Eminent Domain done right

by liberal japonicus

The New York Times had the following

The power of eminent domain has traditionally worked against homeowners, who can be forced to sell their property to make way for a new highway or shopping mall. But now the working class city of Richmond, Calif. hopes to use the same legal tool to help people stay right where they are.

An abandoned home in Richmond, where roughly half of all homeowners with mortgages are underwater, meaning they owe more than their home is currently worth.

Scarcely touched by the nation’s housing recovery and tired of waiting for federal help, Richmond is about to become the first city in the nation to try eminent domain as a novel way to stop foreclosures.

This sounds like a good idea. What took them so long? Since we seem to all have different ideas about what constitutes appropriate governance, this might be interesting.

Comments

[Brett Bellmore]

I must point out that it's still working against home owners here. The bank owns 'your' home until you've paid for it. That's why they can evict you from THEIR property if you stop paying.

And to forestall the inevitable jabs, I lost 'my' home in Michigan a few years back, built by my own hands, on my family's land. But, built with the bank's money, not my own, so I was clear on who owned it.

[liberal japonicus]

It would help if you read the link

The city is offering to buy the loans at what it considers the fair market value. In a hypothetical example, a home mortgaged for $400,000 is now worth $200,000. The city plans to buy the loan for $160,000, or about 80 percent of the value of the home, a discount that factors in the risk of default.

Then, the city would write down the debt to $190,000 and allow the homeowner to refinance at the new amount, probably through a government program. The $30,000 difference goes to the city, the investors who put up the money to buy the loan, closing costs and M.R.P. The homeowner would go from owing twice what the home is worth to having $10,000 in equity.

[jpe]

banks will sue and win. there's no public purpose, only private benefit. I'm sure the city will try to pay less than FMV, so expect litigation over the price, too.

[FuzzyFace]

Far from clear to me how this would work. Certainly and lender sitting on a bad loan; that is, one they don't believe they can collect, should be willing to accept a buyout offer, but that doesn't appear to be what's proposed. Instead, the city proposes to force the lender to lose money on a loan that they borrower IS able to pay, simply because the collateral has dropped in value.

Most likely result would in fact be future borrowers finding banks strangely reluctant to lend money.

And then the city plans to reduce the amount of the loan that must still be repaid? That just takes taxpayer dollars (the borrower's neighbor) and gives them to the borrower. How in the world is that fair?

I get the motivation, certainly. Through bad luck, some homeowners are in a bad way, just as somebody who borrowed money to invest in any asset, be in stocks, precious metals, or anything else, that is no longer worth the original price. I just don't see this as a good idea, especially in the wake of cities like Detroit, which have run out of tax dollars and are now about to deprive workers of promised pensions.

[liberal japonicus]

jse, it seems that keeping a city solvent is a public purpose.

The problem is contagious. Communities with many underwater homes bring down the value of other houses in the area. Foreclosures alone have drained at $2 trillion in property values from surrounding neighborhoods, according to a Center for Responsible Lending study. The resulting decline in property tax revenues has plunged some cities into near-bankruptcy, lay-offs and cuts to vital public services.

link

The article also points out that Richmond is going, at least initially, after 'PLS' loans, which are loans that have been bundled and sold to pools of investors who then claim they can't modify the loans, so it is not the local banks, it is speculators that may be strangely reluctant to do things like this, which might be a good thing. And if the loans are repaid, the cities are not out any money.

[Tyro]

there's no public purpose, only private benefit.

The public purpose is to keep residents from moving away and keep the houses from being sat on by the banks without being sold. In this case, the private benefit and the public purpose go hand-in-hand.

I must point out that it's still working against home owners here.

It doesn't work against the banks at all. The banks get fair market value compensation for their property, in particularly property that they themselves are not using.

[McKinneyTexas]

It doesn't work against the banks at all. The banks get fair market value compensation for their property, in particularly property that they themselves are not using

No, it's a great deal for idiots who lent their money thinking they will get it back someday.

This is classic progressive thinking: banks are bad, speculators worse. They wanted to *make money* by lending at low interest rates. People who took their money got a bad deal by paying too much for a house or by borrowing more than they can afford to pay. Bad banks, for lending people money on houses they can't afford or lending them money they are unable to repay.

By the definition of public purpose defined very loosely above, any articulable public "benefit" justifies eminent domain. It's the perfect world for the left--want to make people happy? Compel their lenders to write down half their loans. What's next, free cars?

If dumbasses who lend money think it is in their best interest to write down some part of the loans they foolishly made, they can do that. Claiming a state right to force a write-down is confiscatory. There is also a constitutional problem, not that I expect anyone to get overly exercised about that.

[liberal japonicus]

Claiming a state right to force a write-down is confiscatory.

Claiming that the loan owners can't write it down seems to be one of the problems here.

This pdf, I think, forms the basis for the legal reasoning. The title "Breaking the Mortgage Debt Impasse: Municipal Condemnation Proceedings and Public/Private Partnerships for Mortgage Loan Modification, Value Preservation, and Local Economic Recovery" gets at my thinking, so I'm not sure what progressivism actually has to do with that, unless you have caught Brett's knee-jerk reflex. At any rate, given that perhaps more than 1 out of 5 mortgages are underwater, I hope I'm not being too 'progressive' by suggesting that something ought to be done.

[Ugh]

For some reason I have it in my head that we've discussed this before, but why let that stop us!

The 5th Amendment requires "just compensation" in eminent domain proceedings. So, what is that concept as applied to, say, a $300k mortgage loan, since paid down to $280k, but that it seems if a private party were to buy the loan they would only pay 80% of what the house securing the loan is worth, and that happens to be only $150k?

Shorter me: what is the "fair market value" of the loan? For tax purposes, it's generally "the price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell and both having reasonable knowledge of relevant facts," but there are other tax definitions.

In its purest form, I would say that the use of the power of eminent domain requires a private party to exchange one type of asset for another of equal value. That's not quite right, however, as the Constitutions states "just compensation" and not value. Thus, I can see arguments that while I might only be able to sell my house for $150k on the market should I so chose, the fact that I am being forced to do so requires something more; compensation for the expense of moving, breaking up relationships/friendships, kids changing schools, etc.

But that is a very different calculus than what, it seems to me, applies to the banks/investors in the NYTimes article. They hold the loans as assets in a business and/or to earn a return on investment. "Just compensation" in their case therefore seems to be much closer to what the "market will bear" than for an owner occupying his or her home. The banks/investors will simply need to find another place to put their financial assets. A forced move, on the other hand, is a fair bit more traumatic.

[Ugh]

I should note that the Constitution also seems to require a "public use" but it also seems that that requirement is satisfied by, well, that the government is taking it.

[russell]

This is classic progressive thinking: banks are bad, speculators worse.

Sometimes banks *are* bad. Or, at least, act badly.

When banks not only act badly, but are also very large, the effects are broader than just the private contractual arrangements and obligations between borrower and lender.

There are lots and lots of places to lay blame for the housing bubble. Are you saying the banks have nothing but clean hands here?

I don't, personally, see a big problem with requiring the investors we're talking about here - folks who bought financial instruments made up of sliced and diced tranches of home loans - to take a haircut.

Everybody else is taking one. The homeowners are, the municipalities that are seeing their property tax bases shrink are. Really dramatic haircuts.

It's not clear to me why the folks who bought financial instruments based on mortgages should be exempt.

Perhaps you can explain why they should be. My lefty blinders are too strong, I can't see it.

[Ugh]

Brett: The bank owns 'your' home until you've paid for it. That's why they can evict you from THEIR property if you stop paying.

Well clearly I have been stupid in not asking the bank to pay for all the repairs to the structure I'm currently living in instead of paying for them myself. They should have also paid for that slip and fall judgement from a few years back. And I guess I need to amend my tax returns since I've been taking mortgage interest deductions for federal under the theory that I own the structure. Probably should cancel the home "owners" insurance too.

[hairshirthedonist]

Some guy from Wells Fargo showed up at "my" house last night and kicked my son out of "his" room. He was still sleeping in my son's bed this morning when I left for work. But I couldn't do anything about it.

[Model62]

Cramdown via bankruptcy would have been the more elegant -- and equitable -- solution. Just the threat would have pushed lenders and borrowers to the table.

Instead we're stuck looking for other less elegant solutions, such as this one, which is better than allowing communities to drown under all those sunken homes.

[Brett Bellmore]

Fair "market" value in eminent domain is an absurd fiction; Market value is the price at which two people voluntarily close the deal, government uses eminent domain because it wants the property at LESS than would cause the owner to voluntarily sell. Unless some kind of sweetheart deal is involved, eminent domain essentially always cheats the owner, that's the point of doing it: To get the property at less

"Claiming that the loan owners can't write it down seems to be one of the problems here."

I recall reading some time ago that the problem is, it's not just individual home 'owners' who are "underwater", it is also the banks. They're required legally to maintain a certain asset to debt ratio, in order to continue in business. But the properties have dropped in value so much that were most banks to correctly value them on their balance sheets, they would be required to go out of business!

In as much as they can keep the properties on the books at their original, inflated value, so long as they're not marked down, or sold, the banks have been slow-walking the process of getting rid of vacant properties. Even though this results in the vacant properties deteriorating in terms of REAL, not book value. It's infuriating, and remarkably wasteful, but can we really expect the banking system to commit suicide in order to make life easier for people looking to buy homes?

[Marty]

I paid cash for my house, now it is worth half as much, can I get the city to just pay me the difference? Please?

Otherwise this is all a crock and everyone has full lefty blinders on. Middle class welfare.

[Brett Bellmore]

I know what you mean, Marty: Since '08, I've done everything I was supposed to; Moved to find work instead of staying unemployed, paid on my mortgage for as long as I could, instead of instantly defaulting, kept the utilities going when it wass empty. All it did was disqualify me for every program that came along.

We've made anyone who does the ethical, responsible thing into a sucker.

[Tyro]

Middle class welfare.

Since the most important priority in our society is the maintenance and support of the middle class, I am mostly ok with this. Seriously.

A city has a vested interest in maintaining its tax base of resident property owners and tax paying citizens. These eminent domain moves to promote this are totally ok with me. I am particularly uninterested in arguments that complain that these inelegant policy moves are not the ideal platonic market based policy For Freedom which do not actually exist and can't be implemented. I am not going to let the perfect be the enemy of the good when the good means that people can live in homes with mortgages close to the fair market value when the alternative would be for the banks to let them go empty at the expense of the city. No city is going to allow their city to turn itself into Detroit to satisfy the moral and aesthetic preferences of a bunch of libertarians. Community and lifestyle is FAR more important than working out a libertarian morality play.

The town and community's health is more important than a speculator's right to maximize his return. That is basic local real estate planning and policy.

[McKinneyTexas]

"Just compensation" is what someone lent, not what a city says after the fact is the fair market value of the security underlying the debt. Jesus.

You take a haircut when you sell at a loss. You take a haircut when values decline. No one forces you to do either.

Telling someone they have to take X when they paid Y under state duress is almost too bizarre to be discussed rationally.

What is being proposed is no different in theory than requiring all lenders to all unemployed to write down their loan amounts because, you know, it would make things better for the folks who don't have work.

[Slartibartfast]

Apparently this is just not one of those conversations that we can have.

I own my house. It (or part of it) is collateral on a loan. There isn't any contradiction between those two things. Its current value and how heavily it's collateralized are only connected at the time of the loan it was used as collateral.

Its market value could fall to zero next week, and I'd still be on the hook for the loan, because I really did borrow that much money.

The bank doesn't own my house in any legal sense until I default, and at that point there are some hoops that it has to jump through before it can evict me and sell.

That's all I have to say about this for now.

[McKinneyTexas]

I don't, personally, see a big problem with requiring the investors we're talking about here - folks who bought financial instruments made up of sliced and diced tranches of home loans - to take a haircut.

Why is it right or fair or acceptable to screw "investors" out of their money? Did they do something to the homeowner who borrowed the money to justify screwing them? Is there something wrong with selling a note to a third party?

[russell]

Middle class welfare.

And none of our tax dollars have gone to the banks?

But the properties have dropped in value so much that were most banks to correctly value them on their balance sheets, they would be required to go out of business!

And that was seen as a totally unacceptable social outcome, so we pumped them full of more cash, and extended credit to them in greater amounts, by several orders of magnitude, than anyone is remotely talking about in the Richmond scenario.

The banks don't want to take a loss. I can understand that.

If the banks and investors not taking a loss means everybody else in the country is FUBAR, then maybe there are issues to consider beyond whether all of the folks who bought RE backed financials are made whole.

Lots of people screwed up, including the banks. It's unclear to me why they should be the only ones who should be receiving extraordinary levels of public support.

Which, in fact, they have received.

You can't have it both ways.

I agree that cramdowns would have been a better solution. The banks didn't like that either. They would have lost money.

Everybody's losing money. I'm unclear on why they should be exempt.

Lefty blinders, no doubt.

[Tyro]

"Just compensation" is what someone lent, not what a city says after the fact is the fair market value of the security underlying the debt. Jesus.

Wrong. Compensation is the fair market value of a property. If I have a loan against my car and I total it, the insurance company is only obligated to compensate me for the fair market value of the car, not the underlying loan. Same if my house burns down.

All investments involve risk. Telling a bank to eat it on a loan that went bad is part of life. Normally that would occur during a cram-down in a bankruptcy proceeding, but since that is not possible, alternative means are provided.

[Tyro]

Apparently this is just not one of those conversations that we can have.

So it seems. I admit I don't get the whole "the bank owns my house!" thing just because there is a mortgage involved. The reason the loan is intimately tied to the property is because the bank wants to protect itself in the event of default. If I get a personal loan and spend that money on a suit, I don't say, "the bank owns my suit!" Rather, I have a loan that I owe. I happened to use the money for something, and the bank and I work out how I pay it back, and they have recourse through various means if I don't. They can take some of my property if it comes to that, but they don't "own" any of my property until the law hands it over to them. This always seemed obvious to me, but apparently not to others.

[russell]

Did they do something to the homeowner who borrowed the money to justify screwing them?

No.

They invested in a financial instrument whose value is based on the value of an underlying physical asset. The value of the underlying physical asset has declined, in many cases dramatically.

So, the piece of paper they hold is not worth as much as they thought it would be. Shit happens.

They should have done more due diligence before they gave their money to the smart-@ss MF'ers at the investment banks who told them what they were buying was grade A.

You win some, you lose some. Investment incurs risks.

Seriously, who hasn't gotten kicked in the nuts over the last five years? Why are these guys special?

They can hold that paper until the cows come home, and they're not going to get their money. Where's it going to come from?

Are they going to hold until the value of all of those houses comes back, sufficiently to make them whole?

Are they going to hold until every person who can no longer afford to pay their mortgage wins the lottery?

Seriously, the money is not there. It's not there because it *never was there*. The investment banking dudes who created all of those grade-A financial vehicles lied.

Maybe I'm missing something but it seems to me the investors are simply unwilling to accept the reality that they have lost a sh*tload of money. Like pretty much everybody else involved.

Reality bites, sometimes.

At least the city is trying to deal rationally with the reality of the situation.

[Tyro]

I think the other thing people have trouble accepting is that there is a limit to which you can "game the system" to your advantage before the advantage is taken away. This seems vaguely unfair to some people, but it is reality. Banks are trying to game the system by sitting on property rather than selling it off after foreclosure. This is a clever way of shoring up their balance sheet. But eventually, once just about everyone is gaming the system, the government and the community realizes that they are on the losing end of this clever manipulation, which they were willing to allow on a small scale and put an end to it when it becomes a large scale problem. That is life. No clever "hack" you discover works forever, in the same way that you can't perform an arbitrage trade infinitely-- eventually the arbitrage closes and you have to find a new "hack" to exploit.

[Tyro]

Banks don't want to take a loss. Towns don't want to see the collapse of their population and tax base, nor do they want to see empty blocks of unoccupied homes. Towns and cities are going to pursue redevelopment initiatives that maintain their own viability rather than allow banks continue to make choices that send the towns into a downward spiral. So the banks will be on the losing end. What they can legally get away with on a small scale they cannot do on a large scale.

I really don't see what's so offensive about this. Houses are made for being lived in. If they're not being used for such a purpose, the town suffers. The town is just using its power to benefit the community. That is the way it should be. In fact, it is a typical eminent domain situation.

[bobbyp]

Telling someone they have to take X when they paid Y under state duress is almost too bizarre to be discussed rationally.

But, but, but....in some standard issued bankruptcy proceedings, does not the exact same thing occur? The court (i.e., the state) puts some creditors under "duress" and mandates a financial haircut?

[Marty]

Russell,

The "investor" is the homeowner, the "lender" is the bank. 99% of the "lenders" involved don't owe the government any money.

If you have a plan that reduces the mortgage, takes the reduction and creates a long term low interest loan to the government then you have duplicated the bailout, and I'm good.

SF real estate went up 20% last month.

Nationally, the mortgages in default is the lowest since 2004. The % of underwater mortgages fell below 20% in the first quarter and that reduction is accelerating.

So using some ridiculous ruse to make the banks recognize a loss on an unsold asset is bs.

[Turbulence]

I don't really understand the threat the banks are trying to make. Promising not to make loans in the future because the city might invoke eminent domain and that implies a higher risk? Really? If the banks made decisions by rational assessment of risk, we wouldn't be in this mess to begin with. But they didn't and they don't. The truth is, the next time the housing market heats up, banks will fall over themselves to shovel money at anyone they can find, eminent domain or not.

[joel hanes]

banks bad

I think the large bankers have provided more than adequate evidence for this bit of "lefty" judgment.

In perhaps the most egregious bit, they foreclosed on hundreds of military homeowners on active duty, which is against the law. (Not to mention the smaller number of "foreclosures" on homeowners who were up to date on their mortgages).

Also there's the issue that in many foreclosure cases, the banks have failed to preserve a legal title chain (they broke the law regulating title transfer), and have been unable to prove their title claims when challenged in court.

[Tyro]

Telling someone they have to take X when they paid Y under state duress is almost too bizarre to be discussed rationally

The free market is not a suicide pact. We are totally willing to allow some individuals to suffer because of the free market, but we will not sacrifice the collective on its altar. No tax shelter lasts forever once everyone starts using it. No monopoly power will be allowed to exist indefinitely.

[Ugh]

McKinney: "Just compensation" is what someone lent, not what a city says after the fact is the fair market value of the security underlying the debt. Jesus.

...

Telling someone they have to take X when they paid Y under state duress is almost too bizarre to be discussed rationally.

I'm trying to understand this concept. Why is "just compensation" the amount lent? Does this only apply to loans? I mean, if I paid $10 for a share of stock two years ago and today it's trading at $5, and State X decides to purchase all the shares of the company under its eminent domain power, do they have to pay me $10? What about the guy that bought the stock for $5.50, do they only have to pay him that? Conversely, what if it's trading at $15, do they only have to pay me $10 and the other guy $5.50?

That is, when the state exercises its eminent domain power to take private property, does it have to pay you what it's worth at that time or what it was worth when you acquired it, or, alternatively, what you paid for it? What if you paid nothing for it (gift, inheritance, treasure trove), is that "free" to the state?

[russell]

Marty -

I appreciate what you're saying here.

What I see in the situation that is somewhat different than what you've described is that, per the NYT piece, *all* of the loans included in this program have been bundled into private label securities. That is, they were bundled into financial instruments and then sold to investors.

Who knows, I may own some of them.

The folks who wrote the loans are long-since paid, by the folks who bought the notes from them and bundled them into financial paper. Those folks, in turn, have also long since been paid, by the folks who bought the paper as an investment.

So, the folks who are being obliged to take a haircut are folks who bought financial instruments, as an investment.

So, I call them investors.

The banks - the actual lenders - are long out of the picture. In this particular scenario.

The idea of reducing the value of the mortgage is a fine one, IMO, however nobody on the financial side - not the banks, not the folks holding the PLS paper - have found that acceptable. Not now, and not any time in the last five years. That was basically offered to the folks holding the paper and they didn't want it.

Do Not Want.

I personally find the use of eminent domain in this way to be pretty weird. I have no idea if it will hold up in court, and I'm not sure it ought to.

But I have a really hard time faulting the city of Richmond for trying to find some way to avoid widespread loan default, followed by blocks of vacant houses declining into unkempt decrepitude, followed by widespread decline in property values, all of which are not unlikely outcomes if they can't find a way to sort all of this out.

Nobody else appears to be looking out for the city, or for the folks who live there, that's for damned sure. So, they're just trying to find a way to secure their own interests in the situation.

RE in SF may be up 20%, and national default and foreclosure rates may be down, but that may not be of much help to Richmond, specifically.

[joel hanes]

Brett :

I sadly salute your adherence to your personal sense of honor :

I've done everything I was supposed to ... paid on my mortgage for as long as I could

You made real sacrifices to keep what you regard as your promise, and that deserves respect.

I wonder, though -- do you think that the bank would make sacrifices to honor their end of a deal with you? Ever? Public corporations are not people; they are incapable of honor, or love, or religion, and would default on their end of a contract in a New York minute if they thought it would make them a few dollars more.

So as someone who has argued with you here and elsewhere for years and years, and who maybe has come to know you, a bit: perhaps you should re-think a bit about entering a reciprocal honor relationship with entities that have none.

[McKinneyTexas]

Maybe I'm missing something but it seems to me the investors are simply unwilling to accept the reality that they have lost a sh*tload of money. Like pretty much everybody else involved.

Yes, you are missing something. The value of the house is immaterial--the bank lent X to the borrower. The borrower owes X to the bank, plus interest. It's called a contract. The bank took the house as security against default. Even if the security loses value, the contract remains. The borrower can default, the bank sells the house for Y, the bank subtracts Y from X and the borrower owes the difference.

In this proposed regime, the bank lends X and the state tells the bank, you must forgive down to Y.

That is confiscation of someone's property. You can dress it up however you like, but it is still, essentially, theft.

[hairshirthedonist]

What russell said:

(...)*all* of the loans included in this program have been bundled into private label securities. That is, they were bundled into financial instruments and then sold to investors.

Who knows, I may own some of them.

The folks who wrote the loans are long-since paid, by the folks who bought the notes from them and bundled them into financial paper. Those folks, in turn, have also long since been paid, by the folks who bought the paper as an investment.

So, the folks who are being obliged to take a haircut are folks who bought financial instruments, as an investment.

So, I call them investors.

The banks - the actual lenders - are long out of the picture. In this particular scenario.

[Marty]

"*all* of the loans included in this program have been bundled into private label securities. "

This is the same justification that bank robbers use, "we're not hurting real people". Bah.

Besides, what is really the point is why is Richmond so worse off than other places.

My town is a little behind the curve (up 10% or so, originally down 60%) but the numbers have stabilized, not in small part because Blackstone and others have come in and bought up the excess for rentals.

So, why is Richmond 50% underwater and still not making progress? Why isn't the rental companies buying up the excess?

Q: And why would they buy mortgages that aren't even behind?

A: Well, at this point, because once the city buys one they pretty much are buying them all. Because who would pay if they were going to get their mortgage cut in half?

So, after the first 600 that the banks have sold, the rest are going to come due pretty fast.

Again, bah.

I want my 200k that I spent over the years on my mortgage that is paid off for my previously 400k house that is now worth 200k. Can you tell me why they shouldn't take it by eminent domain, give me 160k and then just give it back to me?

[sapient]

Yes, you are missing something. The value of the house is immaterial--the bank lent X to the borrower. The borrower owes X to the bank, plus interest. It's called a contract. The bank took the house as security against default. Even if the security loses value, the contract remains. The borrower can default, the bank sells the house for Y, the bank subtracts Y from X and the borrower owes the difference.

No, McKinney, I think you're the one missing something, and since you come from a "no-recourse state", I'm surprised that you're missing it. In a mortgage contract (unlike some other ordinary loans) in a "no-recourse" state, a lender must satisfy the debt by foreclosure on the property, and cannot sue for residual deficiencies. In other words, the value of the property is everything.

[russell]

This is the same justification that bank robbers use, "we're not hurting real people".

OK, so you have completely misread my point.

I am making no claim, whatsoever, that 'real people' won't be hurt.

I am stating that the folks who would be hurt would be investors - people buying financial instruments as a form of investment - rather than banks lending money to anybody.

The banks already got paid.

what is really the point is why is Richmond so worse off than other places.

Actually, I'm not sure that's really the point.

That is confiscation of someone's property.

Yes, it is. It is the taking of private property, with compensation. That is called 'eminent domain'.

Whether it will stand up in court or not remains to be seen. I'm not sure it should.

We'll see.

[russell]

I want my 200k that I spent over the years on my mortgage that is paid off for my previously 400k house that is now worth 200k.

You paid 200K for a house that's worth 200K. In today's environment, you haven't done badly.

[cleek]

Besides, what is really the point is why is Richmond so worse off than other places.

who cares?

it's up to Richmond to decide what they want to do with their town, not some outside morality police.

don't like it? don't move there.

[hairshirthedonist]

This is the same justification that bank robbers use, "we're not hurting real people". Bah.

I'm not so sure russell was justifying anything so much as correcting your characterization of the situation, which was wrong. You wrote, specifically:

The "investor" is the homeowner, the "lender" is the bank.

To the extent that the investor is the homeowner, the homeowner invested in a home, not a mortgage.

What's at issue on this particular point is who is holding the paper that constitutes the potential cash flow that comes from a mortgage. You don't have to like what's going on in Richmond, but the fact remains that, through various modes of "financial innovation," people purchased mortgage backed securities, which are investments, making those purchasers investors.

[sapient]

Actually, looking further, it appears that Texas mortgage holders (not home equity lenders though) are entitled to a deficiency judgment (although the fair market value of the property, not the actual sales price determines what kind of deficiency judgement can be obtained). But in California, where the eminent domain scenario is happening, the lenders are held to foreclosure as their only remedy for single family homes.

So the fact that the properties in question are significantly "underwater" means that the property owners could "walk away" from their property without owing the banks anything. The solution seems fair to all concerned, except (as noted above) that the banks have to come clean on their balance sheets.

[hairshirthedonist]

Man, it takes me too long to type comments....

[Tyro]

And even of it is not a no-recourse state, the balance of the loan simply might not be able to be paid of the borrower doesn't have sufficient assets to cover it. The borrower goes into bankruptcy and the lender has to eat the balance of the loan.

This is a risk that lenders bear. Lending involves risk. Sometimes you're the bug and sometimes you're the windshield. Corporations tells their creditors to pound sand all the time. The lenders take their lumps when this happens.

[Brett Bellmore]

"So, why is Richmond 50% underwater and still not making progress? Why isn't the rental companies buying up the excess?"

I tried to explain that: If the bank has a house on their books at $200k, they, for accounting purposes have a $200k asset to balance their liablities. If they then sell the house for $100k, their real assets have not changed, but their nominal assets have gotten worse by $100k.

If this happens to them enough times, they are statutorially required to stop doing business.

They won't sell the $100k houses that are on their books at $200k because to do so is so commit corporate suicide.

[Marty]

"They won't sell the $100k houses that are on their books at $200k because to do so is so commit corporate suicide. "

no they are doing that all over the country.

[Marty]

"To the extent that the investor is the homeowner, the homeowner invested in a home, not a mortgage."

This is cute, no the homeowner leveraged his assets by borrowing the money. Based on the mortgage that leverage is 5-1, 10-1 or in the case of zero down, infinite leverage. So now his investment has gone bad and he wants someone to cover his leverage. For the banks they did that with a loan, for these people they are going to forgive the loss.

The homeowner is still the investor.

Whether the bank protected themselves against the homeowner's leverage by selling the account is irrelevant.

[hairshirthedonist]

To the extent that they aren't selling underwater houses, is it more a matter of keeping the quarterly reports not looking too bad for a while, in the hopes that whatever reckoning does eventually come will be someone else's problem, even if that reckoning falls well short of corporate suicide? Is it bonus protection?

[Tyro]

They won't sell the $100k houses that are on their books at $200k because to do so is so commit corporate suicide.

Correct. They are very clever like that, not unloading an asset they foreclosed on to maintain the fiction on their balance sheet. That is very shrewd. When someone pulls off a clever hack like that for a house of two, we might congratulate them on their slick planning. When it happens on a city wide (or in the case, nation-wide) basis, it is a problem. The entire point of bankruptcy and foreclosure is that the creditor is supposed to take those assets and unload them to keep the market churning. To not do so ends up causing trouble for the public which cannot be tolerated, so the governments have an incentive to do an end-run around their clever hack.

The community and city of Richmond and the smooth operation of its markets and its population are more important than supporting the banks' cleverness.

[hairshirthedonist]

The homeowner is still the investor.

The homeowner is still an investor. As are the people who bought MBSs. But they didn't invest in the same things.

The results will be closely watched by both Wall Street banks, which have vigorously opposed the use of eminent domain to buy mortgages and reduce homeowner debt, and a host of cities across the country that are considering emulating Richmond.

The person who owes the money is not the one holding the mortgage, which is the thing being purchased under eminent domain.

You were wrong. Just admit it and move on. We still love you.

[hairshirthedonist]

So now his investment has gone bad and he wants someone to cover his leverage.

And you do realize it's the city doing this, not the homeowners. I'm sure the homeowners do want someone to cover their leverage. Who wouldn't? But that's not why the city is doing this. It's for the financial viability of the city. The problem is, for the city, systemic.

[anthrosciguy]

Brett: The bank owns 'your' home until you've paid for it. That's why they can evict you from THEIR property if you stop paying.

Wow, your mortgage came with a EULA from a software package?

[Marty]

hsh, The homeowner is the investor being freed from an obligation in this scheme. The person or entity holding the mortgage is the LENDER in this transaction, (all loans are also investments, it defines a type of investment). I am not sure how that is confusing you?

So I don't know if you are wrong, but what I have said is accurate and reflects what I meant to say.

[hairshirthedonist]

There is nothing confusing to me, other than your continuing to miss the point that you incorrectly challenged russell's assertion that investors, other than the original lending banks, would take a haircut - after you brough up the banks, also incorrectly. You said homeowners were THE investors, as though there were no other investors involved, and as though russell was wrong for saying there were. It's not the lending banks. It's people who later purchased the mortgages, like chicken nuggets all chopped up and put back together. They are investors subsequent to the original lending banks. The original lenders are out of the picture.

Yes, homeowners are also investors. But the city isn't buying mortgages from them.

Do I really sound confused?

[russell]

But they didn't invest in the same things.

I think this is correct.

To the degree that the homeowner is an investor, they 'invested' in the house.

The folks holding the paper invested in the mortgage.

What the city wants is the mortgage. They want to buy it from, or failing that take it from, whoever it is that holds the note(s) and then make their own deal with the homeowner.

If I understand everyone correctly here, the sticking point is eminent domain, right? If the city simply offered the folks holding the paper a deal to take their losses and walk, and then renegotiated the mortgage with the homeowner, there would be no problem.

Is that right?

[Ugh]

To follow on russell's 4:11pm - what should the city have to pay a lender for its asset (the mortgage loan) in an eminent domain proceeding, and let's assume the lender is owed $400 but "the market" would only pay the lender $200 for the asset, must the city pay $400 or $200, or something in between?

[Marty]

There is no space between the current and original holders of the mortgages in the impact of this scheme.

In order to get started they decided to make the first 600 mortgages from pools. There is no intent, from the article, to only take those mortgages.

So, no, there is no legitimate distinction between the current and any former holders of the mortgage. The distinction is not pertinent. The holder of the mortgage is the lender.

I didn't miss what he said, I specifically disagreed with it.

[McKinneyTexas]

In a mortgage contract (unlike some other ordinary loans) in a "no-recourse" state, a lender must satisfy the debt by foreclosure on the property, and cannot sue for residual deficiencies. In other words, the value of the property is everything.

So, what was I missing again? Did I get the *contract* part right? Contracts are agreements that both parties are bound to honor. One side doesn't get to say, "Damn, I'm a little short, so we'll have to rework the deal". You live with what you sign.

Now, if a state elects to require non-recourse lending--and if lenders are stupid enough to lend in that state--it is true that the lender has to look to the property's value only for satisfaction UPON DEFAULT. The borrower has to default, move out, find a new home and have trashed credit before the lender takes the hit. What we are talking about is a regime where the borrower keeps the home and gets to rewrite the deal, with the lender, or the lender's assignee taking it in the shorts.

The entire point of bankruptcy and foreclosure is that the creditor is supposed to take those assets and unload them to keep the market churning. To not do so ends up causing trouble for the public which cannot be tolerated, so the governments have an incentive to do an end-run around their clever hack.

Good Lord. Nothing about this sentence is correct. The point of bankruptcy is to discharge the bankrupt's debts and get creditors paid back to the extent of non-exempt assets. The secured creditor can get its security back, if it is tangible, such as a house or a car, or can sell an intangible security, such as stock, bonds, etc. The creditor becomes the *owner* of the asset and as the *owner*, he or she can do whatever he/she damn well pleases with his/her property, just like the people here who treat their own property as their own but others, not so much.

The *owner* of property can sell or hold for a better price. There is no obligation whatsoever to sell. To say so is just ignorant. To say that the entire system turns on mandatory sale of assets is just bizarre. Where does this stuff come from?

But that's not why the city is doing this. It's for the financial viability of the city. The problem is, for the city, systemic.

It's systemic for lenders and investors too. It was a bad deal--or a bunch of bad deals. So what? How does that justify, ever, telling one group of property owners that they have to take a direct financial hit to benefit another group of property owners? Because once that kind of benevolent BS become the law--sorry, but we'll be needing half your savings, it's for the public good--there is no end, no limit to the government's power to confiscate.

[McKinneyTexas]

If I understand everyone correctly here, the sticking point is eminent domain, right? If the city simply offered the folks holding the paper a deal to take their losses and walk, and then renegotiated the mortgage with the homeowner, there would be no problem.

Is that right

Yes, there would be no problem if the note holder is free to reject the city's offer and to continue collecting on the note and take the risk of losing even greater face value of the note if foreclosure occurs down the road.

More broadly, in a free market, any two competent people can agree to contract as they please so long as the contract itself is not void as against public policy, induced by fraud or duress, or subject to the few other limitations on the right to contract that have evolved over time.

What is a BIG DAMN problem is any agency of the state using state power to rework a lawful private commercial agreement to the benefit of one side but not the other, the exception being bankruptcy, and then in accordance with applicable law.

[Ugh]

McKinney: It's systemic for lenders and investors too. It was a bad deal--or a bunch of bad deals. So what? How does that justify, ever, telling one group of property owners that they have to take a direct financial hit to benefit another group of property owners?

If the FMV of your asset has declined by 50% since you acquired it, haven't you already "take[n] a direct financial hit?" It's an "unrealized" financial hit, but that doesn't make it any less of a financial/economic hit.

[hairshirthedonist]

I didn't miss what he said, I specifically disagreed with it.

Then you didn't do a very good job of it, or you're changing your story. It took you an awfully long time to get around to making that clear.

(And the original lending banks would qualify as investors, too, though that wasn't what russell was saying, or at least I don't think so.)

[Tyro]

Contracts are agreements that both parties are bound to honor. One side doesn't get to say, "Damn, I'm a little short, so we'll have to rework the deal".

This is 100% wrong. Incorrect. False. Misleading. People renegotiate contracts all the time. Anyone who doesn't renegotiate a contract is a fool who goes out of business because he has no idea what he is doing or what he is talking about. Contracts aren't suicide pacts. Sometimes one me ever of the contract has enough leverage to renegotiate. Sometimes he doesn't and the other party will just enforce the terms of the contract. But both options are always available.

The *owner* of property can sell or hold for a better price. There is no obligation whatsoever to sell.

This is true. The free market allows a certain amount of shrewdness and cleverness on the part of creditors, but what is allowed is a limit. And Richmond reached its limit in the cleverness of the banks who decided to let blocks of houses go vacant. Once again, the free market is not a suicide pact, and towns and the middle class are more important than the aesthetics of your personal morality plays.

[hairshirthedonist]

How does that justify, ever, telling one group of property owners that they have to take a direct financial hit to benefit another group of property owners?

I don't know if it's justified or not, in this case. (I'll leave aside the question of "ever.")

I'm simply stating that it's not a bunch of homeowners doing this, and that the city is doing it for the city's sake. I'm addressing what appear to me to be mischaracterizations of the situation.

[McKinneyTexas]

If the FMV of your asset has declined by 50% since you acquired it, haven't you already "take[n] a direct financial hit?" It's an "unrealized" financial hit, but that doesn't make it any less of a financial/economic hit

Which I have personally done with various investments over the years; however, not once was I told by the state that I HAD to sell at a loss. Because it was my property, I had the right to sell if, as and when I chose.

My wife and I own property (undeveloped, rural property) that we bought on a five year balloon note. When the five years was up and we refinanced, we had to pay the principal down by 13K or so because the land value had dropped. Our risk, our short term loss if we were to sell today, but it is *ours*, not anyone else's.

If the state can compel lenders today, it can compel borrowers tomorrow or anyone else the next day to act in accordance with the state's wishes. Today's benign, well-meaning statism is tomorrow's naked, ham-fisted statism. F that.

This is 100% wrong. Incorrect. False. Misleading. People renegotiate contracts all the time. Anyone who doesn't renegotiate a contract is a fool who goes out of business because he has no idea what he is doing or what he is talking about. Contracts aren't suicide pacts.

Ok, you've gone from being dead solid wrong to being dead solid obtuse. The topic at hand is the state reworking at deal to one side's advantage. Sure, a contract can be renegotiated, and they often are, but it is a private, consensual, new and enforceable agreement.

The free market allows a certain amount of shrewdness and cleverness on the part of creditors, but what is allowed is a limit.

Now this is "is 100% wrong. Incorrect. False. Misleading." There is no limit of any kind or character on how long a person or company can hold its own property. None, nada, zilch.

I don't know if it's justified or not, in this case. (I'll leave aside the question of "ever.")

The question asks for a justification, ever, of simply confiscating one person's property in favor of another. I'd like to see that justification articulated. I'd like one person here to explain how something like what LJ endorses in his post can be justified in principle.

I'm simply stating that it's not a bunch of homeowners doing this, and that the city is doing it for the city's sake

No it's not the homeowners, it's the gov't elected by the homeowners. To say it is the city doing it for the city's good (a questionable proposition, since no sane bank would ever lend in that city again--which does beg the question of banks' collective sanity, but that is for another day) is a bit of sleight of hand: one group benefits and another takes a hit, the group benefiting live in the city that forces the hit on the out-of-towners.

It is discussions like this--and the virtual absence of a principled defense of contracts, the rule of law and a decent respect for property rights--that is one the most disappointing aspects of Progressivism.

If the end is sufficiently "good" in the progressive mind, the means are justified. The rule of law isn't even a polite fiction.

[Tyro]

There is no limit of any kind or character on how long a person or company can hold its own property. None, nada, zilch.

Wrong. The state can force a landholder to sell using the power of eminent domain. Eminent domain exists SPECIFICALLY for the purpose of insuring that a landholder cannot interfere with public projects (or the greater public interest) by refusing to sell. That's what eminent domain is for. If you disagree with the principle of eminent domain, that is your right, but that means you disagree with much of the founding law of this country.

[McKinneyTexas]

The state can force a landholder to sell using the power of eminent domain. Eminent domain exists SPECIFICALLY for the purpose of insuring that a landholder cannot interfere with public projects (or the greater public interest) by refusing to sell.

Again, you are being obtuse. I was addressing your statements: "the creditor is supposed to take those assets and unload them to keep the market churning" and "The free market allows a certain amount of shrewdness and cleverness on the part of creditors, but what is allowed is a limit." Eminent domain is in the constitution. Oddly enough, I am aware of that. So, yes, all private property is theoretically subject to eminent domain, which has a limited application. And your phrase "or the greater public interest" is progressive mumbo jumbo that you will not find in the constitution; rather it is the progressive rationale for relegating the rule of law to a not-so-polite fiction. The same constitution says that no state shall pass any law impairing the obligation of contracts.

[hairshirthedonist]

The question asks for a justification, ever, of simply confiscating one person's property in favor of another.

Whether or not you think what Richmond is doing is a good idea, the motive is for the good of Richmond, not to favor one property owner of another. It's not "simply."

In the general case, if you want to talk about "ever," I guess I'd just repeat Tyro. That's what eminent domain sometimes does, maybe always in some sense. It's justified by the public good, as a general matter. Sometimes it's for dubious reasons, which I might disagree with on a case-by-case basis. But I don't think it's slippery slope to statism, any more than taxation is.

[Priest]

What I haven't seen mentioned as a type of bank behavior that is "gaming the system" to their advantage and to the disadvantage of neighborhoods and cities is the failure of banks to complete the foreclosure process. The original home buyers move out, but the banks don't act to legally take possession of the property, leaving it vacant and in a sort of limbo; the banks protect their balance sheets, everyone else lives with the negative consequences of the situation. I could see how a city might have a defensible interest in preventing that particular chain of events.

[sapient]

The same constitution says that no state shall pass any law impairing the obligation of contracts.

First of all, the banks' interest in their contracts is a property right, subject to imminent domain. So you can't be saying that contracts should be honored above property itself. Sure, contracts represent an inchoate property right, and the Constitution didn't want to mess with inchoate contract rights any more than with good ole property rights. But, surely, contract rights aren't superior.

Second, banks could easily defend their rights - their rights to foreclose, just as soon as they saw that this political action was an issue. Foreclose already! The Constitution doesn't protect accounting tricks.

[McKinneyTexas]

I could see how a city might have a defensible interest in preventing that particular chain of events.

Yes, I agree given the right circumstances, but I am not sure how widespread this practice is. Also, shame on the buyer for abandoning his/her property and leaving the lender hanging. That said, there are good governmental reasons for requiring ownership and maintenance of real property.

But keep in mind, there are valid reasons why a bank does not want to foreclose, even after a borrower has defaulted. First, foreclosed properties sell for less. Second, by foreclosing, the bank becomes the owner, and thus responsible in tort, as one example, to those injured on the property, which is fiendishly expensive to insure against. That said, there is something to be said for requiring banks to either assume responsibility for or forfeit abandoned property, primarily because abandoned property carries its own set of real and present problems and costs for the city and those living in the neighborhood.

HSH--Richmond isn't taking property, for just compensation, to build a road or a school. Richmond is cramming a loan write-down down lenders' throats to the benefit of its citizens. Saying this is in the city's interests as some kind of rationale is just semantics. Private citizens are getting a state-mandated reduction in the price of the home they bought and are living in at some else's expense. Tell me how this isn't confiscation of one's person's property for the benefit of another?

[McKinneyTexas]

Sapient, you're a lawyer. Give me a break here. The state isn't taking anything from anyone to put it to a public use in this scenario. The state is telling one party to a contract that it must reduce its loan principal and telling the other party you now get a reduced principal and a lower payment. And the purpose isn't to encourage foreclosure, it is to prevent it. The property at all times remains in private hands, the same private hands that bought the property in the first place.

[sapient]

Also, shame on the buyer for abandoning his/her property and leaving the lender hanging.

And shame on the lender for not foreclosing in a reasonably prompt manner. Foreclosure is an equitable action, by the way, subject to the equitable doctrine of laches: "He who sleeps on his rights has no claim." In other words, the action of banks in sitting on their rights (on behalf of their accounting sheets) should cause them to lose their rights.

But keep in mind, there are valid reasons why a bank does not want to foreclose, even after a borrower has defaulted.

Yes, but keep in mind that there are even more valid reasons for a buyer to default in the worst economic recession since the great depression.

But, in your mind, banks always win and have inalienable rights, while common middle class actual people always lose, because they're "irresponsible".

Hundreds of years of law and equity don't back you up here, McKinney.

[russell]

the original lending banks would qualify as investors, too, though that wasn't what russell was saying, or at least I don't think so.

Marty characterized the homeowners as 'investors', and the folks holding the note as 'lenders'. In context, not 'investors'.

I found that inaccurate, because the folks holding the note at this point are, in fact, 'investors'. They are people who bought financial instruments as investments.

It's not even clear from the information we have in hand that they own the mortgages per se. It depends on how the instrument is structured. If I understand the whole sorry mess correctly. They might simply have purchased an interest in the mortgage, or more correctly an interest in many many mortgages, in the form of the right to receive a slice of the income stream it generates.

Stuff like this makes me nostalgic for good old Bailey Savings and Loan.

The question asks for a justification, ever, of simply confiscating one person's property in favor of another. I'd like to see that justification articulated.

I agree that a justification is required.

The justification that appears to be offered is that, from the city's point of view, it's a disaster for their to be lots of foreclosures. The people who own the debt don't want the houses, and they don't want to sell at a loss, so the houses sit vacant and decay. The property values drop, which lowers the tax base. It's generally a crap situation.

That's the justification. FWIW. It's not that hard to puzzle out.

Whether it rises to the level of justification for asset seizure is something that I'm sure the courts will sort out.

Here is what the whole picture looks like to me.

It's blindingly clear to me that a non-trivial portion of the responsibility for this mess lies with the financial sector.

Mortgage originators who do not do due diligence on the borrowers ability to pay, and who simply write crap loans so they can sell them on to the next guy.

Mortgage originators who knowingly and deliberately sell mortgages with highly unfavorable terms to unsophisticated people, so they can sell them on.

Mortgage underwriters who do not preserve accurate title records, and who seek to maximize their bottom line by, instead of paying $25 or $50 to the local registrar of deeds, employ their own half-assed 'database' instead.

Financial whiz kids who slice and dice filet mignon, good old chuck, and pure turds into the same tasty sausage, and then sell it all as grade-A.

I actually don't have much bad to say about the folks who currently hold the paper, because they were just trying to park their money someplace productive. They got screwed. Not by the folks who are trying to actually stay in their homes, but by the SOB's in the FIRE sector who would cut your nuts off if it meant they could take home seven figures.

What I'm hearing here is that the homeowners signed the note, so if they can't make their nut then they need to go under.

What I'm not hearing from anybody is anything about all of the other folks who contributed to this mess, but who managed to cash out and pass the hot potato on to somebody else.

It's all on the homeowner? All of it?

If I understand correctly, it's actually against the law for the face value of the mortgage to be renegotiated in bankruptcy, so even if the homeowners and the note-holders wanted to make a deal, they could not do so through the mechanism of bankruptcy.

There was an attempt to change the law, but the financial sector lobbied their @sses off like they always do, and the law stands.

So the alternative to making a deal with the city is that a lot of the investors involved are going to be pounding sand anyway. They will not be seeing an income stream, because there won't be one. They will be the proud owners of homes - more accurately, fractional slices of homes - that they have zero interest in.

The homes will likely sit and rot for a while, until the market in Richmond rebounds, or until the investors just get sick of holding a piece of paper that isn't worth all that much.

The houses will sell at foreclosure, and maybe turn into rentals. Or, they might just sit for a hell of a long time and rot.

There are probably houses just like that in your neighborhood. I know there are in mine. It sucks.

In Richmond, something like half the houses are underwater, and the employment situation isn't so great, so it will probably be more than a house here or there.

So, I appreciate the concern about contracts, and about not abusing the power of the state, and about the danger of undesirable downstream effects like banks not wanting to lend in Richmond going forward.

But it would be great if somebody could at least acknowledge the freaking elephant in the room.

The bankers f***ed us all over. Some of us have been lucky enough to bounce back, some have not.

In Richmond, it sounds like there hasn't been a lot of bouncing back. The city's just trying to figure out what to do about it.

Doesn't sound like anybody else is going out of their way to help them out.

[sapient]

The question asks for a justification, ever, of simply confiscating one person's property in favor of another. I'd like to see that justification articulated.

Sure: Kelo v. City of New London, 545 U.S. 469 (2005). That cat's out of the bag. Consider it articulated.

[sapient]

McKinney, didn't see your 6:35 pm comment, but I think I've answered it in that Kelo really does address the issue that a government can benefit private persons through eminent domain if the purpose is to further economic growth.

I wasn't a fan of Kelo, by the way, but it's with us, and I think that Richmond is doing something creative and just in this case. And, sure, Kelo.

[McKinneyTexas]

But, in your mind, banks always win and have inalienable rights, while common middle class actual people always lose, because they're "irresponsible".

No, both parties have the rights they contracted for. Foreclosure, like any right, can be waived. It is a right, not a duty. I don't love banks any more than I love grocery stores, I just think that the rules should stay the same for everyone. Under typical loan documents, there is an affirmative obligation to pay the note in accordance with its terms. It's not complicated. The bank, having lent the money, has a right to get paid back. If this seems unjust, then don't borrow from banks. But don't act like banks are doing something wrong when they expect to be paid back.

Russell, if you read LJ's post and the underlying article, it's got nothing to do with foreclosure or abandoned property. It is a regime to prevent foreclosure by forcing lenders to reduce their loan principal to "fair market value", eat the loss and then refinance with new lenders. The home owners keep their homes with their debt substantially reduced by government fiat.

We can debate the concept of predatory lending some other day because that is not the issue for people who bought a house on borrowed money, who knew what they were signing and who are either asking for or acquiescing in their local government forcing a loan balance write down on lenders or their assignees.

I'd still like to see an articulated justification for doing this. Bad banks are beside the point here (although for the life of me, I don't understand why it is morally wrong to lend too much money to someone--stupid, yes, venal, no, not to my way of thinking). And, to respond further to Sapient, any bank stupid enough to lend to someone who can't pay it back or to lend against property that won't support the loan deserves exactly what they get. Any dumbass subsequent holder of mortgage backed securities bought with eyes wide open. The real estate bubble was known and understood years before it burst. The perennial question was whether it would be a soft landing or a hard crash--turned out to be the latter. Tough sh*t for everyone involved except the pensioners and other real victims of a financial system that bought its own BS.

[McKinneyTexas]

Sapient, Kelo was (1) classic liberal statism masquerading as constitutional law, (2) an awful f'ing decision that ought to bother people a lot more than it does and (3) it involved eminent domain on real property, not rewriting contracts. And if Richmond gets away with that, as happened in Kelo, then no deal is safe in the long run. Including those that favor the little people.

The "we won't do it unless we really need to" argument is just short term rationalizing to justify a precedent that won't go away.

Jesus, I cannot believe we are having this discussion. There really is no limit to what progressives will let the state do if it serves a progressive-approved purpose.

[Turbulence]

I don't understand why it is morally wrong to lend too much money to someone

Getting a loan that you can't hope to pay off is extremely stressful for people. Families have broken up and people have committed suicide over less. Moreover, in some cases, banks have better knowledge about whether a borrower is likely to default than the debtor himself. After all, the bank is the one with sophisticated mathematical models and huge data sets while most loan seekers are innumerate.

Do you really think it is ethical for a bank to pitch a loan that they know the borrower won't be able to repay without mentioning that to the borrower?

I think that in general, when I have knowledge that the other party doesn't that they're about to enter into an extremely dangerous contract that will likely ruin their life, I have an ethical obligation to at least tell them that. Don't you feel the same obligation?

[sapient]

I don't love banks any more than I love grocery stores, I just think that the rules should stay the same for everyone.

I'm in favor of that too, except here, in Richmond CA, the banks are being given what their contract is worth. In other words, just as I, a homeowner, can face eminent domain, and can have my property taken today (when maybe the market isn't favorable), they, the banks, are being given what their contract is currently worth.

Eminent domain is a concept that assumes that people's expectations of "forever owning property" can be defied. People are allowed to be compensated for an unexpected taking. They're not entitled to what things might have been had the future continued (my house will accumulate in value, I think). They're entitled to what is. The FMV of these loans is what would happen if these homeowners walked away.

[sapient]

McKinney, despite what you might think of Kelo, I think it's dispositive. I was bothered by it too, but I like it a lot more here.

[liberal japonicus]

A bit out of order
Tell me how this isn't confiscation of one's person's property for the benefit of another?

I thought that was the underlying principle of eminent domain.

I really didn't think I was throwing such a beehive in here. I really wonder what a city can do to stop things before they get to Detroit level bad. Listening to the conservative corps here, the answers are nothing, nothing and nothing.

I'd like one person here to explain how something like what LJ endorses in his post can be justified in principle.

There are lots of things I endorse in particular cases that I don't endorse 'in principle'. Of course, we have to agree who is who and precisely what the principle is, a task not made any easier with the mistaken assumptions about 'owners' and 'investors' and the like. The question to me is doesn't Richmond have some sort of duty to the people who live there to do something about a problem? If so, how do they discharge that duty? Getting on this 'progressives will let the state do anything' seems like a lot of bluster.

[Tyro]

This move by Richmond shows some of the wisdom of Kelo, in retrospect, which is that use of eminent domain is not necessarily a good decision or bad decision, but the decision about how and when to use it is up to the state and local governments. The government needs to have the flexibility available to use eminent domain under a variety of circumstances rather than being straitjacketed by a specific set of court-imposed rules. If, on the other hand, states and municipalities want to write rules that bind them against use of eminent domain, they can, though those rules may change over time as circumstances change. I think the specific use of eminent domain in Kelo was stupid, myself, but if you are going to praise the virtues of personal responsibility, you should accept that states and municipalities should be allowed to make their own mistakes.

[McKinneyTexas]

I think that in general, when I have knowledge that the other party doesn't that they're about to enter into an extremely dangerous contract that will likely ruin their life, I have an ethical obligation to at least tell them that. Don't you feel the same obligation?

You've built a mighty oak out of a very small acorn and in just a few short sentences. If you are saying that some people are just too ill-equipped to manage their own affairs--essentially that they are legally incompetent--and therefore it is immoral to do business with those people at arm's length, then fine, that's your opinion. The question is whether the law should rewrite contracts entered into by legally competent human beings.

Sapient, you are making my point about the fundamental danger progressives pose to freedom. What you are saying is this: Banks, you can lend money to people so that they can buy homes. In fact, we want you to do that, because a good housing market and rising property values are good for our city. But, now that you've done what we wanted you to do, we are going to change the rules after the fact. The new rule is that the face value of the note you took on the loan is subject to diminishing property values. That is, Bank, if property values go down enough to where our citizens feel pain, well, we are going to write down your loan amount to relieve that pain. On the other hand, if property values go up, you don't share in that. Have a nice day, Banks, and we look forward to your future business with us and our citizens.

Seriously, Sapient, you are signing on for this? And, while I will agree banks do a lot of stupid things, do you really think a bank would ever make a loan again if the rules can change just like that?

[sapient]

I really didn't think I was throwing such a beehive in here.

Repeat after me, lj: Bees are good.

You did good.

[Tyro]

I don't understand why it is morally wrong to lend too much money to someone-

Because it is a means of forcing your borrower into bankruptcy so that you can then go ahead and grab their property to pay back the loan. It's exploitative and a form of theft and usury, IMHO.

[Tyro]

if property values go down enough to where our citizens feel pain, well, we are going to write down your loan amount to relieve that pain

That is actually part of bankruptcy laws for just about all loans except real estate. Once again, getting back to my "law of limited cleverness"-- it was all well and good to use that rule to your favor when instances of that occurring were uncommon, but when entire cities have to suffer for it, you're going to get the rug pulled out from under you.... in this case by having the state be more clever than you are.

[liberal japonicus]

you are making my point about the fundamental danger progressives pose to freedom

I'm happy to let people have their rants, but I don't ever want to hear complaints about how 'conservatives' are lumped together after this line.

[sapient]

The new rule is that the face value of the note you took on the loan is subject to diminishing property values.

In California, that's the case already. I'm not endorsing it, necessarily (although because of the extreme existential pain caused to real human people during this financial crisis, I think it's a really good thing).

The fact is this: in California, a single family home mortgagor can walk away from a mortgage, leaving the lender with what it can sell the house for, minus the trouble of foreclosing.

I don't see the Richmond eminent domain scheme as working any kind of unfairness to banks in California. Maybe in other states, we'd have a different conversation.

do you really think a bank would ever make a loan again if the rules can change just like that?

Again, the rules didn't change here. In California, banks signed up for the possibility that the market would collapse, and that they would be saddled with the job on foreclosing on houses that were far less valuable than the original loan.

[McKinneyTexas]

I thought that was the underlying principle of eminent domain.

Then you are mistaken.

I really didn't think I was throwing such a beehive in here. I really wonder what a city can do to stop things before they get to Detroit level bad. Listening to the conservative corps here, the answers are nothing, nothing and nothing.

There are a lot of things cities can do--for starters, not elect and re-elect the most corrupt gang of grifters possible. But, if you think heading off disaster by letting different cities rewrite contracts on a city-by-city basis, Detroit will be the wave of the future because no one is going to do business in that unstable of an environment.

Getting on this 'progressives will let the state do anything' seems like a lot of bluster.

I guess that would hold true for the unending chorus of conservative-bashing that goes on here as a matter of course?
It's bluster if you don't want to address my arguments substantively and on the merits, but bluster in this sentence is really just a synonym for evasion.

The government needs to have the flexibility available to use eminent domain under a variety of circumstances rather than being straitjacketed by a specific set of court-imposed rules.

Perfect: the government can get a let more done if there aren't any silly laws to get in the way. More evidence to support my bluster. LJ, you agree with Tyro? Russell, Sapient?

Because if you do, then I'm sure you'd be fine with the gov't bull dozing a lot of low income homes and apartments to let the Mayor's cronies build awesome condo's for the wealthy. This sword, held in the slipperiest of hands, cuts in every direction.

[sapient]

Because if you do, then I'm sure you'd be fine with the gov't bull dozing a lot of low income homes and apartments to let the Mayor's cronies build awesome condo's for the wealthy. This sword, held in the slipperiest of hands, cuts in every direction.

Keep in mind that the process of eminent domain is regulation intensive. It's not just the Mayor deciding stuff.

[McKinneyTexas]

I'm happy to let people have their rants, but I don't ever want to hear complaints about how 'conservatives' are lumped together after this line

I very seldom generalize and the 'line' wasn't written in isolation. The topic at hand--which I continue to invite you to engage substantively--is taking from Private Citizen X and giving to Private Citizen Y by state fiat. If you don't appreciate the fundamental, profound problems this presents, that is one thing. But if you endorse it, explain why you are not endorsing selective confiscation for the benefit of one and to the detriment of another.

Sapient--you're not endorsing it, you just think it's a really good thing. Thanks for clearing that up.

You continue, however, to miss the point.

A non-recourse loan lets the borrower move out without further obligation. But, there are several hitches. First, the borrower actually has to move out. Second, the borrower now has sh*tty credit and is a permanent renter.

In the Richmond situation, the borrower keeps the home, keeps his/her credit AND gets his/her loan reduced to current property values. And, whoever holds the note gets screwed.

Can you appreciate the difference?

And, here's one more difference: the bank knew the rules going in. In the Richmond situation, the rules are changing after the bank let go of its money.

[russell]

I don't understand why it is morally wrong to lend too much money to someone

I'm not sure that's quite the right way to look at it.

In the case of banks, it's irresponsible, possibly to a degree that merits legal action, to lend too much money to someone, because it's not their money that they're lending.

Once upon a time, investment banks were kind of a different story, because they played with their own money. They're mostly public companies now, so that's largely no longer the case.

Banks are obliged to make good use of the funds entrusted to them.

Whether a widespread and / or systematic failure to act responsibly merits public action is something that, IMO, really has to be decided on a case by case level.

Tell me how this isn't confiscation of one's person's property for the benefit of another?

I thought that was the underlying principle of eminent domain.

I don't think that is the underlying principle of eminent domain.

If I understand it correctly, the underlying principle of eminent domain is that the interests of a sovereign government in a property ultimately trump those of a private property owner.

So, in nearly all states in the US, real property (for example) is owned fee simple, rather than by alloidal title.

That prerogative is limited, in the US, by the 5th Amendment. Private property can only be taken, per the 5th, for public use, and with due compensation, which is generally taken to mean fair market value.

The meaning of 'public use' has expanded, mostly via SCOTUS ruling, since 1789 to mean something more like 'public interest' or 'public good'.

But 'take from one private person to benefit another private person' is, I think, a stretch even beyond that.

Russell, if you read LJ's post and the underlying article, it's got nothing to do with foreclosure or abandoned property.

Actually, the desire to prevent foreclosures is specifically mentioned as Richmond's motivation. Abandoned property and a decline in property values are the normal and predictable consequence of widespread foreclosure.

IMO where this all lands comes down to what the scope of 'public good' is.

It seems to me that, absent taking some action similar to the eminent domain taking, things are likely to go downhill for Richmond. So, I understand their interest in trying to make something work.

[Tyro]

Perfect: the government can get a let more done if there aren't any silly laws to get in the way.

You can rant all you want, but the basic principle of government is that you can change the laws if you want to and follow the proper procedures. You can elect other people to support laws if you disagree with the ones that were passed by the current people.

And as far as banks losing out when the market collapses but not being able to take advantage of gains if the market skyrockets? That is the basic principle of risk as a lender. If you wanted to take advantage of gains when the market goes up, you would be a real estate investor, not a mortgage lender.

[russell]

the government can get a let more done if there aren't any silly laws to get in the way. More evidence to support my bluster. LJ, you agree with Tyro? Russell, Sapient?

No, I do not agree.

the basic principle of government is that you can change the laws if you want to and follow the proper procedures.

This is correct, but you have to actually change the law, following the proper procedure, before you can act on the basis of the new law.

The question here (it seems to me) is whether Richmond's motivations for applying eminent domain constitute a public use (or, per SCOTUS interpretation post-1789, public benefit) that trumps the interest of the folks holding the note.

I don't know the answer to that. I'm sure all parties will see each other in court.

[Priest]

My understanding of the non-foreclosure foreclosures is that the resident home-owners are notified that they will be foreclosed on, and rather than waiting around for the sheriff to show up they make other living arrangements and move out. Or the residents are renting and get told by the landlord that they're letting the house go.

As far as how prevalent this circumstance is I haven't seen any numbers, but the only reason I heard about it in the first place was a local newspaper article about the problem; this was perhaps a year or so ago, and the real estate situation here in Atlanta has finally started reviving some, so it's likely less of an issue now than it was a couple years ago.

I mainly brought it up as another example of why a jurisdiction might want to pursue creative/extreme options to prevent urban blight.

As far as Kelo is concerned, all the liberal/progressive/lefty/whatever bloggers and pundits I read didn't like the outcome, so while I agree it was an endorsement of "statism" I think calling it "liberal" is off the mark.

[sapient]

A non-recourse loan lets the borrower move out without further obligation. But, there are several hitches. First, the borrower actually has to move out. Second, the borrower now has sh*tty credit and is a permanent renter.

In the Richmond situation, the borrower keeps the home, keeps his/her credit AND gets his/her loan reduced to current property values. And, whoever holds the note gets screwed.

Can you appreciate the difference?

Basically, you just want to punish the borrower? In fact, as someone said upthread, the borrower has been punished already by having his investment worth much less than he thought. Why are you into punishing people (in this case, in California, purchase money mortgagors)? These people just wanted to buy a house. They thought they were qualified, and thought they could afford it. They didn't get that the economy would tank, that their income was totally vulnerable, etc. They were banking on what they knew. As Turbulence observed, the banks knew the real score. The homeowners were unsophisticated and vulnerable. Why are you so intent on making them pay for that?

[Tyro]

Without the Richmond situation, the bank would foreclose on the house, sell the house to someone else, that other people would move in, and start paying the mortgage at the market value that the house was sold at when the bank sold it to recover what it could of the defaulted loan. The Richmond situation simply short-circuits that situation and accelerates the process and gets us back to the end-situation where homeowners are living in the home and paying a market-rate mortgage. The alternative was a bunch of vacant homes, and Richmond considered that more of a problem than playing out the aesthetics of your libertarian morality play.

[russell]

The topic at hand--which I continue to invite you to engage substantively--is taking from Private Citizen X and giving to Private Citizen Y by state fiat.

That's certainly one way to look at the situation, but I'm not sure it's completely accurate.

What the city wants to take is the mortgage. Having taken the mortgage, it will hold the mortgage, or its proxy (in this case MPR apparently) will do so.

Having done so, the city will renegotiate the terms of the mortgage with the borrower, to reflect the actual market value of the house.

The borrower definitely benefits. The note-holder, for that matter, may well benefit, although that's not a given.

But the primary beneficiary, from the city's point of view, appears to be the city. Not just the folks who get relief from their mortgage terms, but everybody else who lives in the city, also.

It's not as simplistic an equation of 'we are taking your stuff and giving it to that guy'.