Housing bubble

California Proposes Crony Capitalism to Fix Housing Crisis

Government officials want to use eminent domain to acquire mortgages.


The real-estate market is reviving so quickly that talk of the busted housing bubble is passé. These days, when real estate investors talk about bubbles, they are referring to the new one that might now be inflating as home sellers sift through a frenzy of offers.

Even cities that bore the brunt of the foreclosure crisis are seeing massive price jumps and many homeowners who were "under water" in their mortgages can start talking "home equity" again.

Yet some government officials seem to live in a time warp as they pursue a murky deal to "solve" the dissipating housing crisis by marrying government power with private enrichment. The California city of Richmond is the first one to sign on to an idea that lenders fear could sweep the state.

City officials would use eminent domain — i.e., the power to take property by force, upon the payment of "fair compensation" to the owner — to wrest control of hundreds of mortgages held by private-equity firms. They're not taking the actual property, mind you, but grabbing the notes held by those who financed the homes.

Advocates see it as a way to halt foreclosures, but foreclosures are working their way out of the system — so much so that first-time home buyers struggle to compete with cash-paying investment groups that are grabbing these properties.

"It's the most abusive thing I've seen in a long time," said U.S. Rep. John Campbell, an Orange County Republican who is sponsoring federal legislation to quash such efforts. The concept, he told me, is driven by a San Francisco firm called Mortgage Resolution Partners, which stands to profit financially from this process it has pitched to cities.

Let's say you owe $300,000 on your home and it is currently valued at $200,000. The city takes the mortgage from your lender and pays it the estimated value, minus about 20 percent. Your lender gets $160,000. The new investors refinance the property based on the non-discounted value of $200,000 — and you, the homeowner, get to stay in the house and make payments on the new, lower principle. These new players, consultants and the city profit from the proceeds, which comes from the difference between the price they pay and the higher price at which they refinance the loan.

Campbell is livid that the deal is financed on the backs of taxpayers given that the loans will be sold back to Fannie Mae, Freddie Mac and FHA. He and many others also are opposed to what they rightly view as a misuse of power.

"One group of investors, MRP, has figured out a way to use the legal powers of municipalities to extract profits from the people who hold Mortgage Backed Securities," Chris Killian, an executive with the Securities Industry and Financial Markets Association, told me. The plan will add risk and costs to investors, he said, which will reduce the pool of buyers willing to take a chance in the city.

Lt. Gov. Gavin Newsom, a vocal supporter of the MRP plan, called for a federal investigation of lenders who have opposed it. He argues that they may be colluding to discriminate against these cities. But his statements only remind critics of how much this plan is dependent on political wrangling rather than market forces. MRP is run by a prominent Democratic Party fund-raiser.

"Newsom has no concept of how investments work," Rep. Campbell said, noting that people don't lend money if they know it's going to be seized.

It strikes me as the ultimate "crony capitalist" project where a private organization uses government power to secure a lucrative deal that would never pass muster in the marketplace, where buyers cannot compel owners to sell at a low-ball price.

Cities will face lawsuits challenging these takings. Even if the courts allow it, it will take time to sort through the complexities given the complex ownership structures of many real-estate investments. This process could take years, even as the real-estate market rebounds each month.

Nevertheless, Richmond sent a letter July 31 warning mortgage trustees that the city might proceed with eminent domain if they don't sell the mortgages. MRP did not respond to a request for comment, but its officials talk about the devastation of a foreclosure crisis as if it's still 2006, right after the bust.

Online real-estate sites show that Richmond's property values have increased more than 20 percent in the last year and are expected to increase another 10 percent this year. Here's a case where doing nothing sounds like a far better approach.

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  1. “”Newsom has no concept of how investments work,” Rep. Campbell said,”

    Boy, howdy! That’s just a start of what Newsom doesn’t know.
    What he does know is how to get ink. It was common knowledge that the most dangerous place to be in one of his news conferences was between him and any camera.

    1. How dare you say such a thing!

      1. Shut up and go put on your training bra!

        1. Thanks for your support!

    2. Actually, Campbell is being generous. The more likely scenario is that Newsom thinks he can pull the equivalent of a redlining suit against the banks.

    3. my best friend’s step-aunt makes $75 every hour on the laptop. She has been without a job for six months but last month her pay check was $17502 just working on the laptop for a few hours. Here’s the site to read more… http://www.Can99.com

  2. It strikes me as the ultimate “crony capitalist” project where a private organization uses government power to secure a lucrative deal that would never pass muster in the marketplace, where buyers cannot compel owners to sell at a low-ball price.

    Or, you know, standard operating procedure.

  3. Oh, and:
    “Pacific Investment Management Co. and BlackRock Inc. are among bond investors seeking a court order blocking Richmond, California,…”

    “Federal Housing Finance Agency threatens to curtail lending in cities, including Richmond, Calif., that resort to eminent domain.”

    TBC; two link limit,

  4. “Former San Francisco Mayor Willie Brown and a longtime business partner are among investors in a company drawing criticism for working with local government officials to take over and discount underwater mortgages.”
    (link won’t collapse; google “willy brown MRP”; first reference will do)
    Hey, Chi-town! You think you got a monopoly on sleazy politicos? Willy could teach them a thing or two!

  5. Housing crisis?

    Nobody can expect to go through life without being housed, therefore, mandate purchasing a house or PENALTAX! Problem solved

  6. OT: Atlanta mayor openly ignoring court ruling to run street vendors out. Because the ATL is a thriving beacon of capitalist hope whose streets are not completely empty after dark, amirite?

    1. Jesus, I read your sentence to mean that the court had ordered the mayor to run the vendors out but he was ignoring it. I should have known better.

      1. Yeah, poor writing on my part. Sorry bout that.

        The ATL mayor is ignoring a court ruling that says he can’t use his crony monopoly to control street vending in the city.

        1. And of course he will face no consequence for doing so. Because some animals are more equal than others.

          1. Apparently the city council is trying to get some legislation going that would bypass the mayor. But since when do you need legislation to back up a court ruling on previous legislation? Perhaps Georgia has some really schizoid checks and balances system I’m not aware of.

            1. Maybe he’s just going the Jacksonian route of “she’s made her ruling, now let her enforce it”.

  7. Banking crisis?

    Nobody can expect to go through life without a bank account, thereforem mandate opening a bank account or PENALTAX! This is soooo easy

  8. Let’s just get it over with. California can ED every piece of property in the state, and then the politicians can happily dole out living permits to their cronies, people who know their cronies, and people who vote the “right” way. Everyone else can be rounded up and sent packing. Only then can California become glorious workers’ paradise.

  9. Why wouldn’t we assume some random city council would be qualified to go into the REIT business?

  10. OT: hhmmm…what could they possibly be up to?

    1. You are soooo paranoid! Just another Public/Private partnership to help us all.

      Why do you hate?

      do I have to write “Sarc?” Or is it obvious?

      1. Unlike most of these dum-dums around here, I can pick up the sarc 99% of the time

  11. OT: A reminder of how you are fucked by law:

    To begin with, as Orin Kerr has noted, third party data holders generally cannot assert a Constitutional protection on behalf of their customers. No Fifth Amendment claim arise when the government tries to compel passwords from third parties. As the Court held in Fisher v. United States, 425 U.S. 391, 397-98 (1976) the Fifth Amendment does not prevent compelling information from a suspect’s attorney because compelling the attorney to divulge information does not compel the suspect to do anything. The same, of course, would be true of my password in the hands of my service provider.

    Clever. See? Perfectly constitutional.

    1. Finally, we could imagine the service provider opposing the subpoena on its own account. As one of my more libertarian minded friends has suggested, the provider could oppose the subpoena on the ground…
      [ . . . ]
      But in the long run that won’t work, I think. If we indulge the assumption that the investigation is tied to some grand jury inquiry (likely in most, though not all scenarios) then resistance to a valid subpoena is quite hard. It is pretty close to black letter law that the grand jury “can investigate merely on suspicion that the law is being violated, or even just because it wants assurance that it is not.” United States v. Morton Salt Co., 338 U.S. 632, 642-643(1950). This is pretty much a plenary investigative function. As a necessary consequence of its investigatory function, “[a] grand jury investigation ‘is not fully carried out until every available clue has been run down and all witnesses examined in every proper way to find if a crime has been committed.’ ” Branzburg v. Hayes, 408 U.S. 665, 701 (1972) (internal quotation omitted).

  12. This form is for use in all 57 states:


    1. Bruce,
      On the blog, I see a story dated Aug 18, 2013. Could you please check the market numbers for the 16th and let me know Apple’s closing price?
      Much appreciated.

      1. The Powerball numbers, too, please.

        1. “The Powerball numbers, too, please.”

          Hey, don’t get greedy! You don’t eat a pig like that all at once.

  13. As the Court held in Fisher v. United States, 425 U.S. 391, 397-98 (1976) the Fifth Amendment does not prevent compelling information from a suspect’s attorney because compelling the attorney to divulge information does not compel the suspect to do anything.

    Wait, what?

    Wasn’t there some thing about an “attorney-client privilege” once upon a time?

    1. The federal government has been trying to destroy that for years. Ask the SEC.

    2. I’m reading some early- to mid-90’s Grisham these days, and it’s amazing the stuff that was shocking back then (like torturing an American citizen) is old hat and de rigeur now. In The Partner, he talks about the iron-clad nature of attorney-client privilege. Heh.

  14. The federal government has been trying to destroy that for years. Ask the SEC.

    Maybe all attorney-client meetings should be attended (and recorded) by an assistant federal prosecutor; that would really streamline the process, down the road.

    1. Don’t give them any ideas, dammit! Next we’ll have the “Ensuring Civil Rights of Defendants Act” which will require that very thing.

      1. Not enough acronym….

        How bout:

        Defendants Ensured Rights Procedure

        1. That is a keeper right there.

  15. It is well past time for an amendment doing away with eminent domain entirely.

    Also, this is disgusting: “He argues that they may be colluding to discriminate against these cities.”

    Actually you’re the one colluding against free people. Ass.

  16. it’s all laughs and jokes until they use it to solve the public pension crisis.

  17. Not OT: I wish I knew where these up-up-up prices and bidding wars are, cause they ain’t in my condo complex.

    1. Same here, Kristen. Have had my house on the market since March, and have had only one showing.

      1. It must be all that “blight”…you know, too many Libertarians. : )

  18. Thanks for explaining this, Mr. Greenhut. Previously I’d misunderstood this as gov’t’s condemning the real property, rather than just seizing the note. In that case valuing the “property” “taken” on the basis of the real property value and discounting that (when there’d probably be enough from a foreclosure sale to get more) strikes me as even more unjust compensation than what my previous understanding had been. Does Calif. law allow takings of loans, not just of real property? Would it allow takings of other things of value such as vehicles, company stocks, mfg. inventory, ag futures, etc.?

    1. It occurs to me then that the state could by legislation, based on a “public benefit”, force the sale of controlling interests in businesses. Could they delegate such takings to a permanent authority that would decide to do so on a case-by-case basis?

    2. Don’t forget guns! What a great way to disarm the citizens. Uh oh, did I just write that? Hopefully none of the govt douchebags are reading this

  19. We are the state and we are taking your house away from you unless you accept the false higher market value we have just placed on your home and you pay us instead of your original bank. I see and in the case of my mother who’s house is equity upside down however she is making the payments on her house and will have it payed off in three years but from what i read the state can come in and take her loan and increase it such that she will now have to make payments on a new loan for another 30 years.

  20. Far too much willful ignorance from Greenhut here about the housing “recovery” to make the article have any value.

    Banking laws have been changed so that lenders can sit on the foreclosed properties for 10 years rather than two. That is the entire basis of the non-recovery recovery.

    1. Yes, obviously the problem here is people keeping their own stuff.

  21. House prices are going up? I have a great idea!

    We should loan money to anyone who wants to buy a house. Then take a bunch of these loans put them into a big pile then sell off chunks of that pile to eager investors.

    Since home values will never go down these chunks will never lose value! It’s guaranteed ROI!

  22. “people don’t lend money if they know it’s going to be seized.”

    That’s racist, though.

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  24. what William answered I didnt know that a mom can make $7654 in one month on the internet. did you look at this website… max38.c?m

  25. We must understand what the priority is. People whose homes are foreclosed only know how does it feel to be homeless and at the same time burdened with debt.

    This is not the time to curse Government on the issue of Tax Payer’s money. It is the time to rebuild economy and give relief to people who are already burdened with debt. These types of hue and cries will only lengthen the time for the country to get out of this mess. We should help the economy to prosper so that more employment is created and people get more money in their hands, leading to further prosperity of the nation.

    1. Piss off you statist shitbird.

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  29. Good post. Looking for money to finance a home improvement, pay off your current mortgage, supplement your retirement income, or pay for healthcare expenses ? you may be considering a reverse mortgage.
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  30. quity firms. They’re not taking the actual property, mind

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