Eminent Domain Abuse?

[Dreadnaught]

I considered posting this in the thread about California bleeding itself to death, but I think the merits of this deserve a separate thread.

I just can't see how this is a good idea. Best case scenario is this turns Richmond into a half-crappy place with cheap housing...that's impossible to leave because no bank will loan to a new homeowner in Richmond. So...stasis.

Richmond to pursue eminent domain on mortgages

Published 5:51 pm, Wednesday, September 11, 2013

Richmond's unprecedented quest to use eminent domain for underwater mortgages will move forward after a divided City Council voted early Wednesday to pursue it.

Meanwhile other cities, including Vallejo, San Francisco and El Monte (Los Angeles County) are also evaluating the concept, despite legal obstacles and overwhelming opposition from financial markets. Thursday, Wells Fargo and Deutsche Bank will go to court seeking a preliminary injunction to halt Richmond's effort on the grounds that it is unconstitutional and would hurt lending.

Richmond's City Council voted 4-3 to continue exploring the use of eminent domain for underwater mortgages, after a lengthy and contentious meeting packed with residents who expressed strong feelings for and against the controversial idea.

"Leadership depends on taking risks," said Mayor Gayle McLaughlin, who proposed the measure to set up a joint powers authority with other interested cities.

More than 300 community members, many wearing T-shirts to proclaim their position - yellow for supporters, red for opponents - cheered, booed, applauded and waved signs or flags as council members and dozens of speakers discussed invoking eminent domain to seize and restructure underwater home loans as a way to prevent foreclosures.

"Richmond and its residents have been badly harmed by this housing crisis," McLaughlin said. "The banks have been unwilling or unable to fix this situation, so the city is stepping in to provide a fix."

How it works
That fix would involve acquiring underwater mortgages at steep discounts and then restructuring them to make the payments affordable. While city leaders emphasized that they would prefer to acquire the mortgages through negotiations with banks and investment firms, eminent domain would be an option to force the sales.

Eminent domain, which involves seizing private property for public use, is more commonly used for such purposes as constructing roads or airports. If Richmond proceeds with its plan, it would be the first city in the nation to use its municipal power of eminent domain for mortgages.

Richmond is still far from actually using eminent domain to forcibly acquire the home loans, however. By state law, that step would require approval by a supermajority of the council, or five members. While McLaughlin and council members Jovanka Beckles, Tom Butt and Jael Myrick voted for her measure, the necessary fifth vote doesn't appear to be there. Vice Mayor Courtland Boozé and Councilmen Nat Bates and Jim Rogers voted against the measure.

Opposing measure
Boozé and Bates floated their own measure to assert that the city would not use eminent domain and would withdraw the offer letters it sent in late July trying to buy 624 underwater mortgages at a steep discount. It failed to win support from any of the other council members.

Rogers proposed a measure to require Mortgage Resolution Partners, the private San Francisco firm that is providing financial backing and technical advice, to purchase insurance to protect the city from legal liabilities. That proposal failed, with only Rogers and Myrick supporting it.

Rogers said the possibility that banks might prevail in a lawsuit claiming multimillion-dollar damages is too risky.

"A 1 percent chance of bankruptcy from this program is a deal-breaker for me," he said.

Thursday's hearing in U.S. District Court in front of Judge Charles Breyer is the banks' attempt to freeze the plan in place. The city says the suit is premature and a form of harassment. Several housing advocate groups filed an amicus brief saying the banks' contention that Richmond's plan would chill mortgage lending in the city is itself a threat of illegal redlining.

http://www.sfgate.com/bayarea/articl...es-4807122.php

[Ominous Gamer]

On the other end, Florida is currently dealing with the problem of what happens when its made extremely difficult to use eminent domain to clean up abandoned properties. Eminent domain is the biggest, sometimes only worthwhile tool of code enforcement. Without that threat the agencies have no teeth to go after eye sores and problem properties that bring down the value of the entire neighborhood; a large portion of which are bank owned due to foreclosures.

As the article describes it, this last step to stop a property from reaching the point of what Florida is dealing with seems like a complicated step, so it sounds like its got the right balance of usefulness, although the possibility of being abused is quite high.

[LittleFuzzy]

I'm pretty ok with using eminent domain on empty properties, they can cause all kinds of problems and it is the city and the community paying the price, not the owner. Florida is hamstrung by something which ought to prevent this measure from getting anywhere at all, that in the US eminent domain seizures can only be done for public use. Public interest is not sufficient, though the states do possess some leeway as to what "public use" can entail.

[Hazir]

I'm pretty ok with using eminent domain on empty properties, they can cause all kinds of problems and it is the city and the community paying the price, not the owner. Florida is hamstrung by something which ought to prevent this measure from getting anywhere at all, that in the US eminent domain seizures can only be done for public use. Public interest is not sufficient, though the states do possess some leeway as to what "public use" can entail.

Interesting concept though. I don't really understand why financial institutions would be against this as it's likely that the government would put a bottom in the market. Given that a mortgage only is a different type of loan because the government backs up its special status I see no reason why you'd have to reject the principe off hand.

[Dreadnaught]

Because the banks are having their property seized. Not only that, but the banks are having their property seized because the value of that property isn't expected to grow fast enough in a short-enough timeframe to satisfy a bureaucrat.

Almost (almost) as if the government took away your retirement investments because they weren't growing fast enough.

[LittleFuzzy]

Interesting concept though. I don't really understand why financial institutions would be against this as it's likely that the government would put a bottom in the market. Given that a mortgage only is a different type of loan because the government backs up its special status I see no reason why you'd have to reject the principe off hand.

Well, a lot of underwater mortgages still see their full payments made and the housing market is moving quite a bit quicker these days than it was so even if the current owner can't keep making payments and the bank forcloses, they're probably going to be able to flip the property before too much time has passed so they won't be losing much money sitting on it. Eminent domain will result in a floor but it will definitely lose them a fair bit of money, and they're the ones who are going to be on the hook for the costs incurred by the eminent domain process (don't ask my why the person or organization whose property is being seized is the one paying those, I don't have the foggiest, all I know is that in the US system they are).

[Hazir]

Well, a lot of underwater mortgages still see their full payments made and the housing market is moving quite a bit quicker these days than it was so even if the current owner can't keep making payments and the bank forcloses, they're probably going to be able to flip the property before too much time has passed so they won't be losing much money sitting on it. Eminent domain will result in a floor but it will definitely lose them a fair bit of money, and they're the ones who are going to be on the hook for the costs incurred by the eminent domain process (don't ask my why the person or organization whose property is being seized is the one paying those, I don't have the foggiest, all I know is that in the US system they are).

Just because they (still) generate income doesn' t make those mortgages less of a burden on the banking system and a serious potential systemic risk for the financial system. If anything it would be fair that the little income they still generate benefits the coffers of the state.

As for Dreadnaught' s comment; those banks would have been dead without the deep pockets of the state. Their ownership of anything would not be an overriding argument against anything in this day and age.

[Veldan Rath]

The argument is I saved your life so I can do anything to you?

Interesting.

[Hazir]

The argument is I saved your life so I can do anything to you?

Interesting.

And this is what we call a red herring; a bank is not a living being, it is a commercial entity. If such an entity is being kept in business by a steady flow of money from the tax-payers (let there be no mistake about that; banks are living on money that at some point will come out of your pocket, if not today then in the years to come), then there is no reason in principle to no dispense of their property in a way that is in line with that situation. Now, I know I shouldn't have to spell this out, but I will still do i;. I used the words 'in principle', that means, that there could be other practicle reasons why you shouldn' t do this. None of them based on the high morality Dread and his try to invoke.

[Veldan Rath]

It's not a red herring, it's inconvenient to your point of view.

The bailouts were ridiculous, but if the nudniks in the government did not put the caveat of we will take yer stuff cause you (in some cases forced to) took some money as a loan then I'm against it.

It makes them both bad actors and harms trust.

[GGT]

Interesting concept though. I don't really understand why financial institutions would be against this as it's likely that the government would put a bottom in the market. Given that a mortgage only is a different type of loan because the government backs up its special status I see no reason why you'd have to reject the principe off hand.

Financial institutions are against it because --- those mortgages aren't simply home-loans, but represent multiple CDOs, with so many third party investors and traders --- it would take years of litigation to sort it all out. Deep pockets indeed.

[Dreadnaught]

Just because they (still) generate income doesn' t make those mortgages less of a burden on the banking system and a serious potential systemic risk for the financial system. If anything it would be fair that the little income they still generate benefits the coffers of the state.

As for Dreadnaught' s comment; those banks would have been dead without the deep pockets of the state. Their ownership of anything would not be an overriding argument against anything in this day and age.

Even beyond this whole idea that a one-time bailout means the government can molest banks and property rights for eternity...

If these mortgages were really a problem, the banks would be begging for a bailout as you said. Or they would be writing them off for the tax benefits.

But the banks involved want to hold these loans. The federal government (which bailed out some banks five years ago) isn't seizing the mortgages. Those bailouts were repaid with interest long ago. This is a local government threatening to seize mortgages because they think the homes underneath those mortgages aren't worth much, then re-selling those seized mortgages to other banks.

[LittleFuzzy]

Just because they (still) generate income doesn' t make those mortgages less of a burden on the banking system and a serious potential systemic risk for the financial system. If anything it would be fair that the little income they still generate benefits the coffers of the state.

You asked why they were opposed. I answered.

[Hazir]

It's not a red herring, it's inconvenient to your point of view.

The bailouts were ridiculous, but if the nudniks in the government did not put the caveat of we will take yer stuff cause you (in some cases forced to) took some money as a loan then I'm against it.

It makes them both bad actors and harms trust.

The bailouts were more than anything reality and by and large the only reason why most banks still exist. Hell, banks exist at the mercy of the state today and whenever things get wobbly they will again be holding up their hands which 'you' then will fill with more of your money. You seem to think that banks were saved and now it' s just a matter of the government not having negotiated them paying back. The problem is not that, the problem is that they are still sending you the hospital bills and they have no inclination to get their care on the cheap.

[Hazir]

Even beyond this whole idea that a one-time bailout means the government can molest banks and property rights for eternity...

If these mortgages were really a problem, the banks would be begging for a bailout as you said. Or they would be writing them off for the tax benefits.

But the banks involved want to hold these loans. The federal government (which bailed out some banks five years ago) isn't seizing the mortgages. Those bailouts were repaid with interest long ago. This is a local government threatening to seize mortgages because they think the homes underneath those mortgages aren't worth much, then re-selling those seized mortgages to other banks.

One in six mortgages is under water; this isn' t just about payback for the first bailout; it is ''us'' taking a lesson from it and knowing that with these figures the next and bigger bailout may be just around the corner. Oh, and those tax deductions for the banks? You'll be paying those too.

[GGT]

Even beyond this whole idea that a one-time bailout means the government can molest banks and property rights for eternity...

The reverse is more truthful and real. The idea that Banks and SIFI can continue to manipulate, extort, and extract from the financial system, and hold our economy hostage, is a bastardization of government oversight...and a molestation of the public. FDIC backed banking (deposits, collateral, credit, borrowing, lending) is meant to benefit people, not the other way around.

But the banks involved want to hold these loans. The federal government (which bailed out some banks five years ago) isn't seizing the mortgages. Those bailouts were repaid with interest long ago. This is a local government threatening to seize mortgages because they think the homes underneath those mortgages aren't worth much, then re-selling those seized mortgages to other banks.

Huh? I read the proposal as local gov't seizing property, the land itself....because the lien-holders (banks) haven't honored their end of the initial bargain (legal contracts with community mandates). Eminent Domain has been used to turn around blighted areas, but the first step is normally local gov't going after slum-lords, crappy RE managers, or absentee property owners. Today, the main culprit is often the Bank itself.

[LittleFuzzy]

Excellent restatement of the exact idea expressed 15 months ago when the thread was started. Local governments using eminent domain on underwater mortgages.

[Dreadnaught]

Excellent restatement of the exact idea expressed 15 months ago when the thread was started. Local governments using eminent domain on underwater mortgages.

??

Was something deleted?

[LittleFuzzy]

Yep