Should Eminent Domain Be Used to Save Underwater Homes?

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Daniel Acker/Bloomberg via Getty Images

The one glimmer of hope in a otherwise disappointing recovery is the recent bottoming out of the housing market. While no one expects home prices to start skyrocketing again anytime soon, it appears that the steady descent they saw over the past six years has finally ended.

But that doesn’t change the fact that because of the housing bubble bust, nearly one quarter of all U.S. homes are underwater. And even if home prices have ceased falling, it will take a very long time for owners of these homes to rebuild equity. And this epidemic of negative equity remains a drag on the economy. That is why there has been widespread calls for the federal government –in its role of conservator of Fannie Mae and Freddie Mac — and other holders of underwater mortgages to forgive principal owed. The thinking is that such a measure would keep borrowers in their homes and current on their mortgages, while stimulating the economy by stabilizing the most distressed areas of the housing market.

Unfortunately for proponents of principal reduction, efforts to get this policy implemented on a large scale have failed. This has led to increasing support in the media and among academics and public officials for a proposal first originated by Mortgage Resolution Partners for municipalities to use the age-old power of eminent domain to purchase mortgages at market value and to offer homeowners new mortgages that reflect the actual market value of the property.

(MORE: Housing Market Better Than It Looks)

As Yale Econmics Professor Robert Shiller argues, the fact that the private sector isn’t already doing this is an example of a “collective action problem.” Shiller says that principal write-downs are in everyone’s interest, that coming to an honest assessment of what a mortgage is worth would obviously help homeowners, but also mortgage lenders who would benefit from fewer homeowners defaulting on their loans. Writes Shiller:

“In a nutshell, mortgage lenders need to write down the amounts owed by individual homeowners . . . but the different stakeholders have been unable to reach an agreement, even if it is in their common interest.”

This plan has also been recently endorsed by New York Times columnist Joe Nocera and Cornell University Law School Professor Robert C. Hockett, who has served as an advisor for Mortgage Resolution Partners. And yesterday, in an editorial in American Banker, U.S. Representative Brad Miller came out in favor of the plan.

Of course, there was a lot of pushback from investor and other Wall Street trade groups. In a letter to municipal officials in San Bernardino County — one of the municipalities purported to be considering this plan — 18 trade groups from the mortgage, securitization and investing community protested the plan, arguing that it was unconstitutional and would limit future access to credit. According to the letter, “the impact would be borne by the very homeowners and communities that the proponents of the plan claim they are trying to help.”

As Felix Salmon at Reuters points out, the argument that implementing this plan will curtail future financing of mortgages is flimsy, because there is very little private financing of mortgages going on now anyway. Salmon writes:

“But really the point of the letter isn’t to make an argument: it’s to make a point . . . there’s the word “unconstitutional”, which appears very high up. That’s code for “we’re going to appeal this thing all the way to the Supreme Court, so you’d better be willing and able to spend an enormous amount on legal fees.”

It would be pointless to implement a plan that the industry would fight tooth an nail. If each individual seizure were fought bitterly by investors, then the process would proceed too slowly and expensively to be prudent.

But there is another, more troubling, aspect to this story: the possibility that Mortgage Resolution Partners is using this crisis, and many people’s firm belief in principal write-down, to gain popularity for a program that would enrich the firm but do little to solve the housing mess while putting municipal governments at risk.

(MORE: Report: The Housing Recovery Has Officially Begun)

Yves Smith, proprietor of the blog Naked Capitalism, goes furthest in alleging less-than-noble motives, writing, “Beware of financiers bearing gifts.” She makes several points against the Mortgage Resolution Partners plan including:

  • The firm will charge unnecessarily high fees to bear no risk and act as a middle man.
  • The plan only calls for the seizing of performing mortgages. And while the homes underlying the mortgages are worth much less than than the mortgage, the lien itself is very valuable because the homeowner is still making payments on an overvalued home. Smith writes, “This premise is fundamental to the entire scheme working; it’s how the municipalities can afford to pay the considerable operational costs as well as MRP’s fees. And it amounts to theft.”
  • There doesn’t seem to be any sufficiently transparent competition process for other firms besides Mortgage Resolution Partners to bid for the role of middleman. Writes Smith, “This program looks to have been awarded to MRP without sufficient competition . . . the process smacks of special dealing.”

It is still unclear whether San Bernardino County or any other municipalities are seriously considering this initiative. If one does go forward and attempts to implement this plan as it has so far been outlined, it is not likely to get very far. Without the cooperation of mortgage investors, the probability that this gets tied up in time-consuming and costly legal battles is too great. But even if you are a proponent of widespread writing down of mortgages, it appears that there are better ways to go about it than this.

51 comments
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mweeks7
mweeks7

YES, but not just for homeowners current in payments, also for homeowners with higher rates than 2%. Sounds crazy? Not as crazy as trillions made from illegal lending practices and foreclosures. Next should be increases in taxes for imports by US companies that make products overseas and import them to the US! Government must help Main Street get on her feet! Paybacks not handouts.

mweeks7
mweeks7

YES, but not just for homeowners current in payments, also for homeowners with higher rates than 2%. Sounds crazy? Not as crazy as trillions made from illegal lending practices and foreclosures. Next should be increases in taxes for imports by US companies that make products overseas and import them to the US! Government must help Main Street get on her feet! Paybacks not handouts.

Kent R
Kent R

no  the paper work should be traced back to the originators and what ever commission that was given  to that underwriter should be awarded to cover that part of the balance on that loan since its obvious they did not do due diligence in checking out the credit worthiness of the recipient of the loan. a loan officer that only did paper work and didn't do the credit check did not honestly earn any commission for that loan.

1hopelessoptimist1
1hopelessoptimist1

The proposition that everyone gains in a mortgage cramdown means that the losers, the lender, is a" no one". For those of us who provided seller financing, pray tell how we benefit.

This proposition is pure, unadulterated communism. Those Americans advocating this are whiners and worse, they preach consumption will get us out of this. Keep your home and your toys too and please keep buying, not saving and investing. Funny but that is not how Germany rebuilt after WW II and seldom looked back, nor Japan, nor Korea or China, to name but a few that managed to rebuild. What needs to happen is to create well-paying manufacturing jobs, so let's focus on an industrial policy that fosters that. Reform and simplify the tax code, streamline approval processes, budget for multi-years, send everyone in Washington's inner circle far away, say Wake Island, on a long holiday and make sure the media and Harvard types follow.

Conrad
Conrad

We have eminent domain in Virginia for the Racoon.

I had a Coon in my attic.

Caught her in a trap in the attic.

I was told that I could only release her by animal control (police dept) on my property i.e. no one elses property.

Our property is thus under the eminent domain of  the Virginia Racoon.

She was so resourceful she climbed up my two story drain pipe got on the roof, swung over the peak of the roof/separated the louve on the air vent and got back in. 

Gary McCray
Gary McCray

I can tell that many of those responding to this are either lenders, real estate agents or the upper part of the one percent who think they are immune and everybody else ought to pay for their excesses.

Corporate freedom to rape and pillage versus individual freedom and a reasonable right not to get screwed over by your country and it's corporations.

You all can say what you want on this thread, but the inevitable outcome of all this short term self serving greed is inevitably going to leave you running for your lives.

USMC76
USMC76

ALL IN ALL WE KNOW THIS CAN BE A FATAL BLOW NO MATTER WICH WAY IT,S GOES COMMON FOLK IS ON THE LOSING E N D so whats the use of debating an issue that is at a lose any way-IT WOULD JUST COMMPLICATE ISSUES OF DEFENDING YOUR RIGHTS amp; HOME >>HOW SPUPID DO THIS ISSUE THINK PEOPLE ARE  

bwshook
bwshook

Sounds to me like this "Eminent Domain" concept is a very dangerous proposition; the negative consequences to homeowners and the economy could be severe.  Think of it yourself:  A friend asks to borrow $100 from you, and you agree amp; give the friend the money.  A week later, you bump into the friend and say, "Hey, forget about the total $100 you owe me--just pay me back $70 when you get the chance, and we'll call it even."   How realistic does that sound to you?  Probably as realistic as this nutty "eminent domain" idea.

flyguygirl
flyguygirl

Back when you had people who bought homes to live in. These days you have people who buy homes to flip them. Should we pity and in turn take abuse from the guys who bought a home in June 2011, e.g., "the economy of June 2011", just to flip it; and since they could not

flip it they now rent it to section 8 and because they are from a part of the world that takes

arrogance and dominance from their religion as a given? Should we pity and in turn take abuse from them because they are "OFFENDED" by a list of repairs that section 8 is making them do to their 30 year old house with no sealing, etc. on windows and doors; degraded insulation, water pipes that keep bursting, etc. etc. etc. when the tenant was smart enough

to foresee these problems and insisted that all utilities be included with the rent.? Thus these flip it guys are now paying the double water bills, higher electric air conditioning bills, etc. etc. etc. In short, their arrogance and dominance heritage got them into this mess precisely because they have no respect for other people who are different than they. They should not be in the United States because this is the foundation of this country: people from the world uniting to make a stronger nation and heritage. We should never allow anyone to attempt to have us forget that we are the best.

skalwani
skalwani

No - I do not think eminent domain should be used at all. It was created for public good and I do not see how the public benefits in this case. The company in question that is pushing for this - is a *private* company. So this is clearly misuse of the original intent and purpose!

 

Chris Hubbard
Chris Hubbard

they used imminent domain to take my grandmas farm...

Kaehu
Kaehu

They condemned our family farm on behalf of a factory and turned it into a waste water treatment plant.  It was a "public purpose" to support private industry.  (Not mentioned is that the factory could have built it on their own land but it was cheaper and easier to take ours.)

Richard Bunce
Richard Bunce

Funny how they only go after the lenders principal in all these schemes. How about the folks who made money up front on the sale... the realtor, the loan originator, the appraiser,  the governments that collected taxes/fees/property taxes on the new valuation, and of course the seller. IF there was some wrong here there were a lot more perpetrators than the lender.

i hate this
i hate this

crazy .. who asked those people to buy ? there are so many who have money who cannot buy now .. this is how govt does things. Execuse their loans, they will sell at higher prices, they will look for more houses, driving the housing over roof once again and then we start the cycle again. ... best of luck. 

Michael Nagle
Michael Nagle

There used to be an elegantly simple solution to this with an inelegant name: the "cram-down". 

In bankruptcy law, someone who owes money on a secured loan generally

has the choice of "reaffirming"- agreeing to pay off the debt despite

the bankruptcy- or handing back the security (ie the house). It used to

be that an underwater homeowner could reaffirm the mortgage by agreeing

to pay off what the bank would get from a foreclosure. The bank would

lose the unsecured portion of the loan, but ended up no worse off than

they would be in a foreclosure. Unfortunately, the 2005 vandalism of the Bankruptcy Code- bought and paid for by the banks- eliminated the cram-down. If it were still possible banks would actually renegotiate mortgages.

Michael Nagle
Michael Nagle

There used to be an elegantly simple solution to this with an inelegant name: the "cram-down".  In bankruptcy law, someone who owes money on a secured loan generally has the choice of "reaffirming"- agreeing to pay off the debt despite the bankruptcy- or handing back the security (ie the house). It used to be that an underwater homeowner could reaffirm the mortgage by agreeing to pay off what the bank would get from a foreclosure. The bank would lose the unsecured portion of the loan, but ended up no worse off than they would be in a foreclosure. Unfortunately, the 2005 vandalism of the Bankruptcy Code- bought and paid for by the banks- eliminated the cram-down. If it were still possible banks would actually renegotiate mortgages.

Cyberspeak
Cyberspeak

Remember when the Tsunami waves hit a few years ago the south pacific, well America was hit also, it just happened to be in the form of greed 

Chinga_Tu_Madre
Chinga_Tu_Madre

What's all the deliberation? Just do it already. Let's not be the Germans and their deliberate way of crashing into the iceberg, when they could have avoided it by making drastic decisions sooner. Perhaps it is crony capitalism, social economics--whatever stupid nomenclature you choose to use--let it work to the benefit of the average citizen this time.

crescentfang
crescentfang

This problem was created by the government, the banker's lobby, and especially Freddie Mae and Fannie Mack.  Given time, we can fix this, but only if the government stops trying to "help".

As long as the banks and the government go  back to asking for 25% down or more and the Fed stops loaning the banks money at negative real interest rates, the real estate market will start working again.

DaveZiffer
DaveZiffer

The housing market is NOT BOTTOMING OUT. All you have to do is look at the housing price graphs almost anywhere. House prices are on a steeply declining slope. I suspect that the data upon which this blatantly false PR is based has to do with the number of houses being sold, not the prices at which they are being sold. The PR-meisters have been singing this same song for two years now and it's been a lie every time.

Appraiserexfarmer
Appraiserexfarmer

What about the farmers of the 1980s?  I purchased equpment and land in 1977 with 20% down; by 1982, the variable rate interest ( all that was available) had jumped to 16% on the land and 22% on the machinery--I converted to a FmHA loan at 16% interest; the Fmha forced me to sell in 1983 and forced me to give a farm away that the government lease (CRP) would have paid for in 5 years.  The supervisor of the FmHA told me if I did not sue, he amp; the FmHA would help me start again in 10 yyears on a beginning farmer program (at the age of 53)--I called in 1994; he told me they (FmHA) had changed their

mind.  I still dream of my farm every night and pray for my oppressors because the government (Volker), not market conditions , raised the interest.  that activity set a precedent that should not now be changed unless the 1980s farmers, etc., are bailed out as well.  It is a cruel world; be careful who you trust, especially government beaucrats.

Soxboy
Soxboy

So...my neighbor and I bought "twin" houses at the samae time for the same amounts.  I put down 30% and he put down 3%.  Since then, our houses have lost the same value and he's underwater on the mortgage.  I'm not because I commited more of my capital - versus somebody elses.  Now he gets bailed out to even and I have to live with my loss becasue I had saved more and levered up less before buying the house?  That's what you think is "fair"?

Please explain.

Nonaffiliated
Nonaffiliated

You are correct.  For years, your neighbor has been partying with the thousands of dollars he didn't spend on his mortgage while you scrimped and saved.  Now, you'll help bail out the poor fellow since he obviously needs it more than you do.  How else can the party continue?

Our government rewards bad behavior with money taken from those who did not behave badly.  There's nothing new in that.  They do the same thing with free money for people who build homes in disaster-prone areas.  There's free money for people who goof off at work and get fired.    There's free money for people who can't be bothered to use birth control.  In fact, there's free money for just about any self-inflicted hardship you can think of...all paid for by people who avoid the pitfalls. 

It's your duty as an intelligent and responsible member of society to take care of those less intelligent and less responsible.  At least, that's what I'm told.   The nagging question I have is...how will we ever teach people to be intelligent and responsible if we only reward people who aren't?

Kaehu
Kaehu

This is what we responsible people have been doing ever since the government crashed the economy in 2007.

TimothyLoftin
TimothyLoftin

I know it's been said before, but live is not now and has never been fair.  Surely there must be some benefit you accrue in having weathered a bad turn without  needing additional help, even if it is knowing that by foregoing that assistance, you have freed up resources for some who need it more.  It seems that having kept your head above water gives you more faith in your own ability to foresee   difficulties and to take steps to deal with them.  I myself came through the last several years for exactly that reason - kept my exposure small and had no particular taste for extravagance. 

Don't worry about fair, you've demonstrated that you don't need to count on fair to make your way.  Leave it to someone who needs it. 

Soxboy
Soxboy

The problem here is that you are, in large part, rewarding bad behavior.  Show me 20 people whose mortgages are underwater and I'll find 15 of them who either got caught in a flip gone badly or who used their house as an ATM until the party ended.  Rewarding bad behavior leads to bad behavior - that's human nature.  As for the 5 who have run into problems through no real fault of their own, it would be much easier to help them if we weren't trying to reward the other 15 for their bad decisions.  Taking from the makers to reward the takers isn't sound economic policy.

 

By the way, I'm not talking about protecting the mortgage holder either.  They were dumb enough to lend 97% of the house price and deserve to suffer the consequences of their bad decisions as well.

DaveZiffer
DaveZiffer

You seem to be highly unconcerned about the "moral hazard" effect. If you are unfamiliar with the term, please look it up. When a society subverts the marketplace in order to encourage bad behavior by offering unjustifiable subsidies, student loans, low interest rates, etc. and then bails people out so that there is no consequence for bad behavior, what we get predictably is ... more bad behavior. Your approach here would lead us down the road to "more of the same". Unfortunately our political leaders, in their incessant efforts to get themselves reelected, seem to agree with you. Hope you've got your wallet open!

DaveZiffer
DaveZiffer

You seem to be highly unconcerned about the "moral hazard" effect. If you are unfamiliar with the term, please look it up. When a society subverts the marketplace in order to encourage bad behavior by offering unjustifiable subsidies, student loans, low interest rates, etc. and then bails people out so that there is no consequence for bad behavior, what we get predictably is ... more bad behavior. Your approach here would lead us down the road to "more of the same". Unfortunately our political leaders, in their incessant efforts to get themselves reelected, seem to agree with you. Hope you've got your wallet open!

Chinga_Tu_Madre
Chinga_Tu_Madre

If the problem you mentioned were only between you two, then no. But there's a whole economy to consider. Forget fairness: what does it take to get out of this perpetual housing funk which the momentum may carry us 30 years down the line.

TheAntiProgressive
TheAntiProgressive

I can't believe this is even open for discussion.  The owners purchased the home as an investment.  If not then they would have rented.  They liked the home or the wouldn't have bought it.  They made a decision.  Generally speaking this is one of the biggest investment decisions an owner would make with  thier money.  They lost, oh well.....  Socializing the risks they took, for thier home to support thier lifestyle and now it was a bad decision?  Tough.  Learn to live with disappointment.  I don't exist to fix your bad decisions.  They are your decisions.  If instead the homes were highly priced now well above water would the owners be charged with issuing a check to the government for the excess equity.  I think not.

Standard Progressive heads I win, tails you lose mentality.  All in the name of "fairness". 

Chinga_Tu_Madre
Chinga_Tu_Madre

Forget fairness. What does it take to rescue the economy for which the current catastrophe may last for generations to come. People like you need to stop worrying about "me, mine and I," and just get out of the way.

Yacko
Yacko

"The owners purchased the home as an investment."

You mean monetary investment? This is not the only consideration for some people. People buy homes in safe areas, to have good neighbors, good schools and a nice overall environment to raise a family. Yes, a good circumstance is still making an investment of sorts, but maybe, just maybe, this is one aspect of why people are willing to overextend themselves.

"If not then they would have rented."

Most places I have seen, have all sorts of code violations, even while raking in tenant money. Most apartments are cash cows just 10-20 years from becoming bedbug infested barracks.

Starshiprarity
Starshiprarity

A house in an investment and an investment is a gamble. Why should the lender be held liable because a borrower lost a gamble?

Borrowers should have been smart enough not to buy an illogically inflated home. You don't go ask Best Buy for your money back because your TV is now obsolete.

Chinga_Tu_Madre
Chinga_Tu_Madre

Because the lenders, in many cases, were liars, crooks and thieves.

crescentfang
crescentfang

 The primary duty of a banker is to determine whether the borrower will be able to repay the loan before issuing it.  He owes this to the depositors who are loaning him their money.  The borrowers aren't always capable of determining the risks but the banker is supposed to.  He protects the loan by checking the finances of the borrower and insisting they put down 24% to 30% of the house price from their own savings so he is protected if the market price goes down.

The "sub prime, negative amortization mortgage" was crazy and utterly irresponsible. 

Gary McCray
Gary McCray

Actually, the lender was entirely a participant in that gamble and the same logic could say why should the homeowner take responsibility for a lender stupid enough to loan money often on variable interest rate loans where the rates were immediately raised to the point where the owners would have no longer qualified for them in the first place.

Nuts to you, the banks and lenders totally caused this mess and have largely left the homeowners holding the bag while they get bailed out by our government.

They should have been shot!

1hopelessoptimist1
1hopelessoptimist1

Since when is a mortgage to be considered a gamble? Since debtors lost their moral compass and convinced politicians and judges to change the law after they got the money. Interesting that most politicians and all judges are lawyers. Another reason why law schools should be closed u.f.n. 

Larrie Veith
Larrie Veith

Check out some recent history! Banks did not make sub-prime loans period until the federal government passed a law requireing them to and garranteeing them through Fannie Mae and Freddy Mac with our tax dollars! All in the name of "Fairness"

Starshiprarity
Starshiprarity

Yes, the lenders were participating in a separate gamble- that the borrower would pay what he said he would. They're not responsible for the value of the property though.

Traditionally the lender would just the property in a foreclosure. They literally bought it, so it makes sense.

I disagree with the bailouts. But we had a too big to fail situation which would have resulted in a complete failure of the financial sector. We need to bring back Glass Steagall and add further regulation to prevent the sort of over reach and over influence that allowed the explosive situation we're experiencing the echos of.

No one should be billed for the failure of another's investment. Not the bank, not the tax payer.

crescentfang
crescentfang

 Bringing back Glass Steagall would be a good idea but it isn't going to happen because the bankers have too much influence over the government.  Glass Steagall was repealed after the last real estate failure/too bit to fail scam, remember?  Allowing the banks to fail and  breaking them up was the only hope for restoring integrity to the banking system.  As it stands, we have to wait for the next collapse and politicians with enough courage to say NO!

AJ_Singh
AJ_Singh

Please tell me how the homeowner is left holding the bag. No one put a gun to his/her head and told the person to accept the loan.

This solution is nothing more than taxpayer funded crony capitalism.

It was government's involvement in the housing market that created this problem in the first place.

The best solution would be for the borrower to default and the lending institutions go bankrupt.

Gary McCray
Gary McCray

Actually a response to Yako below,

Pretty much what I expect.

Pretty much self sufficient, in isolated area of US least likely to experience fallout and very low fire danger, year round filtered rain water water supply, High intensity container gardening and a Kimber with tritium night sights (and a few others).

Guess that answers your question.

Chinga_Tu_Madre
Chinga_Tu_Madre

Well then let the crony capitalism work for the average citizen this time. Anything we can do to severely cripple the financial sectors that help create this catastrophe would be justice.

Gary McCray
Gary McCray

Happy to respond,

Banks and real estate agents (sophisticated business people) actively marketed maxed out real estate deals to unknowledgeable (naive) home buyers by basically selling them whatever there maximum available loan amount qualified them for.

A case of completely insidious and ill advised marketing if there ever was one. 

And the marketing ploys were the gun, no mention of a gamble.

No mention ever of possible downside.

They also sold them hideously lopsided variable interest rate loans which no home owner who actually understood the risk would have ever undertaken.

(And which no lender who actually understood the risk would have done either.)

Stupid beyond belief on the part of banks that as soon as it got to the point where they were allowed to raise the interest rate on the variable interest loan they raised all of them as much as the law allowed.

Precipitating the huge housing crash.

Not only did the lenders leave the homeowners totally holding the bag it was their own completely stupid maxed out greed that caused the mess in the first place.

Bailing out the lending institutions was just stupid, they should have been left to rot and the homeowners should have gotten functional relief.

The concept that our economic institutions are more important than the people, the people they are trying to fleece at every turn, is abysmal.

Yacko
Yacko

And a domino effect runs through the economy and eventually chaos reigns the land. I assume you have your .45 and bunker ready?

rsbsail
rsbsail

I'm sorry, but both the borrowers and the lenders are in this together.  I feel for the people who in good faith bought a house for the first time.  However, I have no sympathy whatsoever for all of the people who took out second mortgages to fund their vacations, cars, or other toys. 

The real question is what government policies gave rise to the housing bubble?   I think a large part of the blame goes to Barney Frank.  He told Fannie Mae and Freddie Mac to lower lending standards.

adamsarah292
adamsarah292

You assume the other side can actually GIVE me anything.

You also assume the other side won't take anything away.

I'd say you're wrong to assume. YOU SHOULD READ THIS ARTICLE  ...... FinancialsReports.blogspot.com...