Economics

California's Latest Misguided Attempt to Solve the Housing Crisis

The Golden State's bizarre new mortgage "solutions" won't fix the the problem.

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Just as the housing industry is showing signs of recovery, California's Democratic officials have passed a "solution" that adds additional regulations and higher costs to the foreclosure process. These are the same officials who can't produce an honest budget and refuse to deal with a deepening public-employee pension crisis and other issues under their purview, but once again they think they can correct problems in complex private markets.

The newspaper photograph from Tuesday showed legislators and the state attorney general congratulating themselves for their work on a Homeowners Bill of Rights, which they believe will be emulated in other states. It is based on a national legal settlement between states and five banks and is likely to be signed into law by Gov. Jerry Brown.

Most news coverage makes the legislation sound benign. The bills would stop lenders from engaging in "dual tracking" whereby they engage in loan modification and begin the foreclosure process. It also would require banks to assign one group of employees to deal with each person's mortgage situation and ban those robo-signed documents. I've dealt with banks in buying and selling houses and they are almost as bureaucratic and uncaring as government officials, so I understand those complaints.

But the California Chamber of Commerce bill summaries gets to the heart of the problem: "Creates procedural traps to impede the foreclosure process and delay lenders' ability to recover collateral legitimately in foreclosure, and creates a private right of action that could discourage investment in California's housing market and make capital more expensive for consumers."

A recent study from Beacon Economics finds that various proposed mortgage reforms will delay the foreclosure process and thereby increase the costs of this process. That will only make it harder for these properties to work their way out of the system, increase lending costs, and tie everything up in litigation and red tape. The real key to reform is letting the market sort itself out, not creating a vast expansion of damages that attorneys representing homeowners can seek.

In its editorial, the Sacramento Bee supported the bills, but noted: "But once the measures take effect, legislators need to monitor them to ensure their actions don't have unintended impacts on the housing market, as banks, real estate agents and the California Chamber of Commerce have warned." Can anyone who covers the Capitol seriously believe such monitoring will happen or that the same people who created these bad bills will know what to do to fix them once things go awry?

Everyone at the Capitol ought to read this part of the Beacon report: "All indications show that the number of distressed mortgages in California has fallen dramatically from its high of three years ago, even as the overall market has begun to find its footing. Sales are trending up and prices have started to move off their 2011 bottom." That conclusion conforms to what I've been reading and seeing, as short sales have helped work distressed properties out of the system.

In stronger coastal markets, there's heated competition to buy foreclosed properties. Even in some hard-pressed inland housing markets, prices are going up slightly. These are important signs of life in the market. What will happen when more lawyers get involved and more regulators require an even taller stack of documents for each transaction?

Even the Sacramento crowd has been one-upped for heavy-handed governmental ideas by officials in San Bernardino County and in the cities of Fontana and Ontario. There, officials created a new government entity, called a joint-powers authority, that will be empowered to seize thousands of underwater mortgages. It's a convoluted scheme—concocted by an influential group of San Francisco investors called Mortgage Resolution Partners—that is brilliant in a sinister way.

Let's say you owe $400,000 on your home and it is now worth $200,000. The government will use eminent domain not to take your home by force but to take the note by force from your lender. With eminent domain, the government pays "fair market value" for the property, but experts say the note holders would be paid a wholesale value of about 20 percent less than the value of the property. In this hypothetical case, your bank would be paid $160,000.

The process would be funded by the new investors. You, the homeowner, would now be paying on that lower $160,000 figure, which would make your payments go down. The government believes it will be fixing the foreclosure crisis by eliminating your negative equity and encouraging you to stay in your home. And the firm that finances this (either MRP, or another company like it) will get properties on the cheap and will restructure the new loans on them, thus creating a fortune for investors.

It's a "win-win," according to supporters, except that it comes out of the hide of the current note holders, who would lose their property—or at least lose the chance to collect money that is owed them. I can come up with a similar "win-win" scheme whereby I steal your money and spend it on a new car. Don't complain. It's a "win-win" for me, the car dealer and even the DMV.

For those who shrug this off because of dislike of banks: The plan leaves out all Fannie Mae and Freddie Mac mortgages and those from major banks to avoid political kick-back, so it only targets privately held mortgages.

This is a troubling abuse of government power to advance the interests of private parties. Likewise, the only beneficiaries from the Homeowners Bill of Rights will be private attorneys who gain a new target. These laws aren't about fixing the mortgage crisis. They are about special interests using government to help them get their piece of the action before the crisis goes away.

Steven Greenhut is vice president of journalism at the Franklin Center for Government and Public Integrity.

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    1. More beer than church in ………. Utah!? Hmmmmm.

    2. the South doesn’t need to tweet ‘beer’: 1) moonshine and home-made wine beer, 2) it’s the South; how much tweeting are you really expecting.

      And I live in the South, so re: #2, suppress any desire to clutch pearls.

      1. Chill, bro. It’s meant to be humorous.

        1. I’m with you…just saying tweet and South in the same sentence sounds a bit off, even to folks living here. I can make fun of my own. Besides, there is always NASCAR: beer and church in the same setting.

  1. I’m going to give it six months before a scream goes out that the ‘banks aren’t lending mortgages!’. And, natch, a new law will slither through the dems who run CA requiring lenders to lend to those who can’t make the payments, which will trigger a new round of foreclosures, which will….

    1. Since they can easily blow 68b on choo-choos to nowhere, maybe they can create a CA version or fannie mae too.

    2. Kind of a no pre-existing condition thing for mortgages, eh?

  2. Arrrgggggghhhhhhh!
    Really??? Is it that hard to figure out that besides sellers, there are buyers? And that maybe LOWER house prices would help the buyers out?
    And that maybe we are in this mess because houses in Fresno sold for 300K that were unfit for chickens.

    1. …And that maybe LOWER house prices would help the buyers out?..

      Unless of course you realize the real purpose of multiple government programs, each intended to reversed the harmful consequences of the others, is to empower the statists. In which case it has all been a tremendous success.

    2. Funny how nobody talks about rent prices skyrocketing though. I can’t see what can possibly go wrong.

      1. Higher rent is easily addressed by raising the minimum wage.

        C’mon, this isn’t rocket surgery.

        1. Higher rent is easily addressed by raising the minimum wage.

          Oh Dean, you can always see the Government’s answers so clearly! What I wouldn’t give for such clairvoyance.

    3. If the gov just let the housing prices drop like they should have, I might be a homeowner right now.

      1. Sorry, foreclosed homeowners are the seen, you are the unseen.

  3. ” but once again they think they can correct problems in complex private markets.”

    That is completely incorrect, they have no desire for correcting any problems, they just want to generate state income and pander for re-election (for the childrenz).

    1. ^THIS.

    2. I disagree; I think some politicians genuinely want to “make things better,” they just lack the understanding that actions have consequences.

      It really takes a unique person to be in a position of power and say “You know what, if I fuck with this it’s just going to make shit worse.”

  4. OT 2: Electric Bugaloo: Why didn’t I marry this woman?!?

  5. Always on-topic:
    http://www.hollywoodreporter.c…..oot-333658

  6. OT: So last night NPR did a story on a bunch of construction that was happening during the boom years in Spain that stopped when the economy collapsed.

    One such project was a large hotel whose construction was shut down by the courts because it violated all sorts of environmental rules such as being at least 500 yards from a shoreline, etc.

    Since then, Greenpeace activists have been occupying the property demanding it be torn down.

    However, with the downturn in the economy, Spanish officials and the locals are trying to get construction restarted on the project because the entire area suffers from massive unemployment.

    Some of the locals have began climbing over the security fences and angrily confronting the Greenpeace activists, demanding they GTFO.

    I guess when times get tough and no one has a job, Greenpeace activists blocking construction projects don’t poll well among the unemployed.

    1. Know who else polled really well among the unemployed?

    2. HA! Bubbles, watermelons, broken windows: lots of stoopid in that one.

    3. Story here: http://www.theworld.org/2012/0…..gal-hotel/

      Spain is hinting that it might loosen restrictions on homes and other buildings built too close to its coastlines. The government is under huge pressure to modify a 1988 law that requires tearing down thousands of structures within about a quarter mile of the sea. The alleged changes have given hope to homeowners ? and to supporters of one particular hotel on the southern Mediterranean coast. The controversial 400-room structure has been a sort of poster-boy for Spain’s poor coastal management for more than a decade. It’s called the Hotel Algarrobico.
      […]
      Villalba said he thinks if the people unite they can get the hotel opened. In fact, in recent months a grassroots push has swelled into a political movement. The mayors of 26 surrounding towns have signed a petition in support of the hotel.

      And in a visible turn of sentiment in recent months, some locals have taken it upon themselves to confront Greenpeace occupiers. A couple of young men recently jumped a security fence and entered the empty hotel to demand a dialogue with some activists holed up inside. In a video of the incident posted on Youtube, you can hear one local ask, “Do you even care about the people of Carboneras? You’re giving the town a bad name!”

      1. Wait, wouldn’t tearing down all those homes provide jobs?

        They could carry all the pieces inland a few hundred yards, one at a time, by hand, and put all the pieces back together? Mother earth is happy and unemployment is fixed!

        1. Just tearing down the houses and the hotel would provide short term jobs. Rebuilding them in an environmentally conscious way which gives due respect for Mother Gaia would definitely provide jobs. But in the case of the Hotel, a large number of the people of this town would actually work at the hotel if it were complete.

          Apparently there’s a large number of English who want to get out of the shitty weather and would stay at that hotel.

          1. First, people need to be hired to do an environmental impact study on whether or not the building is safe. Then, a few government bureaucrats need to go to work to process the studies and manage the permitting process to restart the construction. The owner of the company doing the works will need to hire a construction liaison to complete the appropriate paperwork. Then unions will be able to bid on the job, and a government arbitrator can ensure the contract is fair to the workers, even though there is 20% unemployment in the area. Once this takes place, the project can move forward…once they complete a revised environmental impact report to account for the above steps since the original form was filed. Then, once approved, construction materials may be ordered from the appropriate companies, being approved by the government to ensure the workers at those companies are being treated fairly. This approval, obviously, will require the hiring of a government labor oversight panel, which will take time to put together. Once the materials are purchased, there will need to be a follow-up environmental impact study, as at least another year will have passed. Once that is completed, the government’s structural engineers will need to examine the structure for potential weaknesses due to prolonged exposure. Then the building can be razed and construction restarted because it is in disrepair.

            Of course, the new building will require a permit. See step 1 above for that.

        2. Only if it involves breaking all the windows. We know for certain that will provide an unending boom in prosperity.

        3. Ixnay on the ideayay.

      2. Even money that the government is partially underwriting the development or the developer is lobbying for public bond support.

        1. It’s Spain. Is anything done in any of those Euro countries that isn’t a public/private partnership?

      3. The alleged changes have given hope to homeowners ? and to supporters of one particular hotel on the southern Mediterranean coast.

        I’m guessing that the only reason this came up at all is that a bunch of connected Spanishers have money tied up in that illegal hotel.

        1. I have to assume, but the subtext was that when times were good, no one cared when the project got shut down. But now that times are bad…

    4. That’s just crazy,

      Every prog knows that regulations don’t harm economic activity, they enhance it.

  7. Why does Mortgage Resolution Partners sound like its operating a scheme ominously close to the “bond defreezers” of Atlas Shrugged. For these bastards it wan’t a cautionary tale. It was a how-to manual.

    1. California is a cautionary tale that’s often used as a how-to manual by other states.

      Washington has been using California as a template for years.

      I swear to god if I hear one more Washington politician say, “California does it this way…” I’m going postal.

      1. Washington has been using California as a template for years.

        and common sense would tell it would be the opposite – when you see someone do something harmful, you learn to not do likewise. Then again, it’s politicians.

    2. Mortgage Resolution Partners

      “Nice little mortgage portfolio you have there. [crack knuckles] I’m thinking nothing will happen to it if you have the right . . . partners.”

  8. It also would require banks to assign one group of employees to deal with each person’s mortgage situation and ban those robo-signed documents.

    Or they could just start enforcing the perjury and fraud laws, which is the real issue with the robo-signing scandal: that they were signing affidavits claiming to have seen documentation that they did not in fact have.

  9. (Anybody want to stay on topic?)

    Only problem with that scheme is that you can’t use eminent domain to seize private property from A and give it to B, another private entity. (Kelo notwithstanding.)

    As at least one of us mentioned, banks will quietly start dropping out of the home-finance business.

    But that’s no problem, the well-funded state will step in. By now, government is used to lending money to people who can’t pay it back.

    1. Only problem with that scheme is that you can’t use eminent domain to seize private property from A and give it to B, another private entity. (Kelo notwithstanding.)

      Uh, Kelo did -exactly- this, so I don’t know why you think the state can’t seize property for basically no reason.

  10. The magic wand of government power — which has already given us free health care — will restore California’s housing market while simultaneously building a free high-speed rail line!

  11. Why will I NOT be shocked to find out that ‘Mortgage Resolution Partners’ and all of the other firms that are gifted property at pennies on the dollar have deep deep ties to the politicians who enact such ludicrous laws to begin with?

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