Is Eminent Domain a Tool to Address Foreclosure Problems?

July 29th, 2012
in econ_news, syndication

by Gavin Kakol, GEI Associate

san-bernadino-countyIn a recent Rolling Stone article, From an Unlikely Source, a Serious Challenge to Wall Street by Matt Taibbi, an innovative and crafty solution is proposed to reduce the principle of underwater homes and spur an economic recovery. By partnering with a community advisory firm and using eminent domain sanctioned by the fifth amendment, San Bernadino County, California hopes to give homeowners the choice to refinance their homes' mortgages to market price.  The aim is to lower homeowner principle on mortgage payments, reduce the foreclosure rate, and hopefully spark construction again.  However, opponents of the idea believe that the intervention will stall economic recovery by reducing financing options available to new homeowners.

Follow up:

The idea behind Taibbi's article is similar to a successful initiative undertaken by FDR's New Deal programs during the Great Depression.  In June of 1933 the Federal Government began buying salvageable distressed mortgages from banks using terms underlined in the newly created Home Owners' Loan Cooperation (HOLC).  The HOLC's mortgages required a smaller percentage of equity (20 compared to 35) and interest (5 compared to 8) than the banks.  The HOLC acquired 1 Million distressed homes over the course of its two year cash budget, saving 80 percent of its inventory from foreclosure.  The financing program for these homes continued into 1951, generating a surplus of $14 million.

San Bernadino County was hit especially hard by the housing bubble, spawned by irresponsible lending and inflated pricing.  With half of the area's households underwater and 12 percent unemployment, a $50 million dollar deficit, and the recent bankruptcy filling this month, San Bernadino County does not appear to be recovering.  What Matt Taibbi considers throughout his article is best envisioned in his words as:

Instead of letting everyone be slowly ground into dust under the weight of all of that debt, the idea behind the use of eminent domain is to pull the Band-Aid off all at once

Taibbi considers eminent domain to be the "Death Star of America’s financial oligarchy", because it would not need to be approved by anyone other than the local government.  The idea is already being pursued to some degree in San Bernadino cities Fontana and Ontario - both of which already have the legal mechanisms in place.

Nevada, Florida,  and New York have been approached on the idea's founder, San Franciso based Morgan Resolution Partners (MRP).  MRP is a private community advisory firm who is promoting the use of eminent domain to help communities and collect profit.

In the current situation, purchasing home mortgages would be far more complex then it was eighty years ago.  Under current proposals, local governments would use eminent domain to seize underwater homes from hedge funds, mutual funds, and banks.  Market value would be paid to the holders of the loans based on similar sales (home auctions), but the value can be further determined in court settlements.

Control over the mortgages would then be handed over to a government controlled Joint Power Authority (JPA). The JPA would offer refinancing at current market value to the homeowner.  Should the homeowner accept (undoubtedly in their best interest for most), MRP would find private lenders to help buy back the home at current market price.  MRP would profit from a fee based on the amounts of loans the community acquires.

Over 20,000 households in San Bernadino County are eligible to undergo the eminent domain process.  Only homeowners current on their mortgage payments would be eligible, which is debated by some because it is leaving those most in need out of the picture.  

Fontana's mayor Acquanetta Warren recently made the statement:

This was supposed to be the promised land, and now we have people waiting in some kind of hellish purgatory. The people who were so eager to give us money before now won’t even talk to us.

"The People" she is referring to are the banking and mortgage lenders, who own large amounts of the mortgages and second mortgages that are currently underwater.   Eminent domain could be a significant loss for these entities, since they will have to accept fair market value (often sold discounted at auctions) compared to the no longer market value outstanding mortgage balance.  But the lenders should actually make out better than if they went throught the expensive foreclosure and attempted resale process.

The Wall Street trade association, SIFMA, has promised to take legal action against any eminent domain proposal.  Additionally, it has threatened to cut new lending options to any county that pushes forward with the idea.

Realtors associations are also opposed, because many feel that without the financial support of banks other lending operations the fragile national housing recovery will be gridded to a halt.

President of Inland Valley Association of Realtors, Steve Mano denounced eminent domain proposals with the following:

We are seeing a recovery, but it’s a fragile recovery... this is the perfect example of something that could derail it quickly.

Mortgage Resolutions Partners co-founder John Vlahoplus recently acknowledged in an interview on July 26, that an official proposal to the San Bernadino JPA could be reached by August 16.  It seems that the upcoming month's news could be filled with this proposal, and it should be interesting to see it develop and what resolutions emerge.

Related Article:

Rent, Demolish or Burn?  What to do with Foreclosed Houses (Gavin Kakol, GEI News, 20 July 2012)

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