The comment below to my eminent domain article merited a detailed response, so I sent it to Professor Robert Hockett, the Cornell University law professor who was the principal author of the Richmond plan. His answer was so useful that I thought I would submit it as a separate post, also below. Thanks Bob and Marc!
I am not in a position to debate the legal theory – which looks plausible. But I think you are missing certain facts which make this situation something far more murky than a plucky local government standing up for the little guy against evil banks.
First, Wall Street has already collected its profits from these securitization deals – in the form of fees paid when the mortgages were bundled 7 or more years ago. While we don’t know exactly who owns all the securities that would be negatively impacted by an eminent domain, we do know that a lot of it is held by public employee pension funds. So instead of taking it to the big banks, you may well be taking it to the humble public servant.
Second, not everyone who took on these mortgages is a poor innocent victim. Some wanted to take cash out of their properties for one reason or another, and actually got the money cheap due to the lending bubble. Also, many homeowners with underwater mortgages in Richmond are not poor. The original pool slated for eminent domain included 3000+ square foot McMansions and waterfront properties. Finally, with the recent rebound in home prices, many fewer homes are underwater and foreclosure rates are down – so you are addressing yesterday’s problem.
As for the council, they need to work with Mortgage Resolution Partners because they want someone to cover their legal costs during the inevitable litigation. The City could be driven into bankruptcy if it is forced into endless litigation or suffers an adverse judgement. More disturbing is the recent expose from the Center for Investigative Reporting showing that Richmond public housing – a Council responsibility – is dilapidated and infested with vermin. If we can’t trust elected officials to provide livable public housing why should we rely on them to resolve blight arising from private foreclosures.
Prof. Hockett’s response:
It never ceases to amaze me how, even after years now of explaining and advocating the eminent domain approach to the underwater PLS loan problem and detailing precisely (a) when it is and when it is not called for, (b) how it works, and (c) the premises upon which it is predicated, people still seem to misunderstand or mischaracterize the plan and entirely overlook or breeze past its fundamental premise. That premise is, again, that deeply underwater loans are subject to enormous default risk (just look at Fannie’s and Freddie’s 10K filings for a hint as to how high that risk is – nearly 70% for non-prime and 40% even for prime loans), such that one actually RAISES the actuarial value of the targeted loans by purchasing them and writing down principal so long as one targets the RIGHT loans. That idea is transparently conveyed, I would have thought, in the VERY TITLE of the NY Fed piece: you can pay Paul AND Peter where these loans are concerned.
Why, then, do we continue to encounter, again and again, blithe references to ‘securities that would be negatively impacted,’ ‘investors who would lose,’ etc.? The whole POINT of the plan is to target ONLY deeply underwater loans and associated securities that will be POSITIVELY affected. Those are EXACTLY the loans Richmond and other cities are looking at. And they are getting the values of those loans appraised by the industry’s own favored appraiser – MIAC.
Next, on the ‘yesterday’s problem’ meme, this one entirely ignores the locally concentrated nature of the nation’s underwater mortgage loan problem. Well more than half of Richmond’s, Irvington NJ’s, Newark NJ’s, Baltimore MD’s, Wayne County MI’s, … etc. etc. etc. … loans are deeply underwater. (Take a look at the CoreLogic or Zillow ‘heat maps’ for a ‘big picture’ view of the problem’s distribution.) There is no ‘recovery’ worth the name in these places. Note moreover that even nationally the underwater rate is still around 20% – after having been between 25% and 30% at its worst. All this even though we are now approaching year eight – EIGHT! – since home prices began tanking in the summer of ’06! Are we to wait another 12-16 years for the remainder of the problem to ‘take care of itself?’ And just what is the source of future appreciation supposed to be, given continued real wage and income stagnation, continuing high unemployment, and Fed intentions to taper from historically low interest rates – rates that account for all ‘recovery’ that’s thus far occurred – in coming months?
Hope springs eternal, it seems, and that is a beautiful thing. But it is quite beyond the pale to expect Richmond to watch helplessly – and indeed hopelessly – as thousands more of its own residents are rendered homeless in the name of the beautiful ‘hope’ of pontificating well-to-do financiers.
Like remarks hold of one commentator’s observation concerning Richmond’s recent public housing problem. That is indeed a terrifying story, which I’ve followed carefully from the start, but people like this fellow are drawing the very contrary of the right lesson. The lesson is not that ‘we can’t trust local government to manage public housing well, therefore let us sit back and watch thousands more lose their homes and be forced into public housing.’ The lesson, rather, is ‘let us finally end the foreclosure crisis, in order both that there be no more demand on scarce public housing resources and that there finally be a restoration of municipal revenue, which of course shrinks to the vanishing point when wave after wave of foreclosure destroys property value and with it the city revenue base – all while, with cruel irony, municipal abatement costs brought on by abandoned and dilapidating homes shoot through the roof.’
There could be no more effective solution to Richmond’s challenges – including those with public housing – than to get its residents back into their own homes, and to prevent any more residents from needlessly LOSING their homes.
Finally, I don’t think that the ‘endless litigation’ meme deserves any credence either. I have repeatedly assessed every one of the four to five putatively ‘legal’ objections that opponents have tried out over the past several years, and literally not a single one of them – not the Takings Clause ‘argument,’ not the Due Process Clause / jurisdictional ‘argument,’ not the ‘dormant’ Commerce Clause ‘argument,’ and not, funniest of all, the Contract Clause ‘argument’ – is serious. They appear to be meant more to terrorize municipal counsel than actually to impugn the legal bona fides of the eminent domain plan. (Surely that’s why they flew all over the internet on impressive law firm letterhead long before any suits were filed.) Opponents have lost two suits against Richmond already on precisely the grounds that I said that they would within minutes of their filing them back last August and September. I don’t think these opponents are irrational; at some point they are going to stop throwing millions of their own dollars away on comical ‘Hail Mary’ lawsuits doomed ab initio to failure, and instead enter into constructive dialogue with the cities on how best to select, and then value, loans locked in PLS trusts whose values can be raised by writing down principal. Surely Richmond’s reliance on MIAC in appraising its targeted loans ought to reassure them of the cities’ good faith.
Because value is now being needlessly lost in the form of continuing – yet avoidable – delinquencies, defaults, and costly foreclosures, what we are talking about here – and what I’ve been talking about all along – is value recoupment. It’s about ending an ongoing, deadweight loss. The salvaged value can be distributed solomonically over homeowner, bondholder, and all other stakeholders alike. And it is precisely this distribution – as well as determining how best to maximize the surplus that is to be distributed – that those who now slander and carp at the cities ought to be JOINING the cities in effecting. To do otherwise is simply to throw away value.
Editor’s comment: “distributed solomonically” – great image! That sums it up.
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