Skip to main content

View Diary: Can a Small California City Take on Wall Street - And Survive? (298 comments)

Comment Preferences

  •  Felix Salmon shares your concern. (4+ / 0-)

    Why using eminent domain for liens is a bad idea

    The key here — which is spelled out in much more detail in Hockett’s 56-page paper on the idea — is that the eminent domain powers are not being used to buy the actual houses in a short sale, as would have been the case under the original AHP scheme. Instead, they’re being used to buy the mortgage. Hockett doesn’t spend any time in his paper or his op-ed explaining why eminent domain should be used to buy mortgages rather than houses, and it’s here, I think, that his plan moves from something which could be a very good idea, to being something which is actually a pretty bad idea.
    He's written a second column which is also worth reading.
    Why you can’t use eminent domain to buy performing mortgages
    The problem, at heart, is that MRP is looking to buy up only seasoned, performing mortgages: precisely the ones which are worth the most money, and which don’t present much of a systemic danger to the San Bernadino housing market. We’re talking here about loans which were made during the height of the bubble, on homes which have since plunged in value — and yet the homeowners have diligently made all of their payments on time. [...] Yes, it’s true that I will have written down the value of my holdings on the grounds that my mortgages aren’t worth as much, in aggregate, as they were during the bubble. But that doesn’t mean that I’m valuing the performing loans at deeply-discounted rates. Quite the opposite, in fact: many of them are worth more than par, trading at about 106 cents on the dollar, just because the interest rates are high and the underwater status of the loan means that it can’t be refinanced.

    MRP, by contrast, wants to pay vastly less than par for these loans. To use Kathleen Pender’s example, where a homeowner owes $300,000 on a house now worth $200,000, MRP might pay $170,000 for the loan. Which works out at just 57 cents on the dollar. That’s a highly-distressed price for a performing asset, and I can definitely see that MRP would have a huge amount of difficulty persuading the court that it was a fair price. After all, the only way you get to such a price is by assuming that there’s an extremely high probability of future default — despite the fact that the homeowner has remained current through the largest financial and housing crisis in living memory.

    There’s a very big collective action problem in the distressed-mortgage world, and in principle the use of eminent domain is just what the doctor ordered to sort it all out. But I fear that MRP has done everybody a disservice here by putting forward the worst possible use of eminent domain: basically buying up precisely the mortgages which no one is particularly worried about. What’s desperately needed here is a plan which CDO investors can get behind. Right now, they own many mortgages they’d love to get out of, but instead they’re holding on to them because the way that the CDOs are structured, they basically can’t be sold and have to be serviced instead, at significant expense, even when they’re deeply in default.

    So let’s see an eminent-domain plan which is designed to buy up defaulted properties, rather than ones which are current on their mortgages. Let’s see a plan which buys properties themselves, rather than just the liens on those properties. And most importantly, let’s see a plan which is constructed by the owners of CDOs, rather than by a bunch of outside financiers looking for a huge profit opportunity. In principle, there’s a way to do this right. It just isn’t the MRP way.

    McBride at Calculated Risk is also against it.
    Update on "eminent domain" for mortgages: North Las Vegas rejects "hair-brained scheme"

    -7.75 -4.67

    "Freedom's just another word for nothing left to lose."

    There are no Christians in foxholes.

    by Odysseus on Sun Sep 15, 2013 at 09:45:47 AM PDT

    [ Parent ]

Subscribe or Donate to support Daily Kos.

Click here for the mobile view of the site