Cities Prepare to Use Eminent Domain for Underwater Mortgages
The 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.
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.
UPDATE/RELATED: Relevant headline today from Veronique de Rugy–"Federal Mortgage Bailout Program Sees a Quarter of Homeowners Re-Default."