Critiquing Richmond’s eminent domain plan — Prof. Hockett’s response

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!

Marc Joffe, on March 4, 2014 at 8:40 pm said:

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.

12 Responses

  1. Has Ellen ever had a good look at the writings of Henry George (Progress &Poverty) available from the Henry Schalenback Foundation in New York?

    • Not yet, but I’m speaking at a Georgist conference in July in Long Beach, so I’ll be getting into that shortly!

      • Complete public owning of real estate property or high land value taxes are so foreign to modern Americans, I think suggesting end to Fed and all private banks and printing of U.S. Currency for all govt needs is less of a leap than Georgist inspired land value taxes.

        Poor don’t care, they pay rent regardless, but middle class homeowners and hundreds thousands of small landlord and second house homeowners see their houses as their main source of wealth and security – public ownership or land value tax rips that from them, it’s such a leap! Especially when most old people like to stay in house/ community and already find much lower property tax on a paid off house as a burden in old age, let alone having to pay raising rents to govt or rising land value taxes.

        Just as public state banks are less of leap than just doing away with private banks and Fed, I think there has to be some more palatable way to increment Georgist principles and start cutting out the rentiers while still giving Americans their private cut of land wealth.

      • Good article on the public option for housing at work in Vienna.

        Any gains in wages, such as increased min wages, or disposable income will likely get eaten up in housing costs, just as gains in earnings from women entering workforce in 70s, 80s and having two income families were lost mostly to ever increasing housing costs (and education and health care costs).(see Elizabeth Warrens speech the Coming Collapse of Middle Class )

        It’s so interesting how Vienna public housing seems to have same effect on pricing of private shouting market as our once proud, free-to-students public colleges did. When public colleges were great and cheap, private colleges stay relatively affordable too. Public banking would do same thing.

        Having a private sector that has to compete with public sector is an excellent check and balance on both institutions. Private sector has to hustle to out do non-profit public institutions, but public section can’t get too ossified and bureaucratic if private successes show it up to tax payers. The right balance of private and public can be very effective “process” for consumers, taxpayers.

  2. Quote,” 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. ”

    Quote,” 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)…”

    Quote,” 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. ”

    How do you :
    …get residents back into their homes
    ….prevent any more residents from needlessly LOSING their homes
    ….(save) deeply underwater loans
    ….(save ) value…now being needlessly lost.
    …get value recoupment.
    and at the same time, stabilize the housing market,produce millions of jobs and GAIN trillions in revenue for Congressional spending?
    All of this without increase in spending.
    “What is wrong with a “bailout”, IF in fact it raises revenue ‘for the people’ as well as helping the people ?”
    A solution so simple it screams,

    ***** “Believe nothing merely because you have been told it…But whatsoever, after due examination and analysis,you find to be kind, conducive to the good, the benefit,the welfare of all beings – that doctrine believe and cling to,and take it as your guide.”- Buddha
    Read more:”Justaluckyfool”,

    Have the FED do for US what they have done for the PFPB.
    “QE 4 The People”
    BUY the assets, the mortgages from the private for profit banks, modify them as assumable loans with 2% interest for 40 years.
    IF the amount is $12 trillion, no new money is needed since it would be MERELY a balance sheet item; a transfer of $12trillion from the banks sheet to the Fed sheet.
    The homes would be affordable, payable and price stabilized.
    It would also allow for a sector increase of over 2 million jobs.
    Yes, all of this PLUS an increase of revenue of over $24 trillion over the 40 years-money that Congress MUST spend..””to form a more perfect Union, establish Justice, insure domestic Tranquility, provide for the common defense, promote the general Welfare, and secure the Blessings of Liberty to ourselves and our Posterity,…”

    Why do you not want prosperity for yourselves and your children?

    Please read next post-

  3. THE SOLUTION: A Central Bank (FED) working “FOR THE PEOPLE ” “to form a more perfect Union, establish Justice, insure domestic Tranquility, provide for the common defense, promote the general Welfare, and secure the Blessings of Liberty to ourselves and our Posterity,…”

    “Sometimes the law defends plunder and participates in it. Thus the
    beneficiaries are spared the shame and danger that their acts would
    otherwise involve… But how is this legal plunder to be identified?
    Quite simply. See if the law takes from some persons what belongs to
    them and gives it to the other persons to whom it doesn’t belong.
    See if the law benefits one citizen at the expense of another by doing
    what the citizen himself cannot do without committing a crime. Then
    abolish that law without delay … No legal plunder; this is the
    principle of justice, peace, order, stability, harmony and logic.”
    — Frederic Bastiat
    Why Bernanke should receive the Noble-He has shown the world that a monetary sovereignty can purchase assets without deficit spending. However by buying the MBSs he purchased the banks “poisoned assets” which had such losses that to honor them would have caused a “systemic failure”.The Fed had an opportunity to save the nation but failed to do that because they do not work for the people.
    If the Fed used that opportunity “for the people” and purchased ALL
    residential loans, modified all loans @2% interest, they would have created more then 2 million jobs and solidified the housing market.
    As Hank Paulson said, “We won’t know how much it (crash) will cost until the housing crisis is resolved.” How he would have loved the answer to the question, “Just how much will this crisis cost?” to have been- If $24 trillion were needed it would ‘zero cost’ with a revenue gain of $24 trillion!
    The PFPB have proven their greed .
    Isn’t it time to take away their awesome power to issue currency and to tax that currency?
    How awesome is that power? Did you not listen when they were all shouting “systemic failure” ?

    IF, the FED made a direct purchase of assets (MBSs) and placed those assets on their balance sheet, no new money would be issued, just a transfer from the TBTF balance sheets to the FED balance sheet.
    That’s what a Central Bank working for the Private for profit Banks can do-take their poison fruit and eat it.How great is that for the banks?
    Yet if this same Central Bank was working for the PEOPLE it could have made the same purchases while not only helping the homeowners but also could have created more than 2 million jobs. If only it had purchased the “Ms” of the MBSs; the actual mortgages that back the banks securities. Then modify those loans and make then so affordable that the housing market would become stabilized and construction and employment would increase.And produce “a revenue raised” that would have allowed for a lowering of taxes to perhaps even the elimination of FICA or at least allowing for a basic deduction of $100,000 on income.
    Krugman (01-25-14),”Jobs and inequality are closely linked if not identical issues.” Perhaps, just maybe, we might some day agree : The discovery of the possible “systemic failure” of 2008-9 was the inequality, injustice of the monetary system created by the legislated changes that allows “Private For Profit Banks to issue our currency and to tax that currency.” The discovery of the PFPB being able to “sell the future profit, get todays cash for tomorrows revenue (interest income) , was the prick that burst the bubble !

  4. I like to add to this discussion the specter of ‘fraudulent inducement’ by the Financial Power in all this mess, offered by Catherine Austin Fitts, where she communicates the Financial/Investor Power’s decision, during the Bush era, to take $4 trillion dollars of American investment money out of the US economy and take it to Asia, most of it going to China. The subsequent, phony prosperity in the United States came through the finance/mortgage/real estate industry until the real economy, finally suffers the physical effects of loss of companies, industry and employment opportunities; the Global economy began shedding US workers. Americans are payment buyers of their prosperity and property, now the bubble pops, the foreclosure crisis was inevitable. With this foreknowledge, the Financial Power ordains and orchestrates the destruction of the US economy via the financialization of the economy and speculation in every sector of the population’s economy, in the housing market, in the food supply, etc. US Political leadership, in total submission to Wall St., saw nothing wrong, and could only enable this financial/economic offensive.

    The loss of jobs and industrial, production facilities to ‘Globalization’ was a major contributor to our present crisis. The crisis, in fact, is ongoing. Dangerous declines in production threaten the population’s standard of living now. The housing remedy cannot possibly be effected successfully by the monetary fix, alone. The reinvention of the American system of political economy is the most powerful remedy; it demands the activation of the Full Employment Policy as a national security priority, the redevelopment of North America’s water and power facilities as proposed in the NAWAPA plan, a new national nuclear fueled energy grid, a new trans continental MagLev rail system. Focused Brainpower, Labor, Physical Production and Infrastructure will defend the integrity of the United States and protect and sustain the population.

    Within the US political power base and the citizenry, there is no real recognition of the exact nature of the national crisis, the destabilization of the United States through the offices on the monetary financial system, centered in Wall St. Everyday the United States Congress enables the Fed’s unrelenting unemployment-unlimited bailout system to operate the collapse of the national economy is the national security crisis. The US citizenry must organize, perform the political intervention, work for and demand the stabilization of the United States.

    • Good observations, Clarc King. My observation, however, has brought me to the conclusion that our ‘elected’ govt. reps. do indeed understand the problem, but are in no position, and have no appetite, for upsetting the applecart that allows them to continue to feign ignorance of our economic woes. I live in SC, and have written all of my senators and representatives, our governor, and our treasury secretary, imploring them to recognize the simple remedy to our corrupt financial situation; I. e., publicly owned central banking that does away with the criminal cabal that controls banking in the western world. They won’t even discuss the possibility of circumventing the privately owned central bank cabal. I am now persuaded, without doubt, that our representatives are very aware of the problem, and the remedies required for healing. However, to do so would require them to bite the hand that feeds them, and the privately owned banking cabal perpetuates their irresponsible conduct, and indeed, rewards them for such. Bite the hand that feeds them, at mine and your expense?! That, Dear Brother, ain’t gonna happen.

  5. throwing away value indeed is the approach sans the cafr/cafr solution ala and http://www.cafr1.commargaret.

  6. a better plan…make all the ‘sellers’ of the original mortgage loans buy back these properties at market value…ALL…they were put together by thieves so either recoup or put the makers in jail…ALL….ED just places the burden on …taxpayers in the area’s….imho

  7. […] of the targeted loans. Writing on the Web of Debt Blog, he argues that the very fact that it is the loans “most deeply underwater” that are targeted is what makes the plan […]

  8. Hocketts response kicked ass. Being in construction and watching the whole hosting bubble pop, the most frustrating thing to me (besides half my co-workers losing their jobs, getting my salary cut etc) was people in hopelessly underwater loans not being able to make a win win deal directly with their lender, a principle reduction. Instead the homeowners lost their houses, and the lenders spent far more foreclosing property and see long at reduced price than they would have from a principle reduction with original homeowners. This was one of nuttiest parts of housing bubble pop. If loans owned desire cloth by banks that weren’t leverage to hilt and relying on the fake house value for backing, assets, then the banks would have done same thing as an individual who had loaned money to homeowner, made a deal to avoid costs of foreclosure. In a sense, what Richmond is doing is saving investing for themselves. Only losers are parasites that live off the churn that destroys value and communities and families.

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