Our Housing Market’s Recovery is Eminent… Get It?

This past November, I read The New York Times article, “More Cities Consider Using Eminent Domain to Halt Foreclosures,” but it took more than a month for me to realize what the story had to do with what I’d been seeing reported almost non-stop about our housing markets of late.  I might have bought it… had they not lied quite so much.

As strategies go, it’s really quite brilliant and very well executed.  If those behind it would only put the same kind of thought and effort into solving the foreclosure crisis, we’d never see another Notice of Default or Intent to Foreclose notice in the mail.

Despite some very nasty threats of retaliation from Wall Street and Washington, something like two dozen new cities are now reportedly joining the efforts to potentially head off home foreclosures by using eminent domain to seize mortgages and write them down for homeowners.

Richmond, California was the first to make serious overtures related to the use of eminent domain to take over an initial 600 underwater mortgages in order to prevent foreclosure, blight and property values that continue to fall.  Now, Irvington, N.J. is also said to be proceeding with a study of the plan… the city is thinking that if the program is effective, it could help save 500 to 1,000 homes.

Yonkers, just up the Hudson River from New York City, is also talking about adopting a resolution to consider using eminent domain, as is Newark, New Jersey.  And in California, Oakland and Pomona are discussing the use of eminent domain, as well… and let’s not forget Seattle, Washington.

Robert Hockett, a Cornell University law professor who has helped design the strategy, along with venture capital firm Mortgage Resolution Partners, is consulting with numerous cities around the country.  He says he’s also been contacted recently by cities in Minnesota and Pennsylvania.

San Bernardino County in California and North Las Vegas both considered the eminent domain plan last year, but were ultimately dissuaded by threats of financial retaliation from Wall Street and Washington.

But that sort of tactic has only brought the American Civil Liberties Union into the fight on the side of New Jersey’s cities… and on December 6th, the American Civil Liberties Union and the Center for Popular Democracy have filed a Freedom of Information Act lawsuit against the Federal Housing Finance Agency for failing to respond to their request for information.

I’d have to guess that more heavy-handed threats are only likely bring more of the same to fight on the side of the cities.

It’s still a plan that is considered in its early stages, but Professor Hockett, was quoted by the Times as saying: “We’re moving into a kind of second generation of municipal interest that is more hard core “” it’s interest with a spine, so to speak.” 

There’s no question about it… they’re popping like popcorn.

So, who’s against it? 

Basically, everyone on the banking and financial services side of the street including BlackRock, Pimco, Wells Fargo, the Mortgage Bankers Association (“MBA”), the National Association of Realtors (“NAR”), the Federal Housing Finance Agency (“FHFA”), Fannie Mae, Freddie Mac, the Federal Home Loan Banks, the Securities Industry and Financial Markets Association (“SIFMA”), the American Securitization Forum (“ASF”) … and I don’t really need to finish this list, right?

The opposition’s arguments are as predictable as the list of those who oppose the idea.

Taking mortgages by eminent domain is a breach of individual rights… investors will not receive fair market value for the mortgages… it’s a further erosion of property rights, raises serious legal and constitutional issues and in general represents an unnecessary burden on homeowners, banks and investors.

Not only that, but if or when homeowners want to refinance in places where eminent domain was used, they will find it next to impossible to get money from the banks and lenders, because where the possibility exists that property will be seized by the government, lenders won’t want to lend.  And if there were lending in the future in these areas it would be at a very high cost, thus harming homeowners.

ASF Executive Director Tom Deutsch has said: “If investors get ripped off today, why would they put capital to work tomorrow?” 

The FHFA calls the eminent domain strategy “a clear threat to the safe and sound operations of Fannie Mae, Freddie Mac and the Federal Home Loan Banks,” also threatening legal action against cities that use it.

SIFMA’s managing director Tim Cameron told DSNEWS.com: “We believe that the use of eminent domain would significantly harm mortgage finance markets, reduce access to credit for borrowers, and negatively impact average investors’ portfolios.”

In Congress, Texas Republican and chairman of the Committee on Financial Services, Jeb Hensarling, has even introduced a bill that would come close to ending mortgage financing in cities that used eminent domain.  And last June, a group of senators asked Shaun Donovan, secretary of the Department of Housing and Urban Development, to use HUD’s authority to stop the FHA from insuring mortgages on properties affected by an eminent domain proposal.

A Revolution Worthy of October… (click to look it up if you don’t get it.)

This is absolutely shaping up to be a battle of epic proportion, and I’ve come to realize that it’s also one that is actually going to be fought, as things stand today, which makes it that much more exciting… interesting… or terrifying… depending on who you are and which side you’re on.

Wall Street’s bankers and investors are as angered as they are terrified by the prospect of cities taking their properties from them, forcing them to accept losses, and then writing them down for homeowners.  I can’t be sure, but I get the sense they’d prefer to start the War in Iraq over again… or relive the financial crisis of 2008… some of them might even be willing to re-start the calendar on September 10, 2001, if it meant eliminating the prospect of eminent domain going forward.

It’s not about 600 homes in Richmond, or whatever numbers of homes are in Newark or anywhere else for that matter.  No one on Wall Street or in Washington D.C. cares at all about houses in Richmond, Newark, or any of these other distressed communities… that much is abundantly clear.  If they did, we wouldn’t be having this discussion in cities all over the country, in the first place.

It’s about the obvious and proverbial slippery slope.  I mean, taking someone’s property away from them, forcing them to accept a price that means they’ll take a loss, and then writing down the loan you’ve taken for the homeowner… well, it’s about as un-American sounding as a plan ever was.  And if it’s done in Richmond, then you can bet money it can and will also be done in dozens of cities all over the country that are sure to fall like dominoes after the first.

Actions by government like that are why people are hesitant to buy properties in places like Mexico… you never know what the south-of-the-border government will decide you’re allowed to own in the future.  Here in the U.S.A. we simply don’t do things like that.  Here our private property rights are sacrosanct, are they not?

Unstoppable force meet immovable object…

Bob Hockett’s Memorandum of Law and Finance, titled: “Breaking the Mortgage Debt Impasse: Municipal Condemnation Proceedings and Public/Private Partnerships for Mortgage Loan Modification, Value Preservation, and Local Economic Recovery,” presents a plan that says:

“… traditional state eminent domain authority, as typically delegated in turn by the states to their municipalities and cognate authorities, is by far the best ground upon which to act.  The Memorandum also finds that a combined condemnation and mortgage restructuring plan of a particular form will be by far the best legally and financially feasible option.”

Obviously, many distressed homeowners, underwater and at risk of foreclosure, are quite happy with the idea… thrilled, might even be appropriate in many cases… maybe even exuberant wouldn’t be entirely wrong.  Millions of homeowners have been emotionally and financially damaged, and not insignificantly.  And they’ve watched what they’ve perceived to be the banks being forgiven everything, while they’ve been forgiven nothing.

While taking private property using eminent domain might be widely considered un-American under almost any other circumstances, now we’re talking about taking it from banks… from Fannie and Freddie, from those that homeowners think of as the cause of our crisis… and the reason for our social, fiscal and psychological pain.

So, screw them… take whatever they own and shower it on homeowners, the people don’t care.  And that’s not a feeling that’s come from within… if the banks and government haven’t created it, they’ve certainly done more than their part to help it grow.

And Bob Hockett is not some piker come to help put on a bake sale. 

Bob’s a Professor of Law at Cornell, a Regular Visiting Professor at the Sorbonne Faculty of Law in Paris, he was a Consultant to the Internationally Monetary Fund, and a Resident Consultant at The Federal Reserve Bank of New York, a Senior Research Scholar at Yale Law School, and a Teaching Fellow at Harvard.

At Yale Law School he earned his LL.M. and J.S.D. His dissertation was titled: A Jeffersonian Republic by Hamiltonian Means: Values, Constraints & Finance in a Just “˜Ownership Society.’

While at Oxford University, Bob earned his M.A. in Philosophy (Mathematical Logic Emphasis) & Economics.  His thesis was titled: “Recursion, Indeterminacy, & Antinomy: A Three-Valued Intensional Logic & Associated Theory of Negation.”

And the fact that I’d be uncomfortable being asked to define more than half of the words in his dissertation’s title is not even what is so impressive… and scary about Professor Robert Hockett.  What made me sit up in my chair and take notice was that he’s written a lot on this and related topics… maybe as much or more than I have… and that’s nothing to sneeze at if not unthinkable… and his CV has thirteen pages of recent media appearances, single spaced.

Many people had told me that eminent domain would never see the light of day, doomed to the darkness of the courtroom through interminable years of litigation that could bore anyone to death.

But, now I’ve met Bob… talked to him at some length.  Read much of his recent work.  (Look for him as my guest on an upcoming Mandelman Matters Podcast, by the way.)  And I like him a lot… on many occasions, and from the very first time we talked, I couldn’t help but notice how often the things he said sounded like me.  A smarter me, perhaps, but still me nonetheless.

On numerous occasions I could have sworn I had written what he had just said.  I asked him if he wanted to take over my blog, so I could take a break.

And now I think it’s actually going to happen… that any litigation will happen after the fact… that we’re going places in the foreclosure crisis we’ve never been before, at least not in my lifetime.  Ongoing widespread unhappiness seems a certainty, so why shouldn’t it be spread around?

She asked you nicely…

Richmond’s Mayor Gayle McLaughlin has asked investors nicely to come join her at her table in order to come to an agreement on a price for the homes she wants to buy, but so far none has accepted her invitation to negotiate.  Some may have actually flipped her off when she wasn’t looking.  I’m sure a few have made rude cartoons out of her photo using marker and a photocopier.

The point is they said no.

Now imagine you’re Gayle for a moment or two.  You’re Richmond’s Mayor.  The people have elected you to protect their communities, to stop injustice inside city lines, to make sure their city is safe… and prosperous… to protect their property values.  And you’re watching your city decompose.  Soon, a full 20 percent of all homes will be vacant, with no hope of new owners moving in any time soon.

Many of the homes are showing signs of decay… the “broken window theory” is at work before your eyes, and things are getting only worse… crime is rising… six years in and values keep falling… while no one seems to care… and even fewer seem willing to lift a finger to help in any way… even those who easily could.

What do you do?  Leave it alone.  Go down with the ship?  Allow those far away, connected only by money, who remain entirely intractable at every request to literally allow the city to be drained of its lifeblood until the people have been beaten and it rivals the worst parts of Detroit?  Don’t you owe your constituents something more than that?

Bob has testified before the Congressional Financial Services Panel Series on “The Housing Crisis and Policy Solutions: Should Eminent Domain Be Used to Save Underwater Homeowners?”  His testimony answered the Mayor’s question in no uncertain terms:

“It is incumbent on local government to purchase underwater mortgage loans from private label securitization trusts, reduce principal, thereby mitigate loss for borrowers, communities and investors, and in so doing stabilize homeownership rates, families, neighborhoods, and communities across the country.”

He also discussed the constitutionality of the using eminent domain for principal reduction… the precedent for using eminent domain to purchase mortgages… whether eminent domain should be limited to certain types of loans or conditions… and how cities and judges determine fair market value for a mortgage loan.  (You can read his testimony in its entirety HERE.)

His points are both well considered and well stated.  His message is simple and logical to the point of being easy to understand and hard to fault… especially when you’re a homeowner invested in a community that’s falling apart, or one who’s facing the prospect of losing a home to the bankers.

And the headlines become even more frightening all the time… Wall Street has felt the tremor… this could really be happening… “Cities Begin Moving on Hockett “˜Municipal Plan.’

“What is particularly exciting about this,” Hockett observes, “is that all of these cities are acting independently, and that all of them are showing interest in different variations on the plan tailored to their own unique foreclosure crises.” 

“After years of first quietly, then not so quietly pushing this idea,” Hockett says, “it is very exciting to see that it now is becoming a fully fledged “˜movement.’ The cities and the nation at large might now at long last emerge from their six-year-long debt-deflationary slump, and they have my great colleagues in government and the financial, community advocacy, and legal communities to thank for it.”

Once only a seed, now growing like a weed…

We’re no longer just talking about Richmond, California and Gayle… everyone’s Mom… the city’s mayor.  We’re talking maybe 26 cities in states across the country, and the potential for more joining the ranks all the time.

Wall Street and Washington have to see it growing, becoming harder to stop.  It’s very much like watching a political movement favoring default come to power in Greece… except it’s happening here, without riots in the streets.

Last year, ten congressional democrats sent Edward J. DeMarco, while he was acting director of the Federal Housing Finance Agency, and Shaun Donovan, secretary of housing and urban development, a letter saying that policies restricting mortgage lending in areas because they used eminent domain would be discriminatory and in fact, violate anti-discrimination laws.  Elected officials have taken their sides… the battleground is being readied.  The war may be coming soon.

“We write to express our disappointment that the Federal Housing Finance Agency is actively supporting and threatening legal action against communities which consider exercising their legal rights to use eminent domain to help struggling homeowners,” the letter to Mr. DeMarco said.

Make eminent recovery your domain…

“Lending might become scarce or too costly in the future” doesn’t really provide for an adequate defense.  It sounded like it had more impact when there were only one or two cities talking about eminent domain, but not now.

According to the ASF: “ASF staff and members have continued significant outreach efforts to major media outlets decrying the potential use of eminent domain to seize mortgages.” 

From the Wall Street Journal: “Eighteen banking, securities and housing groups have joined together to issue a warning to three California municipalities looking to use eminent domain as a way to seize troubled mortgages from investors.”

But, Bob Hockett is too prolific… “Paying Paul and Robbing No One: An Eminent Domain Solution for Underwater Mortgage Debt.”

More is needed, much more… a better strategy.

So, what can opponents do to thwart the growing support for the plan… they’ve got plenty of money, after all… but they also have little credibility among the plan’s supporters, and not all that much elsewhere either.  The message shouldn’t be seen as coming from them.

Wait… there’s only one way I can think of to stop the masses from coming to support the plan to use eminent domain to write down underwater loans… only one. 

If we all believed the housing markets were in full recovery all over the country… that would do it.  And if not right near you… then somewhere near by.  Surely if the people thought home values were going up from here, they wouldn’t support an unnecessary use of eminent domain.

That’s it… it’s positively brilliant.  And it just might work.

But, how will we get them to believe that?  Call the P.R. pros… the pros from Dover… tell them to get ready to rock… tell them we’re creating a recovery… at least one that’s eminent.

Yep, I get it now.

Mandelman out.

P.S. Of course, it’s possible that the opposition to the use of eminent domain will prevail, but telling people of a recovery in housing markets does not a recovery make… and so the problems that have led cities to consider eminent domain will continue.  What then?  What is a city dying under the weight of a downward economic spiral to do.

Well, if history is to be our guide, it’s interesting to consider that during the 1930s, which was the last time we faced the same sort of market forces that we face today, 28 states passed foreclosure moratoria, five others passed consumer friendly laws related to foreclosure, such as extensions of the redemption period, during which homes could be reclaimed.  Most moratoriums lasted five years and many required the homeowner to pay property taxes, some required the payment of some interest payments.  But, foreclosures were largely prohibited in those states.

If you want my prediction, that’s what comes next for cities drowning from foreclosures going on unchecked and falling home values that have no end in sight.  And, if you want my guess as to how those that oppose eminent domain now, will feel about moratoria… well, they won’t like that idea one bit either.

The only thing that group seems to advocate is the status quo, and that’s the only thing many cities will not be able to withstand.  But, forcing people to take increasing amounts of pain, doesn’t end well, historically speaking.  We should have learned that from our experience with the Treaty of Versailles… which made possible the rise of Adolph Hitler.

I’m not claiming we face that same sort of risk here… we don’t.  But one day, we may get to see someone in Athens stand up on a chair to ask that the crowd support him in the next election based on his platform of telling Germany to go f#@k themselves.  And if the pain has become bad enough and he’s elected, we all just have to hope that he doesn’t have a swastika on his armband.