Using Eminent Domain To Acquire Mortgages Would Be Reckless And Dangerous
Just when I think that the bailout plans couldn’t get any wackier, along comes this gem proposed by the National Community Reinvestment Coalition to the House Financial Services yesterday- they propose using eminent domain to buy loans to modify them. Here’s a summary from Diana Olick of CNBC:
We all know that the biggest roadblock to mortgage modification is and has been the loan servicer and that servicer’s responsibility to its investors. So many loans during the housing boom were pooled and sold off to investors that it became close to impossible for the servicers of those pools to get permission across the board to change the terms of individual loans.
Taylor and the NCRC are proposing a new government program, using TARP money, whereby the government would “use its power of eminent domain to take troubled properties/loans from mortgage servicers and lenders, so large numbers of loans could be modified, writing down principal and interest rates. The loans would then be re-sold to the private market.”
The government would buy these loans at a “steep discount.” Eminent domain allows the government to take an asset where a public purpose is served, and it requires that they pay the investor the “fair market value” for it. NCRC claims the fair market value would be about 30-50 percent of the current loan value.
NCRC argues, “Discounting the purchase of these loans would strike a balance between assisting homeowners and ensuring that lenders, servicers and securitizers are not rewarded for financing and servicing predatory and price-inflated loans.” That discounted price would then “be sufficient to write down the loan balance of millions of loans such that they can be permanently refinanced or modified to ensure long-term sustainability.”
This strikes me as a REALLY BAD IDEA for several reasons. Olick touched on one of the problems briefly:
The sticky part is proving that a mortgage is in fact a piece of real estate, but I’ll leave that to the scholars out there. Essentially it’s a way to force lenders/servicers into submission.
A number of legal scholars have suggested that there are legal impediments regarding the complexity of selling loans held in securitized pools. Therefore, NCRC recommends the alternative approach of using eminent domain with the HELP Now proposal to purchase loans from investors and servicers. The current economic crisis would justify the government’s use of eminent domain laws for a compelling public purpose. In addition, eminent domain would overcome several barriers. Through compulsory purchases of troubled loans, reluctant servicers, investors, and lenders would not need to be persuaded to participate.
Utilizing the federal government’s power of eminent domain avoids lawsuits from disgruntled investors. As Harvard Law Professor Howell Jackson points out, eminent domain can solve the barriers related to first and second liens by directly purchasing all mortgages on targeted properties.
The use of eminent domain could also alleviate pricing uncertainties to unfreeze the credit market, and it could establish fair prices for mortgages through existing judicial mechanisms. The government should ensure that renters receive protections under its program. A sizable number of distressed loans involve investors who do not live in the property they purchase but
have rented the properties to tenants.Once fair prices are established, a secondary market can then be re-established and voluntary efforts to refinance mortgages will most likely accelerate.
My concerns are as follows:
- That rather than re-establishing a secondary market, this would kill it. Would investors really believe “Hey, we know that former purchasers of mortgages were turned into fish bait, but now it’s safe to go back in the water?” As long as the government keeps changing the rules and putting investors at a disadvantage, there will be no stability in mortgage markets.
- The moral hazard issue is huge here. Why buy a house you can afford when you can buy a home beyond your means and have the price adjusted to your budget? This punishes those who were more conservative in their purchases or chose to rent. This rewards the wrong people.
- Investors as well as homeowners would benefit from this plan on the pretext that this helps renters. Should flippers and speculators be bailed out in the name of “helping” their renters? Just how much irresponsible behavior should be financed at the expense of the responsible?
- Lastly, I am concerned about the fact that this would be seizing mortgages, not real property, and that this is stretching the definition of “public use”.
I am not an expert in constitutional law, but I am aware the eminent domain need not be real property. According to Wickipedia:
The exercise of eminent domain is not limited to real property. Governments may also condemn personal property, such as supplies for the military in wartime, franchises; this includes intangible property such as contract rights, patents, trade secrets, and copyrights.
In spite of that, typically eminent domain has been restricted to real property. To expand this use on such an excuse is to start down a slippery slope. It is one thing to have eminent domain used to obtain vital supplies in a military campaign, it is another to confiscate the assets of one group of people in order to benefit another group. The potential for abuse is huge.
Wickipedia also states:
The legal doctrine of eminent domain, like the doctrine of seizure of contraband, allows expropriation of property within the existing system of law. Otherwise, expropriation may imply either a criminal or a revolutionary act.
We need to consider whether this really falls under the existing system- the alternative is frightening.
Fortunately, so far the NCRC’s proposal is just that- a proposal. Here’s hoping that the House Financial Services Committee members nodded off during Taylor’s presentation.
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