Local governments’ have often stirred controversy with their use of eminent domain. While it’s supposed to be used for the public good, too often it has been used to profit developers, while the public just feels ripped off.
Still, the idea of local governments using eminent domain as a tool to stabilize home prices in some of Southern California’s hardest hit communities is an intriguing one.
It’s the kind of bold action that’s been missing in the government’s limp response to the foreclosure crisis.
But the scheme that’s unfolding in Southern California’s Inland Empire, rated as the one of the most underwater in the nation, is a step in the wrong direction.
It smacks of politically-connected high-finance types, boasting of their access to politicians as their “secret formula,” wheeling and dealing in secret.
A san Francisco venture capital firm is cooking up a scheme in San Bernardino to use the government’s eminent domain power to seize some underwater mortgages from investors who own them and have been unwilling to offer borrowers principal reduction that would allow them to stay in their homes.
The firm’s idea, apparently, is to for San Bernardino County and other local government’s form a joint powers authority that would allow those government to act together to use eminent domain to seize mortgage loans, not the property, of underwater homeowners who were not behind on their payments at “market value.”
Then, according to the scheme, the firm would find investors to issue new mortgages to the homeowners at that lower, more affordable “market value.”]
The plan was hatched by San Francisco-based Mortgage Resolution Partners. That’s the firm originally headed by Phil Angelides, former state treasurer, real estate developer and venture capitalist best known recently for leading a congressionally-appointed investigation into the financial crisis.
After issuing a report highly critical of the banks, Angelides didn’t stump the country to put pressure on authorities to follow up on his report with prosecutions.
He went into the mortgage business himself, swaddling his efforts to make profits from distressed mortgages in good intentions of finding solutions to the foreclosure crisis.
It was Angelides who boasted in a letter to potential investors that his firms’ secret formula was its connections to public officials. Reuters reported that Angelides told potential investors they could generate 20 percent profits.
After Angelides’ involvement in the firm was publicized earlier this year, he stepped aside. Replacing him was Steven Gluckstern, a hedge fund veteran who was one of President Obama’s major bundlers in the 2008 election.
According to published reports, Mortgage Partners would make its profit charging a fee on every mortgage seized. How much will it be paid and how? That hasn’t been disclosed. But according to Naked Capitalism, its sources say that the firm expects to make a 5.5 percent fee on each mortgage – paid for by having the government seize the mortgages at a discount and sell them back to the homeowner for a profit.
The most serious general flaw in the scheme is that has unfolded behind the cloak of confidentiality agreements between government officials and Mortgage Resolution Partners, with no public disclosure or debate on the concept or details, giving the whole deal the stink of a sweetheart deal, not a solution.
When the Riverside Press-Enterprise sought written records of communication between county officials and the mortgage firm, they were told there were none.
The use of eminent domain is highly controversial because it has often been justified as benefiting the public when it ends up benefiting real estate developers. In this case, investors who own the mortgage loans have already weighed in opposing the plan. Though the plan’s backers say eminent domain has been used to seize intangible goods, they acknowledge it hasn’t been used to seize mortgage loans before. So investors are likely to challenge the process in court.
But I wouldn’t shed too many tears for the investors, who have stood in the way of principal reductions or any other means of helping homeowners.
Another question raised by the current plan: why is only Mortgage Resolutions Partners being considered as a partner for the joint powers authority? The idea should be put out for an open bid. Maybe other firms would have even better plans and offer a better deal.
And there are plenty of other issues surrounding the plan. Walter Hackett is a former banker who is now lead attorney in the Legal Aid Riverside’s branch near San Bernardino. While he likes the idea of using eminent domain as a tool to stabilize home prices,
he questions why eminent domain would be used to seize mortgage loans – which are more difficult to set a price on – rather than property itself. Seizing the property and paying the investor for the fair market value of the property, rather than the mortgage, would extinguish the old mortgage and the new investors could then issue a new one to the borrower at the market value.
Hackett also questions why eminent domain would be used only on mortgages deemed current, so-called performing loans, rather than including properties that have already fallen into foreclosure that are still owned by investors. “Former owners, or others might be able to afford reduced payments once the properties are priced at market value, rather than at the price of the underwater mortgage,” Hackett said.
Hackett’s unusual background, having been a banker and represented homeowners in foreclosure, would be invaluable in redesigning such a proposal. It should not be left only to the venture capitalists and the county politicians.
I’m not suggesting that local governments shouldn’t find a way to use eminent domain or find other creative solutions to help struggling homeowners. But we also need to stop assuming that when the financiers and politicians go into the back room, they come out with something that’s in our interest – even if they say it is.
We learned from the bailout and the government’s subsequent coddling of the financial industry how the secrecy and lack of transparency undermine trust in both our financial system and our government.
However inconvenient to the bankers and hedge fund honchos, such proposals must be hammered out with full public participation and debate. We don’t need any more secret formulas” brewed with corporate cash and political connections in back rooms with you and me kept out.
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About Martin Berg
Martin Berg, WheresOurMoney.org editor, is a veteran journalist.
Correction: “. . .without any compensation or other resource” — should be: “without any compensation or other recourse”
Extremely creative idea, applying eminent domain to grab a financial instrument (mortgage) instead of real property.
Instead of vulture capitalists, why not have a semi-public entity — a vaguely Resolution Trust Corp type of vehicle — grab these mortgages and add just barely enough “load” or fee to cover costs of operation and, perhaps, an extremely modest return back to the taxpayers who would finance the enterprise. Alternatively, run it like a mutual savings bank, where the participants have a stake in the enterprise.
Where might the money (capital) come from? Let’s say, a North Dakota-style public bank that can borrow at the Fed window, coordinating and supporting lending by a loose-knit consortium of community banks and credit unions.
Why would these modest institutions invest? Because these assets (mortgages) would be seized through eminent domain and therefore be acquired by the government (or public or quasi public agency) at the bottom end of their real value — thereby making them a relatively low-risk investment for community institutions that must, and should, invest people’s money conservatively.
In any such eminent domain scheme, the government would essentially be confiscating upside potential from “ugly investors”, the recalcitrant ones who are sitting tight on a moldering housing stock, causing all sorts of problems for families, communities and the nation as a whole while helping perpetuate the overall bad economy.
On the other hand, as the article notes, eminent domain is currently being abused to grab property for private development — an outrage. “Power corrupts, absolute power. . .” You know. In a society based on notions of “private property”, eminent domain is the most extreme solution to serving the public good. The nuclear option, obliterating the principle of private property. It speaks to the delicate balance between private property and public interest — both part of the very fabric of society.
When we start lobbing nuclear bombs for any but the most urgent public interest situations, the fabric of our society is ripped asunder: it puts our ass under. That’s the problem with current abuses, whereby private developers in cahoots with public officials use eminent domain to grab private property for private, not urgent public, projects. It’s an obscenity.
Therefore, after this reflection, I’d vote against any further widening of the practice of eminent domain, just as I would vote against any widening of nuclear weapons (let alone nuclear power plants) with even the best of intentions to achieve some public good. It’s not worth it, not at any cost.
I would absolutely support the idea of creatively exploring other existing laws that would help reach essentially the same or even better outcomes. I believe Ellen Brown wrote about a Massachusetts county tax official who wanted to use the banks’ flawed and fraudulent mortgage paperwork system as a way to seize properties — I assume without any compensation or other resource, because the banks themselves (the smartest guys in the room) screwed up their own ownership rights. THAT would be really cool, and serve the bastards right.
That’s just one example. There may be others — again, without expanding use of the nuclear option. For that, I can see the law of unintended consequences bearing down on us like the proverbial Mack truck.