
Desperate CA city looks to use 'eminent domain' to seize loans - bcx
http://www.startribune.com/business/yourmoney/220998141.html
======
cynicalkane
The blog Naked Capitalism--hardly a friend of big finance--points out that
this is a scam here: [http://www.nakedcapitalism.com/2013/08/beware-of-
private-equ...](http://www.nakedcapitalism.com/2013/08/beware-of-private-
equity-guys-bearing-gifts-eminent-domain-mortgage-scam-hit-with-well-deserved-
lawsuit.html)

Some key points:

* The profits are being split among Richmond and a private investment firm named "Mortgage Resolution Partners, LLC".

* Seizing a mortgage for less than its fair market value is blatantly unconstitutional. The argument that the value of an underwater mortgage _in repayment_ is worth less than the house is so obviously wrong, I have a hard time believing Richmond officials honestly buy it. A mortgage that is on track to be repaid is undoubtedly worth close to the future value of repayment, even if the house is worth $0.

* Big banks do not actually own most mortgages in general. So this is not a scheme to rob big banks, although Mortgage Resolution Partners, LLC certainly wants to spin it that way.

* Almost all housing mortgages are merely serviced by banks but owned predominantly by entites such as "state and local governments, hospitals, Fannie, Freddie, and to a lesser degree, foundations and endowments". The banks have a legal obligation to protect these mortgages, of course.

* Many of these loans are current--they're not distressed mortgages at all! They also plan to steer clear of houses with liens. Naked Capitalism comments that the plan only works financially if they go after the mortgages of those that need help the least.

In short, this is a transfer of wealth from a diverse array of investors to
the city of Richmond and a bunch of investment banker types--theft under the
cover of populist outrage. It would also severely damage the market for future
homeowners in Richmond, anyone who wants to sell their home, anyone who wants
to refinance... Oh, it's also a threat to fundemental notions of private
property, rule of law, and market capitalism, but distressingly few people
still care about that. The bit I want to emphasize is that it's Prince John
pretending to be Robin Hood.

~~~
mbreese
_> argument that the value of an underwater mortgage in repayment is worth
less than the house is so obviously wrong_

I'm not so sure that it is so obviously wrong... For the individual home, yes,
it is a stretch to think that the value of an inflated mortgage is less than
the value of the house. But, they are thinking in terms of the population of
all underwater homes. There is an increased rate of default on underwater
mortgages. So, you could argue (and they are), that the lost value when spread
out among all underwater mortgages, makes the pool of them less valuable than
the value of the homes themselves.

To know the answer, you'd have to know the normal rate of default, the rate of
default for underwater mortgages, and the average amount the bank looses when
a mortgage defaults (as well as the average value of the homes and the
inflated mortgage valuations).

It is very possible that when all of the numbers are calculated that offering
below the appraised value of the home for the mortgage is approximates fair
market value over the whole population of underwater homes. A loan wouldn't
necessarily have to be distressed to fall into that statistical population.

If you think in terms of one house, this plan doesn't make sense. But, when
you think in terms of an entire city, it starts to make more sense (if the
numbers and rates line up). It's probably short sighted for other down-stream
effects, like lack of future investment and loans, but for the short term, it
might work.

~~~
bradleyjg
I think you are missing the point. If a government wants to seize a property
using it's eminent domain powers it has to pay "just compensation" for that
property. The Supreme Court has interpreted that to mean fair market value.

If there was a CDO pool that included only mortgages based on houses in that
particular town, perhaps the whole pool could be seized at once, based on the
fair market value of all tranches of the CDO (although there might be tricky
jurisdictional issues). However, that's not the case. The mortgages are spread
across many many different such pools. So rather than one big eminent domain
case, there needs to be a condemnation of each and every mortgage separately.
That being the case, the city must pay the fair market value of each mortgage
-- not the the FMV of an abstract average house.

The single biggest problem with the city's proposal is not that it is
underpaying (though it likely is in most cases) but rather that it is trying
to claim that every mortgage can be fairly valued using the same simple
formula: 80% assessed value of the underlying asset. Simply put, that's nuts.

The second biggest problem is that Freddie and Frannie have already said that
they won't refinance the written down mortgages. So the city would have to
hold the mortgages to maturity. They don't seem to have anywhere near enough
capital to do that, and I don't think the muni market would be terribly
interested in financing such a scheme (or the litigation!). Especially not
with Detroit making everyone nervous to begin with.

~~~
mbreese
No, I'm not missing the point. I'm trying to figure out their logic here.
Which, I believe would be that they are trying to pay "just compensation" for
a mortgage, based on the actual value of the house, and a built-in discount.
The question is: is this a fair estimate of "just compensation". And it just
might be, if you look at the mortgages in aggregate. It is harder to argue
with an individual home, but when the entirety of all homes underwater is
taken into account, that has a known risk associated with it. Each mortgage is
different at the individual level, and so the risk would be harder to include
in a discounted price. But when you lump them all together, you can start to
look at how the risk affects the entire group, so you could start to apply the
risk discount across the board. Some will be more risky, and others less.

At least, that would be an arguable theory...

~~~
bradleyjg
If you want to know what they are thinking, check out Robert Hockett on SSRN.
He's the intellectual force behind the whole idea.

------
hga
From _A Man For All Seasons_ :

Roper: So now you'd give the Devil benefit of law!

More: Yes. What would you do? Cut a great road through the law to get after
the Devil?

Roper: I'd cut down every law in England to do that!

More: Oh? And when the last law was down, and the Devil turned round on you -
where would you hide, Roper, the laws all being flat? This country's planted
thick with laws from coast to coast - man's laws, not God's - and if you cut
them down - and you're just the man to do it - d'you really think you could
stand upright in the winds that would blow then? Yes, I'd give the Devil
benefit of law, for my own safety's sake.

~~~
HarryHirsch
Not sure I understand the quotation. Who is the one driving a cart and horses
through the law, is it Wells Fargo or Richmond?

~~~
hga
Richmond. What they're doing is flatly unconstitutional, as the article
mentions.

And it's an old American tradition to consider bankers as "the Devil" or
strongly in that direction. This has even provided what's very possibly our
best bit of political rhetoric, " _You shall not press down upon the brow of
labor this crown of thorns, you shall not crucify mankind upon a cross of
gold._ "
([http://en.wikipedia.org/wiki/Cross_of_Gold_speech](http://en.wikipedia.org/wiki/Cross_of_Gold_speech))

~~~
HarryHirsch
The constitution explicitly permits eminent domain, provided it's for the
benefit of the public. It's also clear that Wells Fargo will argue against it,
because it's obviously not in _their_ interest.

Not too far from where I live is a house that Deutsche Bank took possession of
a year and a half back. They haven't made any moves to sell since. The lot is
overgrown, the roof will start leaking soon, it's an eyesore that's getting
worse every month.

A few years back I had the misfortune to rent from an absentee landlady from
one of the poorest ZIP codes in Brooklyn who had bought that property at the
height of the boom. The high point of the tenancy was the heating failing in
early October. When the code inspector showed up I could show him the garbage
that hadn't been collected for three weeks and send him down to the basement
where the lady, her husband and her useless cousin had torn the boiler apart,
attempting to fix it, and couldn't put it back together again. She had
arranged for the plumber to come, cancelled it a day later, and then went out
from Brooklyn to do this cock-up of a cowboy job.

The backstory was that her bank had asserted rights the day the plumber was
cancelled. The garbage was there because the garbage hauler had gone unpaid
for that month. I moved out soon after, and the move was a pain.

That was in 2008. The state of the house is uncertain. _Lis pendens_ was filed
in 2008, as I said, and there has been no court date until now.

What I'm saying here is that unmaintained housing stock and housing stock
without a clean title has real effects on the people that live in them and
nearby, the public that is. You can make a good case that eminent domain is
justified here. No one has done it yet, this is uncharted territory as far as
the law is concerned, but it's heartening to see Richmond take a shot at it.

~~~
hga
What the 5th Amendment actually said is " _nor shall private property be taken
for public use, without just compensation._ "

 _Kelo_ notwithstanding, "benefit of the public" is not "public use"; the
former can be stretched infinitely, to the ending of the rule of law.

You're also ignoring that they admit they're seizing the property for less
than it's value:

" _Richmond, working with San Francisco-based Mortgage Resolution Partners,
offers $150,000 to buy a $300,000 bank loan on a house that is now worth
$200,000 and is in danger of foreclosure.

If the bank agrees, the city and the company then obtain the loan at $150,000.
Richmond and the company then offer the homeowner a new loan of $190,000,
which, if accepted....

If the bank refuses to sell the loan to Richmond, then the city invokes its
power of imminent domain and seizes the mortgage. It would then offer the bank
a fair market value for the home._"

See the _Naked Capitalism_ posting that cynicalkane brought to our attention
for more details and a view from a very different angle:
[http://www.nakedcapitalism.com/2013/08/beware-of-private-
equ...](http://www.nakedcapitalism.com/2013/08/beware-of-private-equity-guys-
bearing-gifts-eminent-domain-mortgage-scam-hit-with-well-deserved-
lawsuit.html)

Also mentions that California has a property owner friendly way of
establishing "just compensation".

~~~
HarryHirsch
The offer of kUSD 150 in cash for a title to a house valued at kUSD 200 in
Richmond, that the bank needs to realize a steady stream of income from,
doesn't seem unfair outright. What I mean is, where are the creditworthy
buyers in Richmond? The town is failing and not getting any better.

What is always troubling is the interaction between municipal authorities and
venture capital; their interests do not intersect, and there is little
experience in municipalities with complex financial deals. The showcase piece
is the Birmingham, AL sewer disaster.

The idea of eminent domain is appealing, and the real-world implementation is
another problem.

~~~
bradleyjg
They aren't seizing title to the house, they are seizing a lien and promissory
note. Although the lien can't be worth more than the underlying property, the
note certainly can.

~~~
HarryHirsch
You are right. I used "title" as a synonym for the note, as in the title the
court awards you against someone who owes you a debt.

------
btilly
The one suggestion that I'd add to this is to play hardball. If you force the
city to use eminent domain, the bank can only get paid a fair market price if
they can demonstrate a clean chain of title.

As a number of scandals have shown, they will be unable to do so for a
significant fraction of the mortgages, and they know it. They will scream, but
push come to shove negotiation will be in their interest. And they know it.

~~~
hga
You're assuming the Supremes will buy off on such a radical extension of
eminent domain. Sure, its possible, but I don't at the moment think that's
likely.

~~~
mbreese
Given their earlier decisions, this isn't so radical of an extension. In fact,
it might not be an extension at all... municipalities can use eminent domain
to give land to private companies if it is in the economic interest of the
city.

~~~
hga
I should clarify, it's not so radical an extension of current eminent domain
law, to wit _Kelo_ as you and lisper note. But I'm judging it's enough of a
radical extension from the base Constitution they won't make that leap with
their current makeup.

Which is an iffy opinion, on, I suppose, Justice Kennedy's opinion, who I
don't know _that_ well, and I would not be surprised to be proven wrong.

Note this is in part due to the fact that there's a lot more than "public use"
at stake, e.g. the whole profitability of the deal depends on there being a
difference between the price paid to the bank and a price of the new mortgage.
The losers are more sympathetic than small time landowners, and the big winner
is another "banker"/eeeevil Wall Street type firm (see the _Naked Capitalism_
posting).

------
moocowduckquack
Is fun comparing two of the arguments being put forward by the bank people
here -

 _" The banks argue the plan would "severely disrupt the United States
mortgage industry" because many other cities would likely adopt the same
program to help homeowners who owe more on their mortgages than their houses
are worth."_

and -

 _" Cameron said pension funds, banks and other groups that made loans in
Richmond stand to lose millions if the city is allowed to use eminent domain
to force lenders into accepting less than the original terms of the loan._

 _He also predicted that cities using eminent domain will make lenders wary of
doing business there._

 _" There's a domino effect in play here," he said."_

If many other cities decide to do this, then the financial services industry
is not going to be able to avoid doing business in those cities. One or two
cities maybe, but not if many cities do this.

The financial services industry is always fond of threatening that it is going
to take its ball and go home if it doesn't like the decisions being made, but
really it can't actually afford to.

~~~
hga
Why ever would they play a game that's rigged for them to lose? Who can afford
to go into deals knowing they'll lose money? How will they explain that to
their investors?

~~~
moocowduckquack
They aren't losing money. The sales price of a home after foreclosure is
usually much lower than it's valuation before foreclosure. Over the short term
they will make more money. They are losing the option to make even more money
in the future however, assuming that over a long enough timeline the price
will go back up when the economy recovers.

I am not sure that the way that this is being done is sensible, however I do
not think that it will drive business from the city, at least not in
comparison to a housing crisis.

------
e40
Richmond is the most depressed city in the Bay Area. It's a horrible place. I
spent time there in the early 80's and it was bad then, but it's a lot worse
now.

Given the federal government is going to do nothing about the problem, I
applaud the mayor for creative thinking. I don't think it'll work, but maybe
it will spur someone into a more reasonable action.

~~~
dnautics
creative is not necessarily good. Even if it's "for the better" \- there are
several questions you have to ask: "whose benefit is it for?" Keep in mind
that these sorts of urban renewal efforts (especially those backed by eminent
domain) are exactly the efforts that get called "gentrification" by left-
leaning individuals. Are we actually helping out the people who live there, or
are we lining the pockets of developers and speculators at the expense of a
slightly wealthier but less connected entity? Finally - "do the ends justify
the means". Maybe you believe that the ends always justify the means. One may
wonder though, if the city does this, what will it do next? How could this
newfound, "creative" power be used for ill? There is a reason why,
fundamentally, we should like for our governments to have defined, proscribed
powers, and not "creative" powers.

------
bcoates
I assumed this was going to be another case of eminent domain abuse until I
found out that the bank's argument seems to be "Writing down our loans to
market value would disrupt our entire industry". I don't think "this would
interfere with my accounting fraud" is a legally sound reason to block an
eminent domain taking.

~~~
dnautics
if there is accounting fraud, the bank should be prosecuted and penalized for
that, and the city should not use a back-door mechanism to punish wrongdoing.
This is not what eminent domain is supposed to be used for, and so
fundamentally it's eminent domain abuse.

~~~
bcoates
Eminent domain isn't a punishment. The lender's interest is solely financial
so they should be theoretically indifferent so long as they are compensated at
market value.

The reason they care (and the reason the situation doesn't resolve itself
without outside intervention) is that they're dependent on reporting
improbably high property and loan values in order to not appear insolvent. The
city doesn't care about this and is uninterested in punishing it, but they are
interested in getting a large chunk of their tax base out of legal limbo and
they have the legal right to do so.

This article makes a good rundown about how this is an unremarkable taking and
likely to succeed in court: [http://www.bloomberg.com/news/2013-08-16/eminent-
domain-isn-...](http://www.bloomberg.com/news/2013-08-16/eminent-domain-isn-t-
government-run-amok.html)

------
toddnessa
This is a great way of holding the banks accountable and asserting fairness in
the citizen's fight against the corprotacracy that has a chokehold on our
nation at the moment. If the banks that have received huge amounts of taxpayer
money in the form of bailouts refuse to right the abuses that they created
then it is incumbent upon a free people to stand up or continue to be run
over. It is unfortunate that our federal legislators have allowed things to
get to this point. Local governments are going to have to do something as the
legislators at the federal level are unwilling to go against or are themselves
corrupted by the corporate lobby. This is why we should not allow for career
politicians.

~~~
dnautics
How about this. We should let the NSA spy on all domestic corporate
transmissions. This would be a great way of holding the banks accountable and
asserting fairness in the citizen's fight against the corporatocracy that has
a chokehold on our nation. If the banks that have recieved huge amounts of
taxpayer money in the form of bailouts refuse to right the abuses that they
created then it is incumbent upon a free people to stand up or continue to be
run over.

Do you not see the problem with inventing a new power out of whole cloth to
fight wrongdoing? Surely, the banks have done wrong - and should be
prosecuted. But the exact thing that you rail against - "banks recieving huge
amounts of taxpayer money" was ITSELF the product of exactly the same thinking
that you are engaged in - "let's invent a clever new government power. for the
public benefit [to save the economy]". problem is, these "public benefits" are
so often really just to help out some private consortium - and you don't have
to look too hard to figure out who that is in this case.

------
DanBlake
Obviously illegal and will be struck down in court.

Heres the issue- Bankers created the housing collapse, as far as the homes
value is concerned. By allowing many 'liar loans' that started defaulting, we
exploded with foreclosures which flooded supply without demand. As a result,
home prices went down. It does not change the fact that a percentage of the
people getting hurt by foreclosures are those who lied in the first place.
Yes, your home value went down. Provided they were in a 30 year fixed (the
vast majority were, since they were being resold to fannie/freddie) your
payments did not go down, OR up. If you could afford it on day one, you should
still be able to today.

Basically, this is comprised of many people who lied to get their mortgage and
as a result, their home values went down (but their payment is the same as day
one) but since their homes are down in value they stop paying. The bank should
have never loaned these people the money in the first place. You should have
never been in this house if you are getting foreclosed on now.

*this comment is not applicable to all situations, but a common occurrence.

------
tomohawk
So, the big fix for lawyers and bankers acting badly is to have more lawyers
and bankers acting badly? What could possibly go wrong?

------
goggles99
Where was the opposition to all these houses selling at over-inflated rates
7-8 years ago. Cities weren't complaining then at all of the new tax revenues
being brought in by new construction sales. They were rubber stamping new
housing developments left and right. Cities have to be accountable for the
mess that they share responsibility for letting happen (not just blaming the
banks).

