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Having eviscerated the fourth amendment protection against unreasonable search and seizure and most of the fifth amendments protection of due process one has to wonder why the very last line of the fifth amendment "nor shall private property be taken for public use, without just compensation" being treated so reverentially.

Recently it was announced the HOPE project to help renegotiate mortgages was a complete failure. Only in Washington would that come as surprise. Leaving aside the obviously problems why would any lender agree to take a haircut while there all these proposals to buy the mortgages at full face value- most notably from John McCain during the presidential campaign. But I digress.

The real reason that it is not possible to restructure mortgages is legal.

  1. many homeowners have not only first mortgages but also second mortgages. A modification will require the consent of the second mortgage lender who has absolutely no incentive to agree since they stand to lose the entire amount of their loan;
  1. Even if there is no second mortgage, the securitizing of the mortgage ensures that there is a group of investors (those who own the riskiest tranche) who will lose the entire amount of their investment if the loan is modified. Since they can't do worse than zero there is no incentive for them to accede to any type of restructuring.

In the case of the second mortgage there is at least the possibility of buying off the second mortgage lender. In the case of securitization any preference shown to high risk investors will come at the expense of some other class of investors which ends substituting one set of disgruntled investors for another.

There are  only two ways to get past this problem.

  1. My preferred method would be to create a new chapter in the Bankruptcy code that will provide for expedited foreclosure and renegotiation of mortgages.
  1. The government needs to creatively exercise its power of eminent domain and "seize" all the first and second mortgages and pay fair market value for them- in the case of the second and high risk tranches that would $0.01 recognizing their value to be zero. Having seized the mortgage the Government can negotiate with individual borrowers. If done right the collective value of the renegotiated mortgages should be greater than what the government paid for seizing them. (Note this would not violated the fair market value principle of the 5th amendment since the renegotiated package whether done by the government or private individual would have greater value because of its greater certainty.

The government should start by seizing loans made by Fannie/Freddie and the have Fannie/Freddie immediately go to court challenging the constitutionality of the seizure. Simultaneously Congress could require the Courts to hear the case on an expedited basis. If the Courts upheld the constitutionality of the seizure the government could immediately begin modifying mortgages using their eminent domain power.

Such an action would not increase the financial exposure to the Government beyond what it has already accepted. In fact it would probably reduce and make it much more transparent. Under the HOPE program the FHA would guarantee any modified mortgage (same things as owning it). Furthermore Fannie/Freddie and the Federal Reserve are purchasing mortgage backed securities and the Treasury is offering subsidized interest. Also, if there ever was a time to this, now is it while the markets are falling all over themselves to lend money to the government (0% interest on t bills).

The only thing IMHO holding them back is that money class would like to retain the power of eminent domain for their own favored personal purpose. God forbid that it actually be used for the purpose that it was originally intended - the general welfare.

Originally posted to keepingitstraight on Tue Dec 23, 2008 at 01:09 PM PST.

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Comment Preferences

  •  Replacing a right wing justice would help (3+ / 0-)
    Recommended by:
    mbayrob, coffeetalk, 2questions

    Kelo v. City of New London, affirmed eminent domain to tear down a blighted area of New London and replace it with a marina, a park and housing for people who were better off financially than those evicted.  This was by the normal 5-4 liberal conservative split, with Kennedy joining the liberal majority to affirm the eminent domain.  This makes Kennedy's concurring opinion very important, really a one justice law of the land:

    My agreement with the Court that a presumption of invalidity is not warranted for economic development takings in general, or for the particular takings at issue in this case, does not foreclose the possibility that a more stringent standard of review than that announced in Berman and Midkiff might be appropriate for a more narrowly drawn category of takings.  There may be private transfers in which the risk of undetected impermissible favoritism of private parties is so acute that a presumption (rebuttable or otherwise) of invalidity is warranted under the Public Use Clause. . . .

    This taking occurred in the context of a comprehensive development plan meant to address a serious city-wide depression, and the projected economic benefits of the project cannot be characterized as de minimus.

    If the present make-up of the Court continues, you will have to convince Justice Kennedy that a house by house condemnation serves the general public and not just benefiting the home owner.

    "We have always known that heedless self-interest was bad morals, now we know that it is bad economics." Franklin Delano Roosevelt, Jan. 20, 1937

    by Navy Vet Terp on Tue Dec 23, 2008 at 01:41:50 PM PST

    •  It's good enough for me... (0+ / 0-)

      We the People of the United States, in Order to form a more perfect Union, establish Justice, insure domestic Tranquility, provide for the common defence,promote the general Welfare, and secure the Blessings of Liberty to ourselves and our Posterity, do ordain and establish this Constitution for the United States of America.

      And, but too also such as (there)...

      We finally after eight long years...have a POTUS who believes in it.

      Confront all issues in a timely manner...

      by 2questions on Tue Dec 23, 2008 at 02:08:45 PM PST

      [ Parent ]

      •  But the Supreme Court may not (2+ / 0-)
        Recommended by:
        mbayrob, 2questions

        FDR believed in it too, but until 1937 he had to deal with a Supreme Court which had a narrow majority of right wing ideologues who struck down one New Deal enactment after another.  This was until one of the right wing ideologues, Willis Van Devanter, retired and was replaced by the liberal Hugo Black, one of the greatest justices in our history.

        "We have always known that heedless self-interest was bad morals, now we know that it is bad economics." Franklin Delano Roosevelt, Jan. 20, 1937

        by Navy Vet Terp on Tue Dec 23, 2008 at 02:15:04 PM PST

        [ Parent ]

        •  New Reality Show: SCOTUS's Next Van Devanter (0+ / 0-)

          I know that I'll be watching.

          "If another country builds a better car, we buy it. If they make a better wine, we drink it. If they have better healthcare . . . what's our problem? "

          by mbayrob on Tue Dec 23, 2008 at 03:24:25 PM PST

          [ Parent ]

    •  New Deal Deja Vu All Over Again (3+ / 0-)
      Recommended by:
      G2geek, marina, Navy Vet Terp

      Yeah, I'm not going to be surprised if the Court turns out to be a major PITA.

      I'm not going to wish any of the Fab Five ill health.  But if someone like Scalia or Thomas decides it's time to develop an interest in playing lots more golf (or spending lots of time trying to convince the Church that it should go with Scalian morals and champion, say, human sacrifice), then I'm all for it.

      "If another country builds a better car, we buy it. If they make a better wine, we drink it. If they have better healthcare . . . what's our problem? "

      by mbayrob on Tue Dec 23, 2008 at 02:10:04 PM PST

      [ Parent ]

  •  Its possible that in three years the TARP loans (0+ / 0-)

    to the banks will put the US citizens in senior note position and SHOULD reorganize the Board of every bank in favor of citizen/owners.

    Bush will be the death of property rights as we knew it.

  •  Takings by the (1+ / 0-)
    Recommended by:

    Government are really what started the whole thing in England.  Property rights are a big part of liberty.  However, all liberty is a compromise between freedom and necessity.

  •  whoa! You forgot guns, li'l feller! (0+ / 0-)

    Them's sacred, too.

    It's not a fake orgasm; it's a real yawn.

    by sayitaintso on Tue Dec 23, 2008 at 04:42:39 PM PST

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