Eminent Domain To Buy Mortgages A Disaster For All and Downright Un-American!
I wrote the following post in response to the following WSJ report:
"City leaders in Richmond, Calif., said Tuesday that they would take the first steps towards potentially seizing underwater mortgages, becoming the first city to pilot an unorthodox use of eminent domain to tackle blight left by the housing bust.
Working with the investment firm Mortgage Resolution Partners, the city said it had begun sending letters to 32 lenders and other firms known as mortgage “servicers” that process loan payments on behalf of mortgage investors. The letters offer to buy some 624 mortgages at what MRP has concluded is the market price for those loans..." 1
Since the dawn of time, the legal concept of eminent domain has been intended for narrow use. We’re talking about the real estate equivalent of police powers, government TAKING private property, spending tax payer dollars, and a strict interpretation of public good (to build roads, for safety, etc). Buying mortgages, and in particular PERFORMING mortgages, so that those specific homeowners can benefit by having their mortgage reduced meets NONE of these criteria.
This initiative has been driven from day one by a FOR PROFIT company for their own for profit purposes, eventually garnering backing from government and not for profit housing counselors who do not represent the average tax payer perspective.
The eminent domain process can be a very expensive way for government and not for profits to try to acquire mortgages. The use of this power will no doubt also be challenged in court – a total waste of tax payer dollars. At a time when some of the most hard hit local government can ill afford to throw money away.
If they are truly offering market value, there are plenty of lenders-servicers that will sell them loan portfolios. And if they are not offering market value, they should not be forcing private enterprise to sell them assets using eminent domain.
We already have plenty of procedures for folks to get their loan modified, do short sales, etc., run by the experts who should be running them. Local government has no place in this line of work (side note: I’ve experienced similar situations first hand where local Legal Aid lawyers wrongly fought to keep folks that hadn’t worked or paid their mortgage for year in their homes… a good gesture for housing counselors and not for profits, but not something legal aid lawyers are supposed to be doing… not the purpose of legal aid, not in their wheel house of expertise. And they do this by making outrageous claims against banks, title companies, etc., they know they can never support, tying up the courts and simply using legal delays until they run out of excuses… sometimes 6 or 7 years!).
Scams like this could easily backfire and raise the cost of mortgage loans for ALL homeowners in these areas simply because lenders will not want to loan there and, if they do, they will factor the possibility of having their loan stolen from them by eminent domain into the cost they charge borrowers for the loan. What can we expect next from Mortgage Resolution Partners? How about an “eminent domain protection insurance” product banks will require borrowers in these areas to buy just in case!
The bottom line?
Let’s stay away from convoluted use of legal fancy footwork to get through what’s left of the housing crises. So far every attempt that's been backed by a for profit motive has left a mess in its path. Take for example Fidelity, a Florida based company that claimed to be able to get homeowners out of their mortgages using convoluted legal theories. The principals eventually had their assets frozen and many of the owners who went along with this something for next to nothing plan now have the title to their homes tied up in never-never land.