Scheme to seize underwater mortgages

by Walter Olson on August 18, 2013

Inspired in part by the work of Cornell law professor Robert Hockett, the city of Richmond, Calif. is planning to 1) use eminent domain to seize private mortgages for considerably less than their actual worth; 2) cut a deal with existing residents of the homes to install FHA mortgages in place of the seized mortgages; 3) use the windfall surplus — derived by paying the private mortgage holders less than the actual value of their forcibly seized holdings — to subsidize the local residents, thus buying their political favor, as well as leaving a goodly sum to pay off the private outfit called Mortgage Resolution Partners that’s pushing the scheme (written up sympathetically in a recent New York Times account).

What could go wrong, aside from to the spirit of the Constitution and the rule of law? Gideon Kanner points out that even California eminent domain law still requires the payment of “fair market value, not some bargain basement figure pulled out of thin air”:

…we believe that not even California courts will stand still for that. Why not? Because under our law, if the condemnor tries to lowball too much, and makes an unreasonable pre-trial offer, it may have to pay the condemnees’ attorneys’ and appraiser’s fees, plus other litigation expenses, on top of the “just compensation” required by the constitutions. And, of course, any diminution in value brought about by the the market’s reaction to the imminence of the condemnation, cannot be considered in determining fair market value. The property has to be valued as if unaffected by the condemnor’s plans or by any preliminary steps taken toward the condemnation. Cal. Code Civ. Proc. Sec. 1263.330.

For other reasons the scheme may prove much more expensive to the city of Richmond and its taxpayers, see Ilya Somin [more, yet more] Other commentary: Matt Welch, Richard Epstein. Earlier here, here, etc.

{ 1 trackback }

Colorado recalls; NYC voters spurn Eliot Spitzer - Overlawyered
09.11.13 at 10:30 am

{ 3 comments }

1 Hugo S. Cunningham 08.18.13 at 12:17 pm

My original understanding of eminent-domain mortgage schemes was that they would pay bona-fide market value, in places where it was substantially less than face value, before arranging a new, downsized loan to solvent employed homeowners able to keep up on the new payments.

Advantage:
Home remains occupied by someone with incentive to maintain it.
Disadvantage:
Unless administrators are careful, they create incentive for solvent homeowners to default in hopes of better deal. (This is why the new competently-run Fannie Mae did not like the idea.)

Has the honest eminent domain proposal been sidelined nationwide? Was Richmond CA’s crooked, low-ball approach the real plan from the beginning?

2 Bob Lipton 08.18.13 at 5:17 pm

This and Detroit are fine examples of why one should not lend money. Unless, of course, one wishes to get rid of “friends”.

Bob

3 DensityDuck 08.21.13 at 5:55 pm

Gideon Kanner is an idiot.

“most people writing on that subject talk about the right to take, and don’t seem to have a clue that the would-be takers of these mortgages… will have to pay just compensation, i.e., fair market value, not some bargain basement figure pulled out of thin air.”

The “bargian basement figures pulled out of thin air” are what THE BANK ITSELF says the house is worth.

On the other hand…
“we are grateful that we are retired and can now view all that as a spectator sport.”

So, you bought your house in 1972 for cash, and now you’re fat and rich off of refinancing and ready to tell us all how your good luck means we have to just shut up and Deal With It?

Comments on this entry are closed.