kent nickell
Well-known member
Eminent Domain is unlikely to happen anytime soon but we are seeing what might be called 'eminent domain light'.
With the background of now having about 2.6 million vacant homes in the US with mounting foreclosure problems and large amounts of predatory loans and predatory securitizations it makes some sense to look at viable ways of getting out from under this huge debt overhang.
In it's 'best' light eminent domain would essentially renegotiate mortgages by deeming the previous mortgage null and void and then pricing the house to current market conditions and make out a reasonable mortgage and then seeing if the homeowner can meet these new realistic terms and avoid foreclosure.
It is interesting to see the pressure that various forms of 'eminent domain light' are coming under....
(also in the background are credit debt swaps that may only payout if these loans go bad) (the cozy relationship between mortgage brokers, investment banks, hedge funds, private equity funds etc when things were going good is now turning more acrimonious and giving legs to Geithners request to have more regulatory authority over the whole lot)
http://biz.yahoo.com/ap/081204/fdic_mortgages.html
""Two companies that invested in mortgage-backed securities recently sued Countrywide Financial Corp. over its plans to make as much as $8.4 billion in loan modifications as part of a settlement with attorneys general in 15 states. Their lawsuit maintains that Countrywide, now owned by Bank of America Corp., sold most of the loans to trusts that turned them into securities, and that Countrywide intends to pass the cost of reducing the mortgages to the trusts.
Elsewhere Thursday, two Countrywide subsidiaries agreed to repay $11.5 million to nearly 4,800 North Carolina borrowers who were overcharged on their mortgages, the state banking commission said. Countrywide Home Loans and Countrywide Mortgage Ventures will refund the money to close an investigation.
For lenders and companies servicing loans held by struggling borrowers, Bair said, "There is an obligation to modify, not to foreclose." "Investors should be taking a hard look at what they're advocating," she said. The harder investors push, "the more there's going to be backlash here."
Congress may step in and change the legal obligations of mortgage servicers toward investors, she suggested."""
http://pubcit.typepad.com/clpblog/2008/09/stabilize-home.html
September 29, 2008
Stabilize Home Mortgage Borrowers with Eminent Domain
By Lauren E. Willis
Edward Leamer's "trickle up" economic plan is a good start, but if a downward spiral is a serious possibility in the economy right now, we need not a trickle but a flood. We need to quick-take homes by eminent domain, prepay mortgage balances that are not extinguished (mortgage debt beyond the market value of the home would be extinguished), and sell the homes back to the homeowners using fixed-rate mortgages with affordable monthly payments. This would eliminate today's mortgage debt overhang, staunch foreclosures, and restore liquidity and stability in our financial markets.
To halt the Great Depression, the federal government nullified all clauses in contracts that pegged debt to the price of gold. By taking these contracts off the gold standard, debts were reduced by roughly 40 percent. Economist Randall Kroszner, now a governor on the Federal Reserve Board, examined the effects of this sweeping debt reduction and found that both stocks and bonds responded favorably. Investors and creditors decided that the elimination of debt overhang and the avoidance of threatened corporate bankruptcies more than offset the cost to creditors of receiving 60 cents on the dollar.
And the taxpayer did not pay a penny.
This trick could only be performed once, now that gold clauses are out. But we still have a potent weapon against the crisis: eminent domain.
Eminent domain is the power of government to take private property for a public purpose, so long as the owner is paid just compensation. Eminent domain can be used to correct deficiencies in the market, particularly when they threaten public tranquility and welfare.
How would this work? Upon petition of the homeowners, the government would take primary residences at risk of foreclosure and then sell the homes back to the homeowners at current prices.
Because just compensation in eminent domain is measured by the market value of the property, today's fire-sale home prices would be a boon to this plan. Lenders and investors would receive the lesser of the mortgage balance or the amount paid by the government as just compensation. Unlike newly-invented securities and other financial instruments, homes have been appraised for a very long time and objective criteria can establish market value.
For homeowners with mortgages that are underwater, the effect would mirror the debt reduction achieved when Congress nullified the gold clauses. Home values would bottom out quickly, and households looking to buy would see lower house prices.
Families that can not afford a mortgage even with a balance reduced to market price will lose their homes, but will not have the additional burden of a foreclosure or bankruptcy on their credit histories.
While some commentators seem to think that the $700 billion bailout will provide homeowners with a kinder, gentler federal government lender, the bailout primarily contemplates buying not individual mortgages, but shares of securities backed by pools of mortgages and other complex financial instruments. Unless the government buys all the shares in a pool?an unlikely proposition given that owners are spread around the globe?it will lack authority to do workouts with homeowners whose mortgages are in the pool.
The thousands of families falling into foreclosure and bankruptcy each day will continue for years, with the limited capacity of loan servicers and courts prolonging the problem. The social costs of foreclosure will roll on, increasing the tax burdens and decreasing the quality of life for all households, renter, former homeowner and current homeowner alike. Eminent domain has the virtues of the Wall Street bailout plan without the vices.
Financial firms and other investors could no longer delay realizing losses on their mortgage backed securities and similar financial assets, but simultaneously would bring in cash from mortgage prepayments. These payments would pump liquidity back into the financial system to be lent out again.
Taxpayer money would not be spent paying Wall Street a speculative price for unmarketable financial instruments, but instead would pay market prices for houses. Investors would receive precisely what their investment contracts provided for in case of prepayments, rather than whatever they can convince their friends at the Treasury Department to dole out. Most importantly, the underlying mortgage debt overhang problem would be addressed.
This is not to say that this plan is cost-free. But so long as the government underwrites the mortgages well, with monthly payments the borrowers can afford and are therefore likely to pay, banks and investors will buy the mortgages at close to what the government pays. Using a streamlined quick-take process to take eminent domain over the houses, appraise them, buy them from and sell them back to the homeowners, give Wall Street the money it is owed, and underwrite the new, affordable mortgages and then sell them, will cost far, far less than $700 billion. Even if the government spent $10,000 on each of the approximately 5 million mortgages expected to go into foreclosure in the next three years, the cost would be $50 billion.
As the Wall Street bailout plan recognizes, a crisis that sweeps the country requires a solution of like scope. Like the abrogation of the gold standard clauses, eminent domain is a blunt instrument, one that inevitably will be overly generous to some and will hurt others. But hurting the ordinary taxpayer to be overly generous to well-heeled banks and other sophisticated investors, without even addressing the underlying mortgage debt overhang and foreclosures, is not the answer. Eminent domain would stabilize Main Street and Wall Street.
Lauren E. Willis is an Associate Professor of Law at Loyola Law School Los Angeles and an expert on the regulation of consumer financial products, including home mortgages.
With the background of now having about 2.6 million vacant homes in the US with mounting foreclosure problems and large amounts of predatory loans and predatory securitizations it makes some sense to look at viable ways of getting out from under this huge debt overhang.
In it's 'best' light eminent domain would essentially renegotiate mortgages by deeming the previous mortgage null and void and then pricing the house to current market conditions and make out a reasonable mortgage and then seeing if the homeowner can meet these new realistic terms and avoid foreclosure.
It is interesting to see the pressure that various forms of 'eminent domain light' are coming under....
(also in the background are credit debt swaps that may only payout if these loans go bad) (the cozy relationship between mortgage brokers, investment banks, hedge funds, private equity funds etc when things were going good is now turning more acrimonious and giving legs to Geithners request to have more regulatory authority over the whole lot)
http://biz.yahoo.com/ap/081204/fdic_mortgages.html
""Two companies that invested in mortgage-backed securities recently sued Countrywide Financial Corp. over its plans to make as much as $8.4 billion in loan modifications as part of a settlement with attorneys general in 15 states. Their lawsuit maintains that Countrywide, now owned by Bank of America Corp., sold most of the loans to trusts that turned them into securities, and that Countrywide intends to pass the cost of reducing the mortgages to the trusts.
Elsewhere Thursday, two Countrywide subsidiaries agreed to repay $11.5 million to nearly 4,800 North Carolina borrowers who were overcharged on their mortgages, the state banking commission said. Countrywide Home Loans and Countrywide Mortgage Ventures will refund the money to close an investigation.
For lenders and companies servicing loans held by struggling borrowers, Bair said, "There is an obligation to modify, not to foreclose." "Investors should be taking a hard look at what they're advocating," she said. The harder investors push, "the more there's going to be backlash here."
Congress may step in and change the legal obligations of mortgage servicers toward investors, she suggested."""
http://pubcit.typepad.com/clpblog/2008/09/stabilize-home.html
September 29, 2008
Stabilize Home Mortgage Borrowers with Eminent Domain
By Lauren E. Willis
Edward Leamer's "trickle up" economic plan is a good start, but if a downward spiral is a serious possibility in the economy right now, we need not a trickle but a flood. We need to quick-take homes by eminent domain, prepay mortgage balances that are not extinguished (mortgage debt beyond the market value of the home would be extinguished), and sell the homes back to the homeowners using fixed-rate mortgages with affordable monthly payments. This would eliminate today's mortgage debt overhang, staunch foreclosures, and restore liquidity and stability in our financial markets.
To halt the Great Depression, the federal government nullified all clauses in contracts that pegged debt to the price of gold. By taking these contracts off the gold standard, debts were reduced by roughly 40 percent. Economist Randall Kroszner, now a governor on the Federal Reserve Board, examined the effects of this sweeping debt reduction and found that both stocks and bonds responded favorably. Investors and creditors decided that the elimination of debt overhang and the avoidance of threatened corporate bankruptcies more than offset the cost to creditors of receiving 60 cents on the dollar.
And the taxpayer did not pay a penny.
This trick could only be performed once, now that gold clauses are out. But we still have a potent weapon against the crisis: eminent domain.
Eminent domain is the power of government to take private property for a public purpose, so long as the owner is paid just compensation. Eminent domain can be used to correct deficiencies in the market, particularly when they threaten public tranquility and welfare.
How would this work? Upon petition of the homeowners, the government would take primary residences at risk of foreclosure and then sell the homes back to the homeowners at current prices.
Because just compensation in eminent domain is measured by the market value of the property, today's fire-sale home prices would be a boon to this plan. Lenders and investors would receive the lesser of the mortgage balance or the amount paid by the government as just compensation. Unlike newly-invented securities and other financial instruments, homes have been appraised for a very long time and objective criteria can establish market value.
For homeowners with mortgages that are underwater, the effect would mirror the debt reduction achieved when Congress nullified the gold clauses. Home values would bottom out quickly, and households looking to buy would see lower house prices.
Families that can not afford a mortgage even with a balance reduced to market price will lose their homes, but will not have the additional burden of a foreclosure or bankruptcy on their credit histories.
While some commentators seem to think that the $700 billion bailout will provide homeowners with a kinder, gentler federal government lender, the bailout primarily contemplates buying not individual mortgages, but shares of securities backed by pools of mortgages and other complex financial instruments. Unless the government buys all the shares in a pool?an unlikely proposition given that owners are spread around the globe?it will lack authority to do workouts with homeowners whose mortgages are in the pool.
The thousands of families falling into foreclosure and bankruptcy each day will continue for years, with the limited capacity of loan servicers and courts prolonging the problem. The social costs of foreclosure will roll on, increasing the tax burdens and decreasing the quality of life for all households, renter, former homeowner and current homeowner alike. Eminent domain has the virtues of the Wall Street bailout plan without the vices.
Financial firms and other investors could no longer delay realizing losses on their mortgage backed securities and similar financial assets, but simultaneously would bring in cash from mortgage prepayments. These payments would pump liquidity back into the financial system to be lent out again.
Taxpayer money would not be spent paying Wall Street a speculative price for unmarketable financial instruments, but instead would pay market prices for houses. Investors would receive precisely what their investment contracts provided for in case of prepayments, rather than whatever they can convince their friends at the Treasury Department to dole out. Most importantly, the underlying mortgage debt overhang problem would be addressed.
This is not to say that this plan is cost-free. But so long as the government underwrites the mortgages well, with monthly payments the borrowers can afford and are therefore likely to pay, banks and investors will buy the mortgages at close to what the government pays. Using a streamlined quick-take process to take eminent domain over the houses, appraise them, buy them from and sell them back to the homeowners, give Wall Street the money it is owed, and underwrite the new, affordable mortgages and then sell them, will cost far, far less than $700 billion. Even if the government spent $10,000 on each of the approximately 5 million mortgages expected to go into foreclosure in the next three years, the cost would be $50 billion.
As the Wall Street bailout plan recognizes, a crisis that sweeps the country requires a solution of like scope. Like the abrogation of the gold standard clauses, eminent domain is a blunt instrument, one that inevitably will be overly generous to some and will hurt others. But hurting the ordinary taxpayer to be overly generous to well-heeled banks and other sophisticated investors, without even addressing the underlying mortgage debt overhang and foreclosures, is not the answer. Eminent domain would stabilize Main Street and Wall Street.
Lauren E. Willis is an Associate Professor of Law at Loyola Law School Los Angeles and an expert on the regulation of consumer financial products, including home mortgages.