Desperate CA city looks to use 'eminent domain' to seize loans
startribune.com
startribune.com
Some key points:
* The profits are being split among Richmond and a private investment firm named "Mortgage Resolution Partners, LLC".
* Seizing a mortgage for less than its fair market value is blatantly unconstitutional. The argument that the value of an underwater mortgage in repayment is worth less than the house is so obviously wrong, I have a hard time believing Richmond officials honestly buy it. A mortgage that is on track to be repaid is undoubtedly worth close to the future value of repayment, even if the house is worth $0.
* Big banks do not actually own most mortgages in general. So this is not a scheme to rob big banks, although Mortgage Resolution Partners, LLC certainly wants to spin it that way.
* Almost all housing mortgages are merely serviced by banks but owned predominantly by entites such as "state and local governments, hospitals, Fannie, Freddie, and to a lesser degree, foundations and endowments". The banks have a legal obligation to protect these mortgages, of course.
* Many of these loans are current--they're not distressed mortgages at all! They also plan to steer clear of houses with liens. Naked Capitalism comments that the plan only works financially if they go after the mortgages of those that need help the least.
In short, this is a transfer of wealth from a diverse array of investors to the city of Richmond and a bunch of investment banker types--theft under the cover of populist outrage. It would also severely damage the market for future homeowners in Richmond, anyone who wants to sell their home, anyone who wants to refinance... Oh, it's also a threat to fundemental notions of private property, rule of law, and market capitalism, but distressingly few people still care about that. The bit I want to emphasize is that it's Prince John pretending to be Robin Hood.
Heads (banks keep mortgages): You Lose, because the market value of your home is artificially high, and when the bottom goes out on the market again (unless you happen to be drinking the kool aid and equate a life time of mortgage payments as owning a home), you'll either find yourself on foreclosure or trying to refinance again.
Tails (City and PE get mortgages): You Still Lose, but now you have to pay a PE firm those monthly mortgage payments while the above still applies.
Am I missing something?
That's what they're selling. Whether it really happens...? It wouldn't be the first time a gov't entity promised a plan that would 'help' homeowners and that plan failed to actually do so.
As an aside, I wonder if it would just be better sign yourself onto a mansion, get your neighbor to burn "your" house down (using pgp to communicate this with temporal keys), collect insurance, cover neighbors bail and skip to the some emerging market (with no extradition treaty with the US or its allies) together with your "ill" gotten earnings in ones under luggage. </joke>
On the larger stage, the City of Richmond is cutting their own throat by doing this. It's doubtful that I'd ever buy any of their municipal bonds after this. If I were somehow persuaded to (fat chance), it'd cost them a much higher rate - something like what Detroit is paying.
Funny thing is, people probably own their munibonds and don't even know it.
>>> The other problem though, is that wealthy people always seem to have a way of passing the damage down to the working class.
There's no such thing as "wealthy people vs. working class", if they ever were. Look up how much money largest unions manage, how big are largest pension funds, how big are all pension funds combined. We're talking trillions here. Of course, there are some very rich people, but thinking that messing with economy you're only influencing those rich top-hat wearing monocle-donning monopoly men is completely wrong. Everything is connected, and "working class" is as interested in good investment climate as the wealthiest of the wealthy. Maybe even more - if Bill Gates loses 50% of his money, he'd be ok. If your average Joe's pension fund loses 50%, he's screwed.
> 40 to 50%
That would be very unusual in most of the US, as the lenders typically want a 28/36 front-end/back-end ratios. Obviously, during the bubble things were a little ... looser.
The problem with this is that a person makes an investment with a known risk profile. That needs to be known in order to just the worthiness of the investment: the higher the risk, the higher the return needs to be.
When someone comes in and changes the rules, that messes up everything. Suddenly those safe mortgage investments that you felt were a good investment at a 5% return become absolutely shit because you run the risk of taking a huge loss.
What is the impact? All those people that bought up the mortgages a while back now want another 5% in return to offset the risk of having the mortgages suddenly lose value.
Who loses? Homeowners because now you can only find mortgages at 10%, not 5%.
Which gets back to the root of the problem. Mortgage companies were not properly assessing (or outright lying about) the risk for some of these mortgages. A lot of those seemingly safe mortgages were in reality very unsafe.
Everyone needs to feel some pain on this one. Homeowners, mortgage companies, and investors - everyone who underestimated their risks should see some loss. If that risk wasn't properly assessed the first time around, then yes, it will cost more. Mortgages are at ridiculously low rates from a historical perspective, so it wouldn't be unreasonable to see those rates rise.
The people who really got screwed were those that had a properly sized mortgage, ability to pay it, but then had the value of their home drop when the rest of the market failed. If they were unable to ride out the collapse, it was brutal.
Banks - 75% of the house's market value is probably more than they would get from repossession and auction
Home buyers - they now owe what the house is worth, instead of more
City - has enough money to run, keeps citizens happy
Company - $5k (though this can be argued to be unfair and the middleman should be removed)
I'm not so sure that it is so obviously wrong... For the individual home, yes, it is a stretch to think that the value of an inflated mortgage is less than the value of the house. But, they are thinking in terms of the population of all underwater homes. There is an increased rate of default on underwater mortgages. So, you could argue (and they are), that the lost value when spread out among all underwater mortgages, makes the pool of them less valuable than the value of the homes themselves.
To know the answer, you'd have to know the normal rate of default, the rate of default for underwater mortgages, and the average amount the bank looses when a mortgage defaults (as well as the average value of the homes and the inflated mortgage valuations).
It is very possible that when all of the numbers are calculated that offering below the appraised value of the home for the mortgage is approximates fair market value over the whole population of underwater homes. A loan wouldn't necessarily have to be distressed to fall into that statistical population.
If you think in terms of one house, this plan doesn't make sense. But, when you think in terms of an entire city, it starts to make more sense (if the numbers and rates line up). It's probably short sighted for other down-stream effects, like lack of future investment and loans, but for the short term, it might work.
If there was a CDO pool that included only mortgages based on houses in that particular town, perhaps the whole pool could be seized at once, based on the fair market value of all tranches of the CDO (although there might be tricky jurisdictional issues). However, that's not the case. The mortgages are spread across many many different such pools. So rather than one big eminent domain case, there needs to be a condemnation of each and every mortgage separately. That being the case, the city must pay the fair market value of each mortgage -- not the the FMV of an abstract average house.
The single biggest problem with the city's proposal is not that it is underpaying (though it likely is in most cases) but rather that it is trying to claim that every mortgage can be fairly valued using the same simple formula: 80% assessed value of the underlying asset. Simply put, that's nuts.
The second biggest problem is that Freddie and Frannie have already said that they won't refinance the written down mortgages. So the city would have to hold the mortgages to maturity. They don't seem to have anywhere near enough capital to do that, and I don't think the muni market would be terribly interested in financing such a scheme (or the litigation!). Especially not with Detroit making everyone nervous to begin with.
At least, that would be an arguable theory...
So what's the "fair market value" of that piece of paper? You assume it "is on track to be repaid" but that is a highly optimistic evaluation. The note represents a net future value of payments multiplied by a probability P that it _will_ be repaid. P is considerably less than 1.0 for a note whose face value is more than the present value of the property, and it shrinks every time another house in the same neighborhood is foreclosed or abandoned. At best the value of the note is the sale value of the foreclosed home (less the not inconsiderable costs of performing a foreclosure and prepping the property for resale) -- and the sale value of an abandoned foreclosed house in a city full foreclosed houses is a fraction of the original purchase price.
Frankly if Wells Fargo can get $150K for a $200K mortgage in Richmond, they ought to take the money and run.
Roper: So now you'd give the Devil benefit of law!
More: Yes. What would you do? Cut a great road through the law to get after the Devil?
Roper: I'd cut down every law in England to do that!
More: Oh? And when the last law was down, and the Devil turned round on you - where would you hide, Roper, the laws all being flat? This country's planted thick with laws from coast to coast - man's laws, not God's - and if you cut them down - and you're just the man to do it - d'you really think you could stand upright in the winds that would blow then? Yes, I'd give the Devil benefit of law, for my own safety's sake.
And it's an old American tradition to consider bankers as "the Devil" or strongly in that direction. This has even provided what's very possibly our best bit of political rhetoric, "You shall not press down upon the brow of labor this crown of thorns, you shall not crucify mankind upon a cross of gold." (http://en.wikipedia.org/wiki/Cross_of_Gold_speech)
Not too far from where I live is a house that Deutsche Bank took possession of a year and a half back. They haven't made any moves to sell since. The lot is overgrown, the roof will start leaking soon, it's an eyesore that's getting worse every month.
A few years back I had the misfortune to rent from an absentee landlady from one of the poorest ZIP codes in Brooklyn who had bought that property at the height of the boom. The high point of the tenancy was the heating failing in early October. When the code inspector showed up I could show him the garbage that hadn't been collected for three weeks and send him down to the basement where the lady, her husband and her useless cousin had torn the boiler apart, attempting to fix it, and couldn't put it back together again. She had arranged for the plumber to come, cancelled it a day later, and then went out from Brooklyn to do this cock-up of a cowboy job.
The backstory was that her bank had asserted rights the day the plumber was cancelled. The garbage was there because the garbage hauler had gone unpaid for that month. I moved out soon after, and the move was a pain.
That was in 2008. The state of the house is uncertain. Lis pendens was filed in 2008, as I said, and there has been no court date until now.
What I'm saying here is that unmaintained housing stock and housing stock without a clean title has real effects on the people that live in them and nearby, the public that is. You can make a good case that eminent domain is justified here. No one has done it yet, this is uncharted territory as far as the law is concerned, but it's heartening to see Richmond take a shot at it.
Kelo notwithstanding, "benefit of the public" is not "public use"; the former can be stretched infinitely, to the ending of the rule of law.
You're also ignoring that they admit they're seizing the property for less than it's value:
"Richmond, working with San Francisco-based Mortgage Resolution Partners, offers $150,000 to buy a $300,000 bank loan on a house that is now worth $200,000 and is in danger of foreclosure.
If the bank agrees, the city and the company then obtain the loan at $150,000. Richmond and the company then offer the homeowner a new loan of $190,000, which, if accepted....
If the bank refuses to sell the loan to Richmond, then the city invokes its power of imminent domain and seizes the mortgage. It would then offer the bank a fair market value for the home."
See the Naked Capitalism posting that cynicalkane brought to our attention for more details and a view from a very different angle: http://www.nakedcapitalism.com/2013/08/beware-of-private-equ...
Also mentions that California has a property owner friendly way of establishing "just compensation".
What is always troubling is the interaction between municipal authorities and venture capital; their interests do not intersect, and there is little experience in municipalities with complex financial deals. The showcase piece is the Birmingham, AL sewer disaster.
The idea of eminent domain is appealing, and the real-world implementation is another problem.
That's the fifth amendment.
It was the 7th as passed by the Congress, just not as ratified by the states: https://news.ycombinator.com/item?id=6274204 ....
The Supreme Court has ruled that the government can take property from one private party and give it to another private party for "economic development" [1]. So it's already been stretched pretty far.
No. The Constitution provides that property taken for the public good must be fairly paid for. Property can be taken for private use without compensation. For example, the adverse possession laws in many jurisdiction.
I didn't see that mentioned in the article. Are you sure you are not thinking of that article someone linked to in a comment here on HN rather than the submitted article?
That's consonant with the plain language of the 5th Amendment, Kelo notwithstanding: "nor shall private property be taken for public use, without just compensation."
I take the article's language as the author knowing this is scamming the Constitution's provision for eminent domain, even if it's pretty clear he doesn't care. Hence the quote starting this thread.
Not so sure about that... the Supreme Court has given wide leeway to municipalities in their interpretation of eminent domain. This is just one of the slippery slope side effects of their earlier decisions.
But your point about this slippery slope is well taken.
Thomas Jefferson had this to say about it, per Wikipedia:
"You seem to consider the judges as the ultimate arbiters of all constitutional questions; a very dangerous doctrine indeed, and one which would place us under the despotism of an oligarchy. Our judges are as honest as other men, and not more so. They have, with others, the same passions for party, for power, and the privilege of their corps.... Their power [is] the more dangerous as they are in office for life, and not responsible, as the other functionaries are, to the elective control. The Constitution has erected no such single tribunal, knowing that to whatever hands confided, with the corruptions of time and party, its members would become despots. It has more wisely made all the departments co-equal and co-sovereign within themselves."
The subsequent history has shown he was spot on. Given that the Switch In Time That Saved Nine waved through FDR's New Deal, and most subsequent gross violations of the Constitution, shows in practice they're really bad at what they arrogated to themselves, and they've far too often given the other branches of government cover. E.g. "sure, this might be unconstitutional, the Supreme Court will decide!" Fairly often the "might" is really "is", and later politicians who depending on a saving throw from the Supremes got disappointed. E.g. McCain-Feingold.
Can you point out where the article mentions that it's "flatly unconstitutional?" The only reference I could find to constitutionality (mentioned also in the photo caption) is:
"first-in-the-nation plan to use the government's constitutional power of eminent domain to ..."
The article does mention that "The banks have filed two lawsuits alleging that the plan is an illegal abuse of eminent domain", but every legal opposition to eminent domain seizure makes that claim.
I won't get into the much more complicated usury argument, since that's now settled in (post)Christendom, else we wouldn't be having this argument.
For "flatly unconstitutional", see https://news.ycombinator.com/item?id=6273984
I read the link you pointed to. It affirms that the plantiff's claim is "consonant with the plain language of the 7th Amendment."
There must be a typo there, as the 7th is right to a trial by jury, while the given quote about "nor shall private property ..." is from the 5th.
I don't see though how this is an effective argument. Every single lawsuit filed in opposition to an eminent domain seizure must claim that the seizure is violation of the 5th amendment. So of course this lawsuit is "consonant with the plain language of the 5th Amendment" as otherwise it would be thrown out as being unjustified.
A more effective argument would point to existing legal cases, to show how the courts have previously ruled. But the comment you linked to dismissed Kelo - a case which gives some idea of how much the Supreme Court may defer to local governments - without giving any reference to other more relevant cases.
I addressed your other points here: https://news.ycombinator.com/item?id=6274067, in brief the Constitution != Supreme Court.
Specifically, you said: What they're doing is flatly unconstitutional, as the article mentions.
The article, as far as I can tell, says that the plaintiffs claim that it's unconstitutional, but as I've pointed out, every such plaintiff must make the same point.
As you write, this is your interpretation. It's not the same as "flatly." Another, and in my opinion better, interpretation is that the author is reminding the reader what eminent domain means. Let's see if I can provide evidence for my view.
For reference, the original quote is "The banks have filed two lawsuits alleging that the plan is an illegal abuse of eminent domain, which allows governments to seize private property for public use — like a house in the path of a new highway or a piece of land needed for a new park."
What do other newspapers say when they describe eminent domain?
1) "Another option would be for the county to acquire the property under eminent domain, the process by which a municipality can take over private property for a public good, for a price." http://www.miamiherald.com/2013/03/01/3262043_p2/um-county-c... (The private University of Miami wants to build a pedestrian bridge across a major road, where 8 students have died since 1989. The city doesn't have the budget for an eminent domain claim.)
2) "There's a new partner in the mix as Aberdeen officials work to buy the now-closed federal courthouse under eminent domain, which allows government entities to take possession of private property if it is in the public interest." http://articles.aberdeennews.com/2013-08-06/news/41141473_1_...
3) "As with the Trans-Texas Corridor, the pipeline dispute seems certain to reopen a legislative debate over eminent domain powers, which governmental entities and so-called common carriers such as utilities and pipelines use to acquire land for public projects after compensating the owner." Fort Worth Star Telegram, reprinted in http://www.mcclatchydc.com/2012/02/22/v-print/139579/texas-b... . (On the question of if an oil pipeline counts as a common carrier under Texas law.)
Do note how this points out that the Supreme Court isn't the only court to judge the constitutionality of an eminent domain seizure. State courts are also involved, and the Supreme Court usually defers to them, rather than making an overarching statement.
4) The Chicago Tribune articles I looked at never explain 'eminent domain.' I guess they expect their readers to know that already. But quoting from http://articles.chicagotribune.com/2006-01-03/news/060103024... , "Overwhelmingly, the eminent domain cases filed in Cook, Kane, DuPage, Lake, McHenry and Will Counties are for traditional public purposes, such as highways, schools, libraries, police stations--projects that will be owned by the government for the public use. / But a review of court cases filed since 2001 shows local governments have used eminent domain powers in many redevelopment projects where private companies end up in control of the land. / Municipal officials say this is nothing new and the current system should not be changed. Chicago area communities have used eminent domain in this way for decades to dream up new plans, they say."
That suggests that despite your rejection of Kelo, it is not completely out of line with the use of eminent domain over decades. Of course, it isn't, since you're really objecting to the court's decision in Berman v. Parker, and not the more proximate Kelo.
5) In any case, "public use" is a very wide language, and the details are often left to the states. In Nevada, 2011, "A bill by Sen. Sheila Leslie, D-Reno, would strip from state law special provisions that give mining and beet sugar producers the right to eminent domain similar to that of governments." http://www.reviewjournal.com/columns-blogs/political-eye/bil... . Mining justifies the law saying "The eminent domain law has long recognized mining is a public interest use of the lands and is of paramount interest in Nevada," (http://www.reviewjournal.com/news/government/comstock-reside... )
The is the whole issue, isn't it? "Public use" doesn't seem to have a "plain meaning", or at least not the one you think it has.
6) Elsewhere in the Las Vegas R-J, in an interview with a eminent domain lawyer who defends property owners:
"""Question: What is eminent domain?
Answer: It's the power of the government to take land for public purpose.
Question: Does it ever go through uncontested?
Answer: If the government gets to the point of eminent domain, it's contested. They can't come to an agreement on the price of the property. Otherwise, it's a willing buyer and a willing seller. """
With #1, #2, and #3 I've shown that it's not unusual for newspapers to give an explanation of what 'eminent domain' means. The description is often something very much like "allows governments to seize private property for public use". Thus, the original author's elaboration is just that, and not seemingly a subtext supporting opposition to the seizure.
With #4 and #5 I point out that 'public use' is not well defined, and while the land in most cases will be owned by the government, this is not universally true, with examples from two different stated. Thus, the original author elaboration of "like a house in the path of a new highway ..." is true, though incomplete. (The use of 'like' implies that it's incomplete.)
With #6 I strengthen my thesis, which is that any time there is an eminent domain challenge, it must be premised on how it's a violation of the 5th Amendment, or more often the equivalent definition in the state law. Thus, the original author's statement 'an illegal abuse of eminent domain' describes what has to happen for any eminent domain seizure.
I truly fail to see how the author "flatly" expresses an opinion that "this is scamming the Constitution's provision for eminent domain." What I read is consistent with how eminent domain seizures are usually covered, including those where the land is taken for fully constitutional reasons (as in #2).
So, do elaborate how you get a very different interpretation from the same text. How are you sure that you aren't reading your own beliefs into the article?
As a number of scandals have shown, they will be unable to do so for a significant fraction of the mortgages, and they know it. They will scream, but push come to shove negotiation will be in their interest. And they know it.
Which is an iffy opinion, on, I suppose, Justice Kennedy's opinion, who I don't know that well, and I would not be surprised to be proven wrong.
Note this is in part due to the fact that there's a lot more than "public use" at stake, e.g. the whole profitability of the deal depends on there being a difference between the price paid to the bank and a price of the new mortgage. The losers are more sympathetic than small time landowners, and the big winner is another "banker"/eeeevil Wall Street type firm (see the Naked Capitalism posting).
"The banks argue the plan would "severely disrupt the United States mortgage industry" because many other cities would likely adopt the same program to help homeowners who owe more on their mortgages than their houses are worth."
and -
"Cameron said pension funds, banks and other groups that made loans in Richmond stand to lose millions if the city is allowed to use eminent domain to force lenders into accepting less than the original terms of the loan.
He also predicted that cities using eminent domain will make lenders wary of doing business there.
"There's a domino effect in play here," he said."
If many other cities decide to do this, then the financial services industry is not going to be able to avoid doing business in those cities. One or two cities maybe, but not if many cities do this.
The financial services industry is always fond of threatening that it is going to take its ball and go home if it doesn't like the decisions being made, but really it can't actually afford to.
I am not sure that the way that this is being done is sensible, however I do not think that it will drive business from the city, at least not in comparison to a housing crisis.
Given the federal government is going to do nothing about the problem, I applaud the mayor for creative thinking. I don't think it'll work, but maybe it will spur someone into a more reasonable action.
The reason they care (and the reason the situation doesn't resolve itself without outside intervention) is that they're dependent on reporting improbably high property and loan values in order to not appear insolvent. The city doesn't care about this and is uninterested in punishing it, but they are interested in getting a large chunk of their tax base out of legal limbo and they have the legal right to do so.
This article makes a good rundown about how this is an unremarkable taking and likely to succeed in court: http://www.bloomberg.com/news/2013-08-16/eminent-domain-isn-...
Do you not see the problem with inventing a new power out of whole cloth to fight wrongdoing? Surely, the banks have done wrong - and should be prosecuted. But the exact thing that you rail against - "banks recieving huge amounts of taxpayer money" was ITSELF the product of exactly the same thinking that you are engaged in - "let's invent a clever new government power. for the public benefit [to save the economy]". problem is, these "public benefits" are so often really just to help out some private consortium - and you don't have to look too hard to figure out who that is in this case.
Heres the issue- Bankers created the housing collapse, as far as the homes value is concerned. By allowing many 'liar loans' that started defaulting, we exploded with foreclosures which flooded supply without demand. As a result, home prices went down. It does not change the fact that a percentage of the people getting hurt by foreclosures are those who lied in the first place. Yes, your home value went down. Provided they were in a 30 year fixed (the vast majority were, since they were being resold to fannie/freddie) your payments did not go down, OR up. If you could afford it on day one, you should still be able to today.
Basically, this is comprised of many people who lied to get their mortgage and as a result, their home values went down (but their payment is the same as day one) but since their homes are down in value they stop paying. The bank should have never loaned these people the money in the first place. You should have never been in this house if you are getting foreclosed on now.
*this comment is not applicable to all situations, but a common occurrence.