Cities Prepare to Use Eminent Domain for Underwater Mortgages

Real estate market cries out for government intervention. ||| wikimedia.orgwikimedia.orgThe New York Times today has a marvelously biased front-pager about the city of Richmond, California preparing to use eminent domain to seize as many as 626 homes from mortgage-holders so that underwater and occasionally deadbeat residents can stay without fear of foreclosure. Here’s the lede:

The power of eminent domain has traditionally worked against homeowners, who can be forced to sell their property to make way for a new highway or shopping mall. But now the working-class city of Richmond, Calif., hopes to use the same legal tool to help people stay right where they are.

Note the rhetorical sleight of hand there, in which "homeowners" are defined not as "the people or institutions who own the bulk of a home's value," but rather "the residents of a home, regardless of how little they own of it or how infrequently they make loan payments." This frame makes it easier to wave away the property rights and constitutional claims of mortgage holders. Particularly because they’re also maybe racist: 

Many cities, particularly those where minority residents were steered into predatory loans, face a situation similar to that in Richmond, which is largely black and Hispanic. About two dozen other local and state governments, including Newark, Seattle and a handful of cities in California, are looking at the eminent domain strategy, according to a count by Robert Hockett, a Cornell University law professor and one of the plan’s chief proponents. Irvington, N.J., passed a resolution supporting its use in July. North Las Vegas will consider an eminent domain proposal in August, and El Monte, Calif., is poised to act after hearing out the opposition this week. [...]

Many of the communities considering eminent domain were targeted by lenders who steered minority families eligible for conventional mortgages into loans with higher interest rates and ballooning payments

Be honest with you, I just like pretty pictures of California. ||| WikipediaWikipediaEmphases mine.

There is no doubt whatsoever that many mortgage company behaved very badly before, during, and after the 2008 financial crisis—why, here's a fresh headline from this week: "Mortgage Company Sued for Giving Bonuses to Employees who Steered Homeowners to Bad Deals." But the financial crisis was caused, in great part, by government at all levels trying furiously to prop up housing prices and promote home ownership. It was extended, in great part, by government’s steadfast refusal to let the housing market clear, its grossly ineffectual program for modifying underwater loans, and ongoing reluctance to alter Washington's monopolist role in the mortgage lending industry.

When government creates cheap money, aggressively promotes home ownership, subsidizes the risk of mortgage lending, then intervenes once more when the deals go sour, neither market bubbles nor nefarious actions by profiteers should be a surprise. Wrapping a bow on all that by eminent domaining the loans is a perfect circle of lousy public policy, at the expense of all of us.

More on why we shouldn't use eminent domain on mortgages from Steven Greenhut and Dana Berliner.

UPDATE/RELATED: Relevant headline today from Veronique de Rugy–"Federal Mortgage Bailout Program Sees a Quarter of Homeowners Re-Default."

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  • Pro Libertate||

    Jesus, what is it with the government bailing out everyone? Just stop already. There is nothing wrong with renting. Really. In fact, given the expenses of home ownership, there's a great case to be made for many that renting is the superior option.

    You have to wonder just how much less a house would cost without all of the government meddling. 50% less? More?

  • Invisible Finger||

    If a house costs less, then the government rent on that property (aka property taxes) goes down.

    This is why government wants property values up up up.

    And of course the local governments will seize properties when the taxes are unpaid.

  • Bryan C||

    Seize the property? But...but...what about The Homeowners?

  • Zeb||

    I don't think that the prices in absolute terms matters much for property tax purposes if the prices of all houses change similarly. They can just set the rates higher.
    At least where I live, they reassess for tax purposes every 10 years or something and reset the rates accordingly. Sometimes the rates go up, sometimes down, but usually there is no sudden change in overall tax if prices go up.

    Real estate transfer taxes, on the other hand, are probably a reason why governments want housing prices to stay high.

  • Lord Humungus||

    I'm an ex-homeowner. Did that for ten years. Now I rent a house in an upscale neighborhood - the rent is cheaper than if I bought on the same street. Like a thousand bucks cheaper. And my kid gets to go to one of the best schools in the state.

  • Andrew S.||

    When I bought my house, I borrowed about half of what the banks told me they were willing to lend me. Stupid me. Should've just borrowed too much and waited to be bailed out.

  • Dr. Frankenstein||

    Just nationalize the land already. What could possibly go wrong?

  • Heroic Mulatto||

    The land was already nationalized in 1783 when via the Treaty of Paris all land that was held by allodial title was subsumed to be fee simple, that is, the United States is the ultimate landowner of all property within its boundaries.

    Thomas Jefferson spat blood at this development; however the greed of the state eventually won out over liberty, as usual.

  • Dr. Frankenstein||

    tl/dr the link but I'll take your word for it. You learn something new every day, comrade.

  • Heroic Mulatto||

    Well, read the fourth paragraph up from the bottom. The one that begins "That we shall at this time also take notice of an error in the nature of our land holdings, which crept in at a very early period of our settlement."

  • Heroic Mulatto||

    At what point did bankers leap out of the bushes, hold a gun to minority residents' heads, and force them to sign "predatory loan" papers?

    Or is it just ol' Progressive racism of condescension where it's assumed that inner-city poor Black and Hispanics are incapable of elementary math?

  • Andrew S.||

    Why ask questions to which you already know the answers?

  • Heroic Mulatto||

    Why ask questions to which you already know the answers?

    Is it because I'm an educator who was shaped in the Socratic mold? Or was it perhaps because I was raised in a Jewish household? Or maybe....

  • John Galt||

    Just an old-fashioned Progressive racism
    Comin' down in three-part harmony
    Just an old-fashioned Progressive racism
    One I'm sure they wrote in shit and pee
    la-la-la

  • Auric Demonocles||

    It's the catch 22 of loan racism:

    Don't give loans to poor minorities, Barack Obama sues you for racist discrimination.

    Do give loans to poor minorities, have land seized and given to 'homeowner' when they are too poor to pay the mortgage.

  • Auric Demonocles||

    EDIT BUTTON!!!!

    have land seized and given to 'homeowner' when they are too poor to pay the mortgage because your loans were predatory racism
  • ||

    I won't bother shedding tears for the banks here.

    It's the taxpayers that are getting the shaft here.

    Remember, when it comes to eminent domain the word "taking" isn't exactly literal. I'm betting the banks are going to jump at this.

  • ||

    Having RTFA, I take the last comment back.

  • Rasilio||

    As someone who has had this happen to me with a car loan it takes no gun, just a good ability to lie and no morals.

    Once when I was younger (mid 20's)I thought I had bad credit, I'd had a car repossessed a few years earlier and after that experience paid mostly cash for everything. As a result I had almost no experience with credit or credit scores.

    I needed a new car and went in to a dealership worried that I wouldn't even be able to get a loan so I gladly accepted the 19% loan they offered me on a Used Dodge.

    Later on (like 3 months later) I find out that my credit score was a 725 and I could have qualified for about a 5% loan.

    Did they hold a gun to my head and make me sign that note? No, of course not. Should I have researched more before making that decision? Probably yes. Still, there is absolutely no way you can legitimately argue that they did not lie to me and commit fraud because I was specifically told that the finance manager had to fight with the bank for it and that was the best deal he could get.

    I am certain the situation is quite the same here and it has nothing to do with thinking minorities are incapable of math but rather the relatively poor having much less experience with finance and lending and not even knowing the right questions to get answers to and trusting that the banks are dealing fairly with them.

  • CampingInYourPark||

    You might as well argue that Whole Foods lied to you about the price of hamburger because Kroger was $1 per lb. cheaper.

    Later on (like 3 months later) I find out that my credit score was a 725 and I could have qualified for about a 5% loan.

    So, you entered a contract uninformed and it's somehow the other party's fault for you being ignorant. I'm fighting back the tears.

  • robc||

    So after 3 months, you refied into a 5% car loan, right?

  • robc||

    That was for Rasilio, I misclicked.

  • Rasilio||

    Lol no, the loan had a massive penalty for paying off in less than 18 months and within 18 months the dot com bust had hit and I was out of work so would not have qualified for a loan on the basis of income.

    not to mention getting divorced and my ex keeping that car as part of the divorce even though I did eventually have to pay the entire damn thing off cause she skipped the country with like 4k left owed on it

  • robc||

    I was clueless about the home-buying process when I bought my condo back in 1998. My parents were clueless too, they never had a mortgage on their house. They had some sort of 5 year note from a country bank that my grandfather cosigned for them back in 1962.

    So what did this clueless individual do? I brought my own lawyer to the proceedings. The bank was absolutely befuddled by this.

    I was making a 6-figure purchase, the $500 I spent on having a lawyer who represented ME and ONLY ME was maybe the best money I ever spent.

    Not saying you should have brought a lawyer to your used car negotiations, different magnitude. But it applies to everyone who got "suckered" by a mortgage deal.

  • ||

    You found yourself a pro-bono lawyer and sued them for fraud right?

  • Rasilio||

    It would have been pointless, the difference in finance charges was only something on the order of $5000, getting a lawyer to sue them for that would have cost pretty damn close to 5k and I didn't have any evidence of the fraud as it was my word against theirs on what was said, they could simply have denied ever telling me that my credit was bad and 19% was as good as they could get

    I did note that I did things wrong by being uninformed did I not?

    I chalked it up to a learning experience, does not change the fact that the dealership lied to me and committed fraud against me however.

  • Jordan||

    Mission Accomplished!

    The U.S. homeownership rate, which soared to a record high 69 percent in 2004, is back where it was two decades ago, before the housing bubble inflated, busted and ripped more than 7 million Americans from their homes.

    God, I wish MNG was still around to eat this. "BUT TEH SELF-ESTEEM!!1"

  • NoVAHockey||

    I wonder what they will do when you can never again get a loan in Richmond, CA.

  • Sevo||

    Darn you NVH!

  • Invisible Finger||

    They'll claim racist redlining and hope you forget the eminent domain.

  • Sevo||

    (fingers of left hand touching forehead, eyes fixed in middle distance)
    Prediction!
    Mortgages will be very hard to come by in a town called Richmond, California!

  • Andrew S.||

    Which is of course racist, or representative of whatever kind of bias they want to claim, and will lead to further government intervention to force banks to give mortgages to people in that city.

  • Sevo||

    (fingers of left hand touching forehead, eyes fixed in middle distance)
    Prediction!
    Banks will be thin on the ground in a town called Richmond, California!

  • Andrew S.||

    Which is also racist, and will probably lead to punishments from the Fed and from the State of California! Yay government!

  • ||

    Or ... mortgage interest rates will continue to spike.

    Whenever there is a risk that the bank might not get the money it lends back, they are going to either restrict loan eligibility to raise interest rates. Any sane person would do the same thing if they were lending their own money.

  • Invisible Finger||

    I have a hard time believeing a sane person would lend their own money.

  • ||

    I'm confused. If the housing market has recovered, then how can so many people still be underwater?

  • Pro Libertate||

    Because it hasn't actually recovered. Lots of smoke and mirrors to prop up things--not just in housing.

  • ||

    Yeah, that's pretty much what I'm thinking. There's a lot of "Let's try to convince people that housing prices are going up to get them to buy now."

  • robc||

    Aggregate market value of homes peaked in 2006Q1 at $28.5T.

    It bottomed out in 2011Q4 at $19.2T.

    2012Q3 (last data I have available) it was "back up" to $20.2T.

    SRC: For the quarterly data sets, the house price data are benchmarked to an estimate of the value of the stock of housing based on micro data from the 2000 Decennial Census of Housing and 2001 Residential Finance Survey, and are extrapolated forwards and backwards from that benchmark year using the Macromarkets LLC (formerly Case-Shiller-Weiss) repeat-sales index for the first data set

  • robc||

    The important thing to remember is that LAND value is what balooned and plummeted, structure value cruised along at a normal pace.

    Land values are at 2000Q1 levels.

    The index used is based off 2000Q2, everything is set to 1.0 for that quarter.

    The land index is now (2012Q3) at .94. Structure index is at 1.41. Market value index is at 1.28. Price index for consumption is at 1.25.

  • Pro Libertate||

    And that is propped up by all of the bailouts, foreclosure weirdness, etc.

  • robc||

    Yep.

    The new owners bribe did boost things for a few quarters back a few years ago, but once that ended, the crash continued.

    Im thinking we have finally bottomed out, it just got delayed by all the etc.

  • H. ReardEn||

    Using eminent domain, the mortgage companies would be paid for the privilege of relinquishing ownership. If the mortgage is paid in full, why would they complain? They aren't proposing to 'seize' the property, are they?

    Without RTFA, it seems that this is would be a bailout of the mortgage companies and the homeowners. Free shit for everybody.

  • ||

    The mortgages are underwater, so they wouldn't get the full value of the loan.

    I suspect California will come up with an excuse for why they don't have to pay market value for the houses either.

  • some guy||

    They will claim that the current appraisal is the fair market value, regardless of how much is left on the mortgage.

  • ||

    To be fair, if the bank forclosed they wouldn't get more than current market value anyway.

    I think the difference is in case A only the bank gets hosed, and in case B, the bank AND the taxpayers get hosed.

  • mad libertarian guy||

    And it isn't a government bureaucrat sitting in a room making numbers up as to what the "fair market value" of the home is, with all the incentive in the world to set said value absurdly low.

    If the bank foreclosed and they resold the home, they might not get what the original loan is worth, but they'll have the actual market value of the home as set by the market, and not by a bureaucrat.

  • WTF||

    You assume the mortgage companies will be fully compensated by the government. I would not be so certain.

  • NoVAHockey||

    "You are not in a position to ask for anything. We will take what we wish, and then decide whether or not to blow your ship from the water."

  • ||

    The banks have better lawyers than the City of Richmond does.

    I'm pretty sure they'll have no problem with the compensation they get.

  • ||

    Now that I've RTFA I see the city is planning to lowball the offer. To which I say, good luck with that.

    Like I say, the banks have the better lawyers.

  • WTF||

    "Eminent domain"? How is seizing property from the owners to give it to the deadbeat resident a "public use"? Oh, yeah, FYTW.

  • some guy||

    Does Kelo cover this or would the banks be able to take this to SCOTUS?

  • ||

    Even if it does I hope they find a way to get it to SCOTUS anyway and maybe (however unlikely) the current justices will overturn Kelo.

  • JohnTheRevelator||

    So they've gone from nationalizing GM, to nationalizing health insurance, and now they're going to nationalize the mortgage industry? Because that's certainly what this is. Private mortgage lending might still be legal, but if you live anywhere near a jurisdiction that even might pursue a policy like this, you'll either pay double digit interest or be unable to borrow at all.

  • WTF||

    if you live anywhere near a jurisdiction that even might pursue a policy like this, you'll either pay double digit interest or be unable to borrow at all.

    And then the DOJ will attack you for racist redlining.

  • some guy||

    You're talking about different "theys". This is just a town in California.

  • Rasilio||

    I don't know I can see a very good reason for municipalities to use eminent domain on houses in foreclosure, but it shouldn't be to let people keep living there rent free, it should be to force the banks to stop dragging their feet take possession of the property and clear the market.

    There is no legitimate reason why banks should be allowed to sit on these houses for years at a time, sure the residents get to live their rent free but since they don't own it anymore and aren't on the hook for a security deposit they have no incentive to do anything more than the most basic maintenance to keep it livable, it basically becomes a zombie house dragging down the property value of it's neighbors.

    A town coming in and telling a bank that the house will be seized by eminent domain 18 months after it enters foreclosure lights a fire under their feet, basically they'll get 75% of current market value from the town at that point and the town will turn around and put it up for auction immediately so that the property has a clear title in less than 2 years following the initiation of foreclosure proceedings, the town can also then give the current residents a definite move out deadline.

    Honestly I am not seeing any downside to this.

  • Auric Demonocles||

    If the bank wants to keep owning their own property, that is their decision.

  • ||

    This is true. Part of the problem here is that there are some cases where it appears that the reason the banks are dragging their feet on foreclosures because of the possibility of a bailout.

    Of course this doesn't apply where state regulations are gumming up the works.

  • Rasilio||

    But the bank does not take ownership of the property and this is the problem, they don't want ownership of the property because the instant they take it they are responsible for maintenance on it, HOA dues, property taxes, etc. and they know they can't sell it without taking a huge loss over even it's current market value.

    So they let it sit there in limbo with current ownership of the property being uncertain, property taxes and HOA dues piling up and maintenance being improperly or possibly not performed at all.

    In some cases this has been going on for 3 or 4 years, often even after the prior resident has moved out and the house sits vacant

  • Jordan||

    My neighbor's property value isn't my concern.

  • ||

    Does the article say they are going to auction the houses, or does it say they are going to give them to the residents?

  • CampingInYourPark||

    There is no legitimate reason why banks should be allowed to sit on these houses for years at a time

    Ownership...how does it work?

  • Rasilio||

    You're not paying attention.

    The problem is the banks are NOT taking ownership.

    They start foreclosure proceedings and then halt them before taking ownership. This in theory prevents them from having to pay for maintenance, property taxes, and HOA dues on the property until they want to, but the prior owner does not really own the property any longer and is either living there rent free or has moved on.

    The point of the eminent domain threat is to force the bank to take ownership or lose the property at a predetermined price.

  • ||

    Doesn't the bank already legally own the land and the structures on it until the mortgage note is paid off, at which time final title is handed over?

    Serious question as I've always rented.

  • DEG||

    It depends on the state and the mortgage terms.

    I own a house in NH. Legally, I own my property (subject to the government's allodial title claims, barf) and the deed is registered in my name as the owner. However, there is a lien (the mortgage note) registered with the county Registry of Deeds. If I sell the house, before the deed transfers to the new owner, that lien has to be paid off.

    The property is collateral for the money lent as stated in the mortgage terms. The mortgage terms also impose some restrictions on how I can use my property, but the lender does not own the property or any part of the property. These restrictions exist and have force because I, as owner of the property, have agreed to restrict my rights of ownership in exchange for money.

  • JohnTheRevelator||

    You really don't see the stupendous opening for graft and cronyism in this scheme? The city isn't going to buy the properties with its own cash, it's going to work with "investors" who will be get a cut of the theoretical profit after they condemn the house for less than "market value", i.e. the city's assessment, since there's no solid market price in a place where half of all houses are facing foreclosure. So the city sets the price, buys the property, then turns around and sells it to the council's buddies in the real estate business, and next thing you know Richmond CA has its own Detroit-style bankruptcy complete with a RenCen and Cobo Hall.

  • Rasilio||

    Sure, it is still better than what is going on now in some places.

  • Longtorso, Johnny||

    But the financial crisis was caused, in great part, by government at all levels trying furiously to prop up housing prices and promote home ownership. It was extended, in great part, by government’s steadfast refusal to let the housing market clear, its grossly ineffectual program for modifying underwater loans, and ongoing reluctance to alter Washington's monopolist role in the mortgage lending industry.

    The Cause of the 2008 Mortgage Crash

  • Pro Libertate||

    And they're stilling doing it. This is the cost to voters (and the media) accepting bullshit explanations rather than demanding accountability.

    If mistakes are made, fucking learn from them. I'm talking about voters and consumers, not government officials who don't care about mistakes so long as they are allowed to retain office.

  • The Late P Brooks||

    Gosh, what does Elizabeth Warren think about this?

  • R C Dean||

    So, the plan is that the City will buy the mortgages at a forced sale? And become the mortgage holder, in effect? Then, I suppose, restructure the mortgage so that it is "affordable"?

    The City's going to be real popular when people redefault. They will either have to foreclose, or they will have to restructure the loan again (thus transferring more losses to local taxpayers), or they will have to just let the residents live there for free.

    What kind of idiot politician can't see far enough ahead to know that they are stepping into the shoes of a business that is hugely unpopular for a reason?

  • ant1sthenes||

    Hell, maybe the banks are putting them up to it. It gets rid of a headache, and if they bribe the city well enough, they might even get an unreasonably good price. It is just OPM, after all.

  • Raston Bot||

    The taxpayers of Richmond, CA will have to bend over backwards to make the banks whole to get them to agree to this. Hilarious. If that small, poor town wants to socialize land, then go for it. Dumbasses.

  • The Late P Brooks||

    What kind of idiot politician can't see far enough ahead to know that they are stepping into the shoes of a business that is hugely unpopular for a reason?

    The regular kind, I'd say.

    Maybe the city will "buy" the houses, boot out the deadbeats, and then establish some sort of preferential program for noble public servants like cops and firemen and teachers. Because, you know, they forego takehome pay in the present for benefits and pensions in the future.They're just barely scraping by.

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