell them back to the mortgagees at fair market value (minus a percentage incentive to the banks or bondholders).”
“Potentially 3+ million mortgages nationwide could be rewritten in this manner, with investors putting up the money in exchange for a bundled percentage of the cram-down. So far it’s not come to fruition, but with housing bubble bust #2 looming, is this an idea whose time has come? What better way to hedge all those REITs than to co-opt the city councils of about-to-bankrupt municipalities?”
US News and World Report. “A city of about 100,000 people on the outer shores of San Francisco Bay, Richmond has been left behind by the economic recovery. Roughly half the home mortgages there are underwater and many are worth less than half of what is owed on them. Vacant and foreclosed properties blight the city, a largely black and Hispanic community.”
“Banks have dragged their feet in restructuring the underwater mortgages. So this week, Richmond invoked the threat of eminent domain to break the deadlock. The city wrote to 32 lenders offering to buy 624 homes at prices close to current market value, but far less than the outstanding loans. This would force the lenders to write off the balance as a loss. The city is threatening to use eminent domain to take possession of the loans and the homes if the banks don’t accept the city’s offer or negotiate a mutually acceptable counter-offer.”
“Once the city has bought the homes – whether by agreement or through eminent domain – it plans to restructure the mortgages so the present occupants can stay in them. The loans will be reset to a price close to current market value, and the payments will be reduced accordingly. Homeowners, instead of being underwater, will now have a small amount of equity in the property. They will have both the means and the incentive to stay current on the loan going forward.”
“The banking and real estate industry spokespeople say that governments have no right to step into a private transaction between a borrower and lender. But objectively, it’s hard to see why bailing out homeowners with a program of this sort is any less an affront to the principles of capitalism than bailing out banks that made bad investments in mortgage backed derivatives.”
“Both sides have a point. If eminent domain were used too freely, it would in effect give borrowers a ‘get out of jail free’ card that would encourage unhealthy speculation. It would also shift the economics for lenders, raising the cost of credit. On the other hand, the present situation is bad for communities, bad for borrowers and, frankly, it’s bad for many lenders.”
From Bloomberg. “Richmond has 4,600 underwater mortgages. It sent purchase offers this week to the owners of several hundred. Just wait till some nosy gadfly or enterprising journalist figures out that some of those borrowers are friends, relatives or patrons of local politicians — or on the city’s payroll themselves. It’s bound to happen, if not in Richmond then in other municipalities that try to follow its example. Then picture the recriminations as folks figure out who scratched whose back in exchange for getting their principal balance reduced by tens or hundreds of thousands of dollars. This could be the biggest wealth creator to hit some small towns since the invention of roadside speed traps.”
“Imagine what would ensue if a program like this were tried in some ethically challenged city such as New Orleans or Miami. Or Hoboken, New Jersey, the town I call home, where two of the last four mayors have gone to prison for taking bribes. Where I live, it’s amazing what people have managed to accomplish with brown paper bags of cash and by knowing the right people.”
“Cities usually use eminent domain to seize land and buildings. If they’re going to start seizing home mortgages, why stop there? In some states cars are subject to local property taxes. Why not seize auto loans, in the name of economic development and promoting the public good? Maybe next they could go for people’s past-due credit-card debt. How could anyone stand by idly and not help local voters who are deemed deserving, right? Then watch city officials complain when banks charge all of their constituents more money for credit because of their ZIP code.”
The Times Argus. “Ordinarily, those with money and power use eminent domain to advance their interests, in the name of the community. In this case, those without power, except the power that inherently belongs to the people, would use it to seize mortgages from those who are holding the community in debt bondage.”
“The burden of debt continues to create enormous disequilibrium within the economy and society. People are burdened with mortgage debt, student loan debt, credit card debt. Often the debt piled up as a result of predatory lending or as a result of efforts merely to keep up. Sometimes debt was incurred irresponsibly — for example, by speculators hoping to churn real estate or by people out of their depth.”
“The effect of debt is to make people slaves to their creditors. The creditors are happy to continue taking our money, which is why they are opposing Richmond’s eminent domain scheme. And yet in numerous ways across the country communities are taking steps to reclaim their destiny from predatory institutions. Vermont’s health care initiatives fall into that category. Fostering of a local food economy serves the goal of gaining independence from big agriculture. Let’s cheer Richmond’s efforts to give the banks some of their own medicine and to force them to share in the misery they have been complicit in creating.”
Nevada Business. “San Francisco-based Mortgage Resolution Partners (MRP) has been pitching a scheme to get distressed cities to use their right of eminent domain to seize underwater homes and pay MRP to help restructure the mortgages. They tried and failed in several cities before finding a receptive audience in North Las Vegas. Under their plan, MRP would identify homeowners who are underwater yet still current on payments, and whose mortgages were financed by private investors and bundled into mortgage-backed securities. Using its power of eminent domain, the city would forcibly take over the properties and pay the current mortgage holders pennies on the dollar.”
“The city could then re-sell the homes back to their current owners at a price closer to market value, assuming the owners could qualify for a new loan. MRP estimates about 5,000 homes in North Las Vegas would qualify for their plan.”
“As an example, the city takes over a home with a $300,000 note and pays the original mortgage holder only $150,000. Then MRP finds a buyer for a new note at $190,000. Theoretically, the city would make $40,000 (less fees) and the homeowner’s mortgage is now $190,000 instead of $300,000. But what about the holder of the original note? In effect, the city is using its power of eminent domain to take $150,000 away from that investor. These mortgage-backed securities are owned by everyday citizens who have put their savings into investment funds. Why should they lose their investment in order to benefit the underwater homeowner, the city government and MRP?”
“This ‘feel-good’ proposal is wrong on so many levels. Implementing the plan could be costly and carries a lot of risk. Investors who currently hold mortgages could sue the city, which could be responsible for court costs. This plan would have repercussions for the entire area by making private lenders unwilling to make loans here. And proposed legislation in Congress would bar federally backed loans in any county where eminent domain is used for mortgage relief.”
“The agreement with MRP contains a clause allowing the city to back out of the agreement at any time. When the City Council meets on August 21 it should cancel the contract before it gets in any further trouble. While we feel for the people who are stuck in underwater homes, the first rule of lifesaving is not to let the drowning person pull you under, and this is just what’s likely to happen if North Las Vegas continues with this unconstitutional and dangerous scheme.”
‘Let’s cheer Richmond’s efforts to give the banks some of their own medicine and to force them to share in the misery’
This is richer than a double chocolate cake, and it is a perfect snap shot of logic in these times. How dare these bankers complain? And these people with their ill-gotten 401k’s can just shut up and sit down! Don’t give us any references to that phoney constitution. So what if these actions can be abused? At this point, what difference does it make?
Pimm Fox and a few others had a fairly long discussion of this on WBBR Bloomberg. My thoughts are, “why not?” Let these jackass politicians stick it right to the bond holders/investors as a means to starve the beast and make financing implode. Either it gets better or gets worse…. I prefer worse….. nothing is ever static.
And this blurb below…..
A city of about 100,000 people on the outer shores of San Francisco Bay, Richmond has been left behind by the economic recovery. Roughly half the home mortgages there are underwater and many are worth less than half of what is owed on them. Vacant and foreclosed properties blight the city, a largely black and Hispanic community.”
Underwater debtors everywhere…. scores of excess empty houses….. Just as we’ve been saying about California for a long time now.
‘Let these jackass politicians stick it right to the bond holders/investors’
Yeah, I don’t personally have a dog in this fight. But it doesn’t look like the PTB are that worried about this eminent domain stuff. Still, these cities trying this may be in for a shock. What do you think will happen to housing loans in Richmond if this goes very far? And if lending is restricted, what will happen to house prices? Ooops, sorry underwater people, you are now deeper underwater.
That’s how things work when you think you can arrange easy, no cost solutions to problems that require somebody to pay up.
“What do you think will happen to housing loans in Richmond if this goes very far?”
BINGO. Unleash the beast and hope every other clueless corrupt elected clown follows suit. Then sit back and watch the entire thing seize up and implode on itself.
And it is the “price be damned no cost solutions” that are the genesis of this pandemic, corrupt disaster.
” What do you think will happen to housing loans in Richmond if this goes very far? And if lending is restricted, what will happen to house prices? Ooops, sorry underwater people, you are now deeper underwater.”
Exactly what needs to happen. The whole bubble would have been prevented if banks would have had the sense to not lend that money in the first place.
The rubes will end up paying what they should have in the first place, and prices will drop for everybody else.
Maybe they thought they were gonna get rich off their houses, maybe not, but that’s water under the bridge. If this is what it takes to fix the market, so be it. Justice will not be served no matter what happens.
Spot on Russ…
And regarding this;
The whole bubble would have been prevented if banks would have had the sense to not lend that money in the first place.
Do you(And Ben Jones) think they actually know and have the sense and lent the $$$ anyways for a reason we’re not discussing? As in “deflation prevention” efforts? Did the thought occur to you guys that other needs based commodities exhibit the same price behavior like fuel for instance? When retail fuel prices are at record highs even though tank farms are overflowing with refined and unrefined product?
“What do you think will happen to housing loans in Richmond if this goes very far? And if lending is restricted, what will happen to house prices?”
REDLINING!
Exactly Ben….Politicians trying to flex their municipal mussel…I am wondering if the lenders are hoping they do it…Not only would lending implode the collective lawsuit against Richmond for the haircut imposed plus legal fee’s would bury them…Just a bunch of Hot-Air-Bags trying to improve there community and save the victims on someone else’s nickel…
I’ve heard of cities having birds as mascots, but a municipal mollusk? Leave it to Richmond….
Richmond officials have clammed up about their choice of a mascot.
Let’s just hope they don’t scallop to a geoduck.
RIP, Oly.
And really, what is the chance that the town can convince a court that this is a “public purpose” (ISTR a requirement for eminent domain seizure) in the face of all the lawyers Wall Street banks would throw at the issue? The idea is a real stretch and unlikely to work.
What if Richmond cites Kelo v. Connecticut? If I recall correctly, in that case the “public purpose” was extra tax money to be gained from luxury condoze. Richmond’s $40K per dwelling could be put to public purpose pronto.
So, Kelo v. New London was one of the most insane and unjust decisions that has come out of the Supreme Court IMO. A local government can seize private property and give it to another private entity if politicians deem it serves some public purpose (like it pays off our cronies). Totally turned my understanding of private property rights in the US on its head.
But there it is. The Richmond approach is an unfair and unjust tactic, but it again does the same thing as Kelo - seizing private property from one entity and turning it over to another to purportedly serve a public purpose. In this case, “neighborhood stabilization” (how much money has been shoveled to the FIRE sector in the name of “neighborhood stabilization”?)
The response to the financial crisis has been completely arbitrary and unjust. The parties responsible for the financial crisis have been rewarded. The Federal Reserve, asleep at the switch, came out with more power. Wall Street got the concept of the Qualified Mortgage, which allows them to continue their previous process of selling loans to the government and shedding all repayment risk, but now they have protection from legal liability (aside: it was supposed to be that QM loans were safe, but now there’s a push on to include more and more loans in the definition of QM, which will take us back to where we were).
So, finally - it is all unfair and unjust. It’s just nice to see the irresponsible and/or stupid buyer get rewarded instead of, as usual, Wall Street (the predatory crony) get rewarded. Kelo was a gift to politicians and big business. It would be nice to see the Kelo Frankenstein turn and devour its creators.
Justice will eventually prevail. It always does. But a great deal of injustice will occur in the meantime. Things will have to get worse before they get better. And if the predators are harmed in the process, so much the better.
Maybe next weekend’s topic should be the infamous Kelo decision, its feckless outcome, and the implications Neuro mentions here. What fun if the literal interpretation becomes its own unintended consequence….
“The effect of debt is to make people slaves to their creditors.”
The effect of debt is to make things “affordable” (choke) whereas otherwise these things would not be affordable.
Unless (gasp) prices were lowered. That would do the trick, that would make things affordable in some old school sense of the term.
If things are bought and sold in a type of auction market (i.e. stocks, houses) whereby the highest bidder sets the going price then two factors that determine this going price are:
1. Enthusiasm by the highest bidder for whatever it is that is offered for sale, and
2. Availability of money for the purchase.
If money is not available for the purchase then it doesn’t matter how much enthusiasm the highest bidder has hence the sale will go to someone with less enthusiasm but with the money to buy - and a lower price will reflect this.
But if an endless supply of money is made available for the purchase and this is coupled with an endless supply of enthusiasm for the purchase then the transaction can result in some very interesting prices.
‘result in some very interesting prices’
I say bring it on. It puts all these housing bubble shenanigans in the proper focus:
‘it’s hard to see why bailing out homeowners with a program of this sort is any less an affront to the principles of capitalism than bailing out banks’
Let’s not stop here! I demand a single payer program for housing. Let’s call it the Obamahouse.
Would that come with an Obamaphone?
If one’s principles go out the window during a crisis, then those principles weren’t very good, or one is a hypocrite.
Many extolled the principles of capitalism and free markets. Principles, which, when in an environment of no monopolists or monopsonists and informed participants are the best approach for efficient and just outcomes. But it all went out the window in favor of more central planning during this current Great Recession.
Why did this happen? Well… the big contributors don’t contribute to politicians because they happen to like them. It’s because when the SHTF, their bacon gets first priority.
Prices would fall to the level where landlords can afford to purchase them and rent them out at a profit. Which is a higher price than most people could afford to pay cash for. You can rent a home or the money to purchase it.
The price level whereby landlords can purchase them to rent them out is a lower price than what, say, flippers will pay. This is because landlords will be restiriced to receiving a ROI by what rents will give to them while flippers are only restricted to what capital gains will give to them.
At some price point on a purchase for rentals the ROI will flatten out and this flattening out can be penciled out. This penciling out puts a ceiling on price.
This is not so on properties purchased for a capital gain; I am not saying that the price for capital gain purposes will not eventually flatten out, but I am saying that the price regarding capital gains will not pencil out. It won’t pencil out as it does for rentals because there is no way to determine value other than price.
IOW buyers seeking properties to rent out are presented with an apparant ceiling price at which they cannot go beyond because going beyond this ceiling price makes the concept of buying to rent unprofitable.
But buying at one price to resell at a higher price offers no apparant ceiling price. The only ceiling is the availability of greater fools who have access to money. And since there seems to be no shortage of greater fools then the ceiling comes down to being dependent on the lack of availability of money to greater fools.
‘buying at one price to resell at a higher price offers no apparant ceiling price’
Which is why I claim that the decrease in flipping is because prices aren’t rising, not because of a lack of inventory/foreclosures as the media reports.
Or because of a dearth of easy financing or credit for the under-qualified.
Speaking of easy finances, thank you, Combo for your several suggestions over the last six months. You were absolutely right, and I’m very glad I listened.
Oh, I agree. Flipping is NOT a normal phenomenon. Purchase of ANYTHING bases on an estimate of future price gains is the very DEFINITION of speculation. Sometimes it works and sometimes it fails. The odds of success can be improved by insider trading or market manipulation, but in the absence of some sort of returns, like rents (or housing) in the case of RE or Dividends in the case of stocks renders it a zero sum game.
Flipping is not a normal phenomenon.
Investing in dilapidated real estate, putting real money in to fix it (not just paint and carpet), and reselling for a profit is pretty common across property types (office/industrial/retail…and housing). In a normal market, THAT activity should have a profit margin…even in a flat market.
The media is really puzzled by all this:
‘the latest July jobs report shows that young adults in the age group of 25-34 years are still struggling with unemployment. The employment rate in this category is 75%, well below the pre-bubble normal rate of 78%-80%.’
‘Unless employment picks up in this category, first-time homebuyers will remain absent from the housing recovery.’
‘First-time homebuyers accounted for just 29% of home purchases in June, according to the National Association of Realtors (NAR), down from 32% a year ago. Historically, their participation rate has been close to 40%.’
‘Trulia economist Jed Kolko estimates that there are approximately 2.4 million “missing households” — people who should be renting or buying but instead choose to live with parents or under the roof of someone else. “Not only are young people not buying homes; they’re not even renting,” Kolko wrote in a recent post. “Household formation is the most important indicator of the housing recovery that ISN’T making great strides,” said Kolko.’
‘Kolko also noted that job growth in “clobbered metros” — those hardest hit by housing — is still trailing behind the rest of the country, as June’s metro jobs data reveals. Year-over-year growth is slowest in Detroit, which filed for bankruptcy recently. It is also very slow in Riverside-San Bernadino in California and Miami.’
http://www.thestreet.com/story/11997751/1/job-growth-too-slow-for-housing-recovery.html
‘Household formation is the most important indicator of the housing recovery that ISN’T making great strides’
“Not only are young people not buying homes; they’re not even renting,” Kolko wrote in a recent post.
Those damned seditious gold-diggers. But we’ll get ‘em with compulsory Obama Care insurance payments. They’ll pay one way or another!
The underwater owners would be hit with a huge tax bill from the IRS.
What if it’s a primary residence? Interesting that if you are foreclosed on a primary residence, you don’t pay taxes on a certain amount of the loan write off. And if you make money on a primary house, you can exclude a certain amount.
‘At least one thing seems pretty clear since we learned the Motor City has run out of steam: Uncle Sam will not be offering up any emergency reserves. Detroit, which has filed for a record-setting $18 billion bankruptcy, will not be getting federal assistance if you believe the rhetoric coming from Washington officials.’
‘This has people debating not just whether or not Detroit should get a bailout (lawmakers coughed up billions for the automakers and banks), but debating more broadly how tax dollars are spent at a time when budgets are tight in general. Bloomberg makes this comparison: $323 million in proposed U.S. aid would go to Colombia next year versus only $108 million that will go to Detroit.’
‘Most of the money flagged for Colombia will go to “peace and security.” Meanwhile, Detroit (where it takes almost an hour for police to respond to 911 calls) has an 81 percent higher homicide rate than the South American country, according to Bloomberg.’
‘And Colombia is not even in the top five of the largest recipients of U.S. foreign aid.’
http://finance.yahoo.com/blogs/daily-ticker/detroit-goes-begging-obama-sends-money-overseas-120525301.html
Boy, this re-distribution of wealth thing is trickier than I thought…
It gets very tricky when Uncle Sam is allocating large amounts to foreign nations while ignoring failed American cities.
Like Iraq, say. Or Halliburton….
Columbia is small change compared to what Israel gets.
Bloomberg makes this comparison: $323 million in proposed U.S. aid would go to Colombia next year versus only $108 million that will go to Detroit.’ ???
Maybe thats why Blackrock has Columbia on their radar for investment vs. Detroit….
Unless Detroit makes a serious effort to get their crime problem under control in order to attract a new economically viable, multicultural residential and business community, investing there will be like pouring money down a rat hole.
Is there any other municipality of 700,000 or more residents in the developed nation economies besides Detroit with a murder rate higher than 58 victims per 100,000 people? (Note: 700,000 X (58/100,000) = 400+ murders per year in Motown.)
Note how the writer of the article below subtly suggests that Detroit’s high murder rate should qualify it for more federal aid? Why not make federal aid contingent on reducing the crime rate; that way, the investment would not automatically go to waste.
Report: Detroit has higher homicide rate than Colombia, gets less aid from fed
David Muller
July 31, 2013 at 10:13 AM, updated July 31, 2013 at 10:48 AM
DETROIT, MI - Detroit’s homicide rate is higher than the country of Colombia’s, but the city will get less than half the proposed federal aid that the South American country will next year.
That’s according to a report in Bloomberg, titled “Bankrupt Detroit Receives Less U.S. Aid Than Colombia,” which says that the U.S. federal government has proposed $323 million in aid to Colombia next year. Detroit would get about $108.2 million, the largest chunk of which comes in a $33 million Community Development Block Grant. Detroit police are slated to get about $2 million.
Colombia’s homicide rate was 32 victims per 100,000 residents; Detroit’s rate was 58 victims per 100,000 people.
…
This article suggests there were several cities with higher murder rates than Detroit’s a few years back. However, none of the reported murder rates at the time approached 58 per 100,000.
P.S. I don’t know how this statistic compares to cities with lower murder rates, but the white percentage of all these cities’ populations was below 50 percent. It appears multiculturalism may be a good predictor for high murder rates, calling into question the California liberal conventional wisdom that multiculturalism is a universal good.
Most Dangerous Cities in America - Murder Rates
J.C. Grant
Nov 30, 2010
This article ranks the most dangerous cities in America by annual murder rates per 1,000 inhabitants. For purposes of these rankings, “cities” are incorporated municipalities with more than 20,000 inhabitants, and “murder rates” are the sum of each city’s murders and nonnegligent manslaughters divided by the population then multiplied by 1,000.
The murder rate rankings set out in this article include demographic information that the FBI deems significantly correlated with crime: population density, population age, median household income, educational attainment, and racial composition.
Compared to residents of the safest cities in America, inhabitants of the most dangerous cities are poorer, less educated, and more Black and Hispanic; however, the most dangerous cities are not necessarily younger or more densely populated.
To read the related articles “Most Dangerous Cities in America - Violent Crime Rates” and “Most Dangerous Cities in America - Robbery Rates,” return to these respective links.
1. Most Dangerous Cities in America: New Orleans, Louisiana
Murder Rate - 0.52
Demographics:
Population - 336,425
Population Density - 1863 per sq mi
Median Age - 36.5
Median Household Income (adjusted for cost-of-living) - $39,382
Percent high school graduate or higher - 83.9%
Racial Composition - Black (61.2%); White (29.8%); Hispanic (4.8%); Asian (3.0%); Two or more (0.8%); American Indian (0.1%); Other (0.3%)
2. Most Dangerous Cities in America: Gary, Indiana
Murder Rate - 0.51
Demographics:
Population - 95,219
Population Density - 1896 per sq mi
Median Age - 37.4
Median Household Income (adjusted for cost-of-living) - $25,328
Percent high school graduate or higher - 82.2%
Racial Composition - Black (83.4%); White (10.1%); Hispanic (4.9%); Two or more (1.2%); American Indian (0.2%); Asian (0.1%); Other (0.1%); Pacific Islander (0.1%)
3. Most Dangerous Cities in America: Richmond, California
Murder Rate - 0.46
Demographics:
Population - 102,566
Population Density - 3374 per sq mi
Median Age - 35.1
Median Household Income (adjusted for cost-of-living) - $35,937
Percent high school graduate or higher - 79.6%
Racial Composition - Hispanic (37.8%); Black (24.8%); White (17.5%); Asian (17.2%); Two or more (2.4%); Other (0.3%)
…
I dunno, seems like an easy problem for Detroit to solve. Local officials could simply organize their petty criminals into a well-run terra organization. Blow up a few abandoned factories, wreak a little havoc at the airport, maybe cross over to Canada for some real fun. Bonus points if they record videos in flowery religious language praising some pagan god twice in every sentence, may Cthulhu rain his blessings upon them. Federal aid money will flow in like amber waves of subsidized grain.
“…sell them back to the mortgagees at fair market value (minus a percentage incentive to the banks or bondholders).”
How is it possible to judge fair market value in the wake of the Fed’s successful efforts to push Bay Area prices back up to pre-Housing Bubble collapse levels?
Due to Prop 13, this would count for a “sale” and now Richmond would find it screwed itself for property taxes. The homeowner would have a new and much lower tax basis courtesy of Richmond’s antics.
This goes for any of the cramdown theories. What would many of these Richmond “owners” do if their basis in the property was dropped significantly? Try to sell, IMO. Down go the comps, you can’t get a loan, down some more, more foreclosures, run for the hills.
Yep…The whole market would implode…
Would it be unreasonable to predict a divergence in the mortgage rates for non- or partial- recourse states like CA where this might “work” and full-recourse states where this would do NOTHING to extinguish the debt represented by the mortgage? If the rates were a percent or two different, there would be great pressure to change the law at the state level to so that CA was a full-recourse state.\
I wonder if there is table or chart of how each city does economically, as in being revenue neutral.
It would be good to compare some mid-west cities to Richmond. If there is GDP growth but negative revenue, how long till cities like Richmond become Detroit?
“…How is it possible to judge fair market value….”
Whatever the investor is willing to offer the banks? Whatever the banks are willing to accept in lieu of default of a substantial portion of an entire city’s mortgages?
If there are no more state or federal bailouts coming and the city passes legislation requiring the mortgage-holder to maintain the properties and keep property taxes current, the banks might be willing to negotiate. Certainly the decline in market value would be partially offset by a similar decline in property taxes. CA is a non-recourse state, remember.
Don’t forget that “CA is a non-recourse state” is an oversimplification (sound bite) of CA law. Only applies to inter alia original mortages. This would probably count as a “re-fi” so the new note holder could elect judicial foreclosure and sue for the deficiency.
“Don’t forget that “CA is a non-recourse state” is an oversimplification (sound bite) of CA law. Only applies to inter alia original mortgages.”
Yep, it’s why anyone in CA who jumped on the HAMP bandwagon is worse off, all of the federal re-fi/mod programs are full on recourse. One of those little details that never made it into the MSM coverage.
Eminent domain would erase the mortgagee of record and resell the property as a new mortgage.
“…resell the property as a new mortgage.”
Presumably that is the point that a much lower tax basis would be locked in, and the effect on the comps suggests it would spill over to all future area home sales.
P.S. Speaking from personal experience, there is a precedent for local governments in California to finally throw in the towel and let housing prices correct down to levels the market will bear. It happened in the mid-1990s, when we and a first-cousin of mine were both lucky enough to be in the market.
However, we are not there yet this time around, thanks to transient measures still in effect to artificially prop up prices.
“…with housing bubble bust #2 looming, is this an idea whose time has come? What better way to hedge all those REITs than to co-opt the city councils of about-to-bankrupt municipalities?”
Wouldn’t it make more sense to kick out the defaulted former owners, sell the homes at echo bubble premium prices to all-cash Canadian and Chinese investors, then let them rent them back to the former owners at market rents?
We could enjoy decades to come of ever-more-affordable rental rates as a consequence, and the losses would be outsourced to other countries.
I think the reasoning goes something like this:
Our communities will stay safer and more cohesive when people have a financial interest in the house and neighborhood they live in. Renting people’s homes back to them removes that “pride of ownership” incentive to keep the neighborhood up and encourages a more transient demographic.
My concern is the precedent this use of eminent domain would establish if any municipality decided to go ahead and try it. (And the chance of triggering yet another round of bank bailouts.) The enforceability of contracts aside, the Kelo case showed us that SCOTUS is more than willing to allow private entities to profit from public misery. The opportunities for political cronyism here are staggering.
Perhaps my sarcasm in the original post was too muted?
My concern is the precedent this use of eminent domain would establish if any municipality decided to go ahead and try it ??
Exactly…Just like the ultimate Federal Supreme Court decision coming on pensions having standing in municipal BK…How many municipalities throughout the country would follow Richmond’s or N Las Vegas lead…
Can’t wait for that one, sc. If it goes to SCOTUS it will have implications as far-reaching as Citizens United…and probably just as destructive.
Bottom line, Boomers lose. Either way, it’s an accounting trick that taps the same money pool, as many if not most major pension funds are invested in bonds and many if not most major bondholders are pension funds.
“The banking and real estate industry spokespeople say that governments have no right to step into a private transaction between a borrower and lender. But objectively, it’s hard to see why bailing out homeowners with a program of this sort is any less an affront to the principles of capitalism than bailing out banks that made bad investments in mortgage backed derivatives.”
Great point! Why is it that only Megabank, Inc qualifies for welfare? Aren’t po folks also entitled?
“Why is it….”
I suspect it might have something to do with us letting Mega Bank create our currency. They don’t just give it away, they lend it to us.
“The effect of debt is to make people slaves to their creditors. The creditors are happy to continue taking our money, which is why they are opposing Richmond’s eminent domain scheme.”
So it’s either the eminent domain scheme or else a return to slavery for Richmond’s minority community.
Sounds like a clear-cut choice to me.
Richmond, CA was a POS in the eighties when I was repossessing cars; Vallejo, CA was a close second. The government has built the biggest modern Section 8 apartment complexes I’ve ever seen in these cities, and I’m not kidding when I tell people about these gated places at night becoming something like a block party where drug dealing and prostitution were like a third world bazaar. We’re easily talking hundreds of people milling about, so many that the police just watched from a distance.
I even used to do voluntary repo’s where they hand over the keys because none of the banks would dare send in their own people in these “red-lined” places because their pockets were too deep, and every shouting-match could turn into a racially-fueled trial. Banks who loan anyone money to do anything in these places are charging at least 24% interest, or they are involved in some government sponsored program. No Adam Smith around there folks.
“…charging at least 24% interest… . No Adam Smith around there folks.”
24% interest sounds to me like pure Adam Smith pricing, including a default risk premium in the market interest rate of 24%.
Adam Smith wouldn’t survive as a businessman in there unless incentivized by the government.
I’m missing why a 24% under-the-table lending rate backed up by kneecaps as collateral would not enable free market lending to thrive in Richmond?
“I’m missing why a 24% under-the-table lending rate backed up by kneecaps as collateral would not enable free market lending to thrive in Richmond?”
There was a thriving used car industry that charged 24%, but they did their own repossessions; I worked for new car lenders. Lots of payday lenders in there too.
A place like Mervyn’s would never make it there with customers wearing the clothes for the evening and returning them the following day, i.e., using the store like a huge closet. There’s plenty of opportunity in these ghettos, but it’s a brusk, in your face, hard-scrabble lifestyle.
“Then picture the recriminations as folks figure out who scratched whose back in exchange for getting their principal balance reduced by tens or hundreds of thousands of dollars. This could be the biggest wealth creator to hit some small towns since the invention of roadside speed traps.”
I’m picturing the howling at Megabank, Inc if these municipal cramdowns are executed, followed by a reconsideration of the wisdom of facilitating so many ‘affordable housing’ subprime loans to low-income communities during the Housing Bubble runup.
It has been evident since day 1 that a lot of these loans would never be repaid. Letting the banks pretend that these loans are still worth something, instead of forcing them to foreclose (and taking the hit, accounting wise)is a direct government subsidy to the banks.
If confiscating bankster houses by “eminent domain” (and making them show the losses on their books) means the whole sorry mess implodes sooner rather than later, by all means, lets do it nationwide.
‘confiscating bankster houses’
It’s easy to fall into the simplified story that has been created rather than the reality, which is probably how this will be decided by the legal system. The securitization of mortgages means many of these houses are not owned by banks. When we read about Wells Fargo or B of A, I’d bet many times they are servicing the loans.
That said, I would imagine the concept of eminent domain will be supported or challenged on the basis of what eminent domain is intended to be used for. I can’t see lawyers saying, “your honor, the banks got bailed out, so we therefore can take over these loans.” Courts should consider what other ways a new interpretation would be applied. Could Detroit use eminent domain to take municipal debt (which can have a lien against a specific asset, like roads or bridges) and reduce the balance?
It would be interesting to see how the financial world would react if it were upheld, but the more I think about it, I see a lower probability of it surviving in court. Who knows, this may be the high water mark of irresponsibility. I have suggested in the past that this idea of not paying what one promised based on all sorts of questionable reasoning has certainly been recognized by those who fund these things. How much of a leap is it to say, “to heck with the promises we made to repay China! They got that money by stealing our jobs and working their people under slave labor conditions.”
Seems to me we solved this a long time ago.
Of course, the US Constitution is a quaint relic of the past, written by slave owners and is a living, breathing document that can be interpreted anyway a goon or hack in power sees fit…
…nor shall be compelled in any criminal case to be a witness against himself, nor be deprived of life, liberty, or property, without due process of law; nor shall private property be taken for public use, without just compensation.