Skip to comments.CA Cities Consider Seizing Mortgages (Patriot Post)
Posted on 07/06/2012 5:31:24 AM PDT by listenhillary
CA Cities Consider Seizing Mortgages
Well-connected political cronies to benefit from eminent domain.
In a move best described as an unholy alliance between over-reaching government and crony capitalism, some local government officials in California are exploring ways to invoke eminent domain in order to restructure mortgages for underwater homeowners. California's San Bernardino County and two of its largest cities, Ontario and Fontana, would seize mortgages from the private investors who currently own them, cut the loan and principle to the current property value, and resell them to new investors. The deal would be run by a venture capital firm called Mortgage Resolution Partners, that in turn has hired investment banks Evercore Partners and Westwood Capital to raise funds from private investors. Evercore's founder and leader is Roger Altman. Altman was Deputy Treasury Secretary under President Clinton, and is a current fundraiser for Barack Obama's re-election campaign.
Eminent domain allows a government to forcibly seize property and then re-use it, under the auspices that such re-use ostensibly constitutes a public benefit. A typical example might be taking a piece of private property and re-using it to help facilitate a road-building project, or new housing. When such property is seized, the former owners are entitled to compensation, the amount of which is usually determined by a court.
The word "ostensibly" is critical here because the Supreme Court, in what many consider one of the worst rulings of the modern era, vastly expanded the definition of eminent domain in 2005. In 1998, the drug company Pfizer constructed a new facility in the city of New London, Connecticut. New London officials, anticipating the additional business the new plant would bring into the community, attempted to purchase 115 homes nearby so they could sell the land to commercial developers. 15 homeowners resisted. The city cited eminent domain and seized the land.
In the case known as Kelo v. New London, the Supreme Court ruled in favor of the city. The Court's majority reasoned that a city may claim private property under the Fifth Amendment, so long as it does so as part of a clear economic development plan intended to benefit the community as a whole. Sandra Day O'Connor's dissent illuminated the implications. "Any property may now be taken for the benefit of another private party, but the fallout from this decision will not be random. The beneficiaries are likely to be those citizens with disproportionate influence and power in the political process, including large corporations and development firms."
Enter Evercore Partners and its well-connected founder and co-chairman, Roger Altman. As the Wall Street Journal explains, the "highly unorthodox" use of eminent domain, as it has been characterized, goes something like this:
For a home with an existing $300,000 mortgage that now has a market value of $150,000, Mortgage Resolution Partners might argue the loan is worth only $120,000. If a judge agreed, the program's private financiers would fund the city's seizure of the loan, paying the current loan investors that reduced amount. Then, they could offer to help the homeowner refinance into a new $145,000 30-year mortgage backed by the Federal Housing Administration, which has a program allowing borrowers to have as little as 2.25% in equity. That would leave $25,000 in profit, minus the origination costs, to be divided between the city, Mortgage Resolution Partners and its investors.
In other words, a group of new investors, hiding behind the combined power of government and crony capitalists, aim to bludgeon the current owners of the existing loans. Their rationale is the idea that homeowners who owe more than their houses are currently worth constitute a "blight" on their respective communities, thus triggering eminent domain. They further argue that such seizures would help homeowners shed debt loads that depress economic activity in their respective communities, and prevent foreclosures that reduce tax revenues for local governments.
That such homeowners freely entered into a contract to acquire such debt? That many local governments, especially in California, have made over-spending an integral part of their agenda for years? In the age where self-entitlement and moral hazard are now openly encouraged -- and often underwritten by government -- such considerations are apparently anachronistic.
"A number of cities, mayors, city managers have come to me and said, 'How soon can we get in?'" said Greg Devereaux, San Bernardino County's chief executive. "We think it would be irresponsible, given the size of the problem in our county, not to at least explore it," he added. Why California in particular? "California legal precedent and political posture favor the program and constitute an ideal proving ground," said Mortgage Resolution Partners, in a document presented to investors and reviewed by The Wall Street Journal. In other words, the most politically progressive state in the nation gives us our best shot to re-write eminent domain statutes. The same document outlines a plan in which a $5 billion initial effort in California can grow as large as revamping three million mortgages in a $500 billion, multi-state effort.
Reuters columnist Daniel Indiviglio explains the downside. "A California county's new plan to seize underwater mortgages from investors may be the most dangerous housing market intervention yet. If it catches on, bondholders could face billions in lossesand taxpayers, too, if local authorities start targeting loans backed by the federal government. That would whack up mortgage costs and may leave Washington as the only lender...Of course, the threat of this program might light a fire under bondholders and servicers that have been sluggish to modify mortgages up to now. But the costs of this coercion would easily outweigh the benefits."
The key word here is coercion, and lenders know it. "The only people who take a loss on this are the holders of the mortgage-backed securities. We're already formulating strategies for banks interested in fighting this," said Brian Murray, an attorney who heads the Issues and Appeals practice for the law firm Jones Day. Mr. Murray then got to the meat of the issue. "We believe the U.S. Supreme Court has made it clear that a taking has to be for a public purpose," he said. "When this whole venture was set up to make money for this investor organization, that doesn't sound like a public purpose."
That's because it isn't. The scheme is nothing more than crony capitalist thuggery aided and abetted by spendthrift government officials. It will no doubt be applauded by morally suspect homeowners, who will be alleviated of living with the consequences of their own freely-made decisions. And all of it will be coated with a patina of respectability to obscure one simple reality: this is nothing more than an attempt to legalize seizing property from one private entity, and giving it to another one.
On June 19, the San Bernardino county Board of Supervisors approved a joint powers authority (JPA) with the cities of Ontario and Fontana. The first public meeting of the JPA is this month. County CEO Greg Devereaux said no program will be approved without a thorough vetting and public approval. Yet who's kidding whom? 43.4 percent of homeowners in the county have mortgages that are underwater. The idea that they would somehow refuse to accept a proposal that saddles a third party with their outstanding debt is ludicrous. Furthermore, Mortgage Resolution Partners has hired Cornell University law professor Robert C. Hockett, as a consultant. Mr. Hockett maintains seizing private property from investors in mortgages is "a classic public use. There is no more classic textbook case than urban blight," Hockett said. Unsurprisingly, he cited Kelo v. New London as his justification.
In New London, Pfizer closed its facility four years after the Supreme Court decision. The land where former housing was bulldozed to pave the way for the anticipated "high end" development, costing the city and state $78 million in the process, now sits vacant. Since the 2005 decision, several states have enacted stronger eminent domain laws to protect property owners. Castlecoaltion.org published a report card on those states. California received a D-minus, cited as a state where "no meaningful reform was seriously considered," and "abusive redevelopment statutes continue to leave all property owners at risk." That report was published in 2007, before the current housing crisis began.
In other words, before yet another opportunity taken by Democrats and their crony capitalist allies to "never let a crisis go to waste" presented itself.
This looks like the California version of nationalizing an industry. If I were a bank, I would refuse to loan money for the purchase of any home in CA. Simply convert the nature of the bank to handle commercial loans only. If the regulators refuse you, close your California offices.
Oh, silly me. How quaint to think that integrity matters any more. </sarc>
Rewarding people suffering from government policies with money seized from banks and capitalists.
Sounds like a winning plan in this day and age.
You forgot to foreclose all delinquent mortgages before the cities have the chance to steal them.
Take the losses as a tax writeoff, resell the houses with new mortages at the new lower value. If you’re going to get robbed anyway you may as well reap any benefit (tax write off) that you can get AND tick off the criminals trying to rob you.
I would never move to, or open a business in California, or any other liberal state. It’s the same as flushing money down the sewer
These schemers have a problem. How much derivatives are involved with highly leveraged portfolios of mortgage backed securities are there in the secretive derivative exchanges? If the mortgage backed securities take a hit, the highly leveraged derivatives owned by US taxpayers and banks will take huge losses that may trigger a banking collapse.
Robert Hockett’s email:
If any Freeper has a proper email letter to send please post it.
I think their actual end-game is to use the threat of eminent domain to pressure banks into accepting cram-downs for the current occupants. But it is still a vast abuse of government power.
At least the connected Altman and his enablers in government will walk away with pockets full of buck$.
Hockett’s essays from his resume:
Note the progressive tilt.
ARTICLES & ESSAYS: FORTHCOMING, PUBLISHED, UNDER REVISION
When Private Goods Themselves Are Public Goods: Credit-Money, Central
Banks, and Legal Hybridization, 14 THEOR. INQ. IN L. __ (2013)
Government as Market-Maker: Central Banks, Treasuries, and More, 55
CHALLENGE __ (2012).
A Sustainable Architecture for Global Trade and Finance, White Paper,
New America Foundation (2012).
Public Infrastructure Investment and the U.S. Fiscal Position, White Paper, New
America Foundation (2012) (with Robert Frank).
The Way Forward: Moving from the Post-Bubble, Post-Bust Economy to
Renewed Growth and Competitiveness, White Paper, New America
Foundation (2011) (with Daniel Alpert & Nouriel Roubini).
The Home Mortgage Bridge Loan Assistance Act of 2011, Draft Statute and
Accompanying White Paper, New York City Bar Association (2011) (with
The Analytics of Distribution, 20 S. CAL. INTERDISC. L. J. __ (2011).
Promise against Peril: Of Power, Purpose, and Principle in International Law,
17 ILSA J. INTL & COMP. L. 71 (2011).
A Fixer-Upper for Finance, 87 WASH. U. L. REV. 1213 (2010).
Foreword: Interpreting and Learning From? Yet Another Meltdown, 61
SYRACUSE L. REV. 411 (2010) (symposium issue).
- Reprinted in part as Bubbles, Busts, and Blame, 37 CORNELL LAW
FORUM 14 (2011).
I wonder if the local communities will revise their assessment values down to reflect the reduced mortgage and therefore LOWER the property tax burden on the new mortgages?
Probably not . . . after all shared sacrifice doesn’t pertain to government coffers.
I guess my lack of experience in scheming is becoming apparent. I’m obviously not qualified to be a banker or a politician.
The leveraged securities angle prior to 2008 was really quite classic. The people using the Liu derivatives model had no idea how it worked or what assumptions it was based on. And I’m sure that the union members whose retirement funds are based on current derivatives are clueless as to how completely their union presidencies have screwed them by backing the current batch of politicians, and the inflated piles of paper they have generated. You have to remember that when the government took over GM, a whole flock of union retirement funds were simply erased.
They can go and eminent domain all the underwater properties. The cities who do that will be bankrupt in months because the note-holders will sue the bejesus out of those who em. domain their holdings.
Since most of these homes have multiple note-holders...these cities are looking at multiple lawsuits on each property em. domained.
Man these politicians are stupid
Many mocked that book for saying a government body would seize private mortgages. Funny that is what is happening now.