Just when I think that the bailout plans couldn’t get any wackier, along comes this gem proposed by the National Community Reinvestment Coalition to the House Financial Services yesterday- they propose using eminent domain to buy loans to modify them. Here’s a summary from Diana Olick of CNBC:
We all know that the biggest roadblock to mortgage modification is and has been the loan servicer and that servicer’s responsibility to its investors. So many loans during the housing boom were pooled and sold off to investors that it became close to impossible for the servicers of those pools to get permission across the board to change the terms of individual loans.
Taylor and the NCRC are proposing a new government program, using TARP money, whereby the government would “use its power of eminent domain to take troubled properties/loans from mortgage servicers and lenders, so large numbers of loans could be modified, writing down principal and interest rates. The loans would then be re-sold to the private market.”
The government would buy these loans at a “steep discount.” Eminent domain allows the government to take an asset where a public purpose is served, and it requires that they pay the investor the “fair market value” for it. NCRC claims the fair market value would be about 30-50 percent of the current loan value.
NCRC argues, “Discounting the purchase of these loans would strike a balance between assisting homeowners and ensuring that lenders, servicers and securitizers are not rewarded for financing and servicing predatory and price-inflated loans.” That discounted price would then “be sufficient to write down the loan balance of millions of loans such that they can be permanently refinanced or modified to ensure long-term sustainability.”
This strikes me as a REALLY BAD IDEA for several reasons. Olick touched on one of the problems briefly:
The sticky part is proving that a mortgage is in fact a piece of real estate, but I’ll leave that to the scholars out there. Essentially it’s a way to force lenders/servicers into submission.
A number of legal scholars have suggested that there are legal impediments regarding the complexity of selling loans held in securitized pools. Therefore, NCRC recommends the alternative approach of using eminent domain with the HELP Now proposal to purchase loans from investors and servicers. The current economic crisis would justify the government’s use of eminent domain laws for a compelling public purpose. In addition, eminent domain would overcome several barriers. Through compulsory purchases of troubled loans, reluctant servicers, investors, and lenders would not need to be persuaded to participate.
Utilizing the federal government’s power of eminent domain avoids lawsuits from disgruntled investors. As Harvard Law Professor Howell Jackson points out, eminent domain can solve the barriers related to first and second liens by directly purchasing all mortgages on targeted properties.
The use of eminent domain could also alleviate pricing uncertainties to unfreeze the credit market, and it could establish fair prices for mortgages through existing judicial mechanisms. The government should ensure that renters receive protections under its program. A sizable number of distressed loans involve investors who do not live in the property they purchase but
have rented the properties to tenants.Once fair prices are established, a secondary market can then be re-established and voluntary efforts to refinance mortgages will most likely accelerate.
My concerns are as follows:
I am not an expert in constitutional law, but I am aware the eminent domain need not be real property. According to Wickipedia:
The exercise of eminent domain is not limited to real property. Governments may also condemn personal property, such as supplies for the military in wartime, franchises; this includes intangible property such as contract rights, patents, trade secrets, and copyrights.
In spite of that, typically eminent domain has been restricted to real property. To expand this use on such an excuse is to start down a slippery slope. It is one thing to have eminent domain used to obtain vital supplies in a military campaign, it is another to confiscate the assets of one group of people in order to benefit another group. The potential for abuse is huge.
Wickipedia also states:
The legal doctrine of eminent domain, like the doctrine of seizure of contraband, allows expropriation of property within the existing system of law. Otherwise, expropriation may imply either a criminal or a revolutionary act.
We need to consider whether this really falls under the existing system- the alternative is frightening.
Fortunately, so far the NCRC’s proposal is just that- a proposal. Here’s hoping that the House Financial Services Committee members nodded off during Taylor’s presentation.
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twist,
your second and third points are the problem with EVERYTHING that’s been laid out there. should the reduce the principle for people in trouble? sure….i’d be thrilled to find out my neighbor owes 50K less than me, when started from the same point. should they drop rates for troubled mortgages? sure……the deadbeat with bad credit really SHOULD pay 1-2% less than me. moratorium on foreclosures? why not let certain people live for free for a year or so. we all know none of this stuff will work.
in my opinion the only thing that should be done (possibly) is fixing those 2-5 year intro rates (and not the 1 or 2% neg am loans) that were around 5-7%. if you could afford it when you bought it at 5-7% then you should be able to keep it by having the rate fixed, as opposed to jumping to 8-10%. people that bought with nothing down and at a lower rate than the prevailing rates, simply should never have been able to own a home. i for one, will be angry if any of this stuff flys. i’ll feel pretty stupid for buying within my means when i could have got TWICE the house.
Seems like a great use of money, too. I mean, California is claiming they may not be able to pay any tax refunds this year, handing out IOU’s instead.. but don’t let minor things like that stop us. It all ends up in the wash, I suppose.. the homeowner can’t repay the loan, so the gov’t takes over and can’t repay it either.
And besides – we’re only in this mess because some jerk along the finance food chain actually wanted to be repaid.. if we could all just go back to borrowing and spending and forget minor things like budgets and repaying loans we’ll be much happier.
And I don’t know, Twist.. this article seems more outrageous. The guy is pushing for taxes on money in bank accounts (ie, a negative savings interest rate) to force people to spend any cash they do have.
Linenoise-
I feel the same way when I see the big push for reverse mortgages. It feels like Americans are being pushed to be without savings or assets. In a declining economy with more jobs becoming tenuous, the last thing most of us need to do is get out and spend, spend, spend.
Here’s the comment in your article that I thought was the most frightening:
Our economy is falling off a cliff, but apparently it’s a smaller cliff than the rest of the world is dealing with.
What a sad corner we’ve all been put in.
Yes Igor, I’m “outraged” too.
Outraged?
My anger is borderline on open hostility. Just a little step until armed vengeance. If things turn much worse, there’s going to be serious social unrest.
Add in the government siezing private property, and you’ve got the boston tea party on a mass scale. They already take 50% of my pay, what more can they take? Answer: a lot, and if they think they can get away with it they will. Someday, our leaders may wake up to slashed throats, and Bawney Fwank is the top of the list.
Talk about unintended consequences!
Yes, Igor, I’m ANGRY.
Linenoise-
I read that article and the first thing that popped into my head was that really will cause people to stash money in their mattress.
(sucks if you have a sleep number bed)
you think banks are failing now you go right ahead and institute that policy and you will really see what a run on the bank looks like.
I love living in the USSA.
Keith, That is about right.
That plan is insane!!!