Is this a good idea?

The Board of Supervisors in the California county of San Bernardino has, perhaps unintentionally, picked a fight with some of the giants of the real estate industry. The Board unanimously approved a plan two weeks ago that would use eminent domain to seize underwater mortgages and restructure them for homeowners unable to sell or refinance the properties.

http://www.mortgagenewsdaily.com/062920 ... tgages.asp

Seems to me that until over valued mortgages work themselves through the system, that the economy will be sluggish. One way is for borrowers to walk away from their properties. When that happens don't the mortgage holders generally get burnt?
In this case, the city is forcing a change in the mortgage through the use of eminent domain....
I wonder about the practicality and morality of it...One can certainly see how it suddenly provides the homeowner with enormous clout to try and reestablish a mortgage. under different terms.

This is a terrible idea.

Can you imagine what banks will do? Put yourself in their place. You would not make loans for any home in any town that even might do this.

I can see big lawsuits and this going to the USSC. This is an abuse of eminent domain. Then again, the Court ruled the wrong way before on this.

I tend to agree with Steve on the possible unintended consequences of this kind of law. Now it probably won't be as far as banks not lending in those cities but I could see interest rates or PMI requirements skyrocketing. I would reference Hawaii Housing Association v. Midkiff(1984) as an example.

Basically, Hawaii realized that 22 land owners owned about 72% of the fee simple titles in the state with residents leasing the property from the title holder. It was felt this kept land prices artificially high making it impossible for the leaseholder, who I believe happened to be lower - middle income native Hawaiians, to ever actually purchase the fee simple title. Therefore, the legislature passed a law that essentially passed the fee simple title over to the leaseholders. The title holders sued and it went to the Supreme Court which decided in favor of Hawaii.

The problem is that the action pretty much had the exact opposite effect. Now that the land was easier to get a hold of, investors and speculators started to offer outlandish amounts for the property and housing prices doubled within 6 years.

Another unintended consequence could come from the non-recourse mortgage laws in California. It appears the law would only refinance the mortgages through another private lender. It is my understanding that California's non-recourse mortgage laws apply to original mortgages but not refinanced loans. This means if a homeowner is foreclosed on an original mortgage, the bank can not go after the mortgagor assets if the amount realized by resale/auction is less then the amount owed but can if it is a refinanced loan. That would seem to mean all those mortgages condemned and refinanced would then be taken out of the non-recourse status.

The city just can't take a mortgage, it would have to take the property, and it could only do so with compensation. The only way I could see it working would be the City takes the property and pays off the note holder, but then it would own the property. Even if they structured it so that the homeowner took out another mortgage and got the house back, then the City takes the loss on the difference. They could try to screw the mortgage holder on the value of the mortgage, but if you have a current homeowner paying on a note, then how could you justify that the note is actually worse less than the person is paying in a court? Tough argument to make.

geojanes wrote:The city just can't take a mortgage, it would have to take the property, and it could only do so with compensation.

Right, but, at best, that is considerably less than the mortgage--and possibly less than the market price. Rarely do folks get full market value on eminent domain.

The only way I could see it working would be the City takes the property and pays off the note holder, but then it would own the property. Even if they structured it so that the homeowner took out another mortgage and got the house back, then the City takes the loss on the difference.

???

The town seizes it at something near the market value, which is much less than it was 7 or 8 years ago. They force the bank to eat the difference because there is no property to foreclose upon. They then find some credit union to provide a new mortgage, presumably guaranteed by the Town.

It's the bank that loses, not the Town.

Are these the same banks losing who are benefitting from largescale public backed quantatitive easing, lowe interest rates and the odd bail out?

Are these the same banks who have been foreclosing on people on false pretences?

Are these the same banks who have been making 'sub-prime loans' to people who actually would qualify for normal loans, but didn't tell them because it's more profitable?

When these banks lose on an eminent domain deal, my heart bleeds just a little, I assure you.

danivon wrote:Are these the same banks losing who are benefitting from largescale public backed quantatitive easing, lowe interest rates and the odd bail out?

Are these the same banks who have been foreclosing on people on false pretences?

Are these the same banks who have been making 'sub-prime loans' to people who actually would qualify for normal loans, but didn't tell them because it's more profitable?

When these banks lose on an eminent domain deal, my heart bleeds just a little, I assure you.

Please let us know.

Meanwhile, supposing this becomes accepted practice for towns. What will banks do?

Well, on the first, I think we know that banks as a whole have indeed benefitted from QE and the Fed setting low interest rates. And that those banks bailed out certainly benefited while any others that were creditors of them did so indirectly. So I'll not bother with evidence there.

But on the other stuff (and more) here's a series of collated posts from Fred Clark, each linking to multiple stories about banks doing all kinds of dodgy stuff to their customers from robosigning credit card agreements to using false documents to foreclose; from evading their own rules on changing a mortgage to misselling insurance:

Banks Behaving Badly
Banks Behaving Badly 2
Banks Behaving Badly 3
Banks Behaving Badly 4
Banks Behaving Badly 5
Banks Behaving Badly 6

And here's an article concerning accusations of Wells Fargo selling sub-primes to people who could get a better loan, seemingly with a racial element to it:

Bank Accused of Pushing Mortgage Deals on Blacks

The New York Times, in a recent analysis of mortgage lending in New York City, found that black households making more than $68,000 a year were nearly five times as likely to hold high-interest subprime mortgages as whites of similar or even lower incomes. (The disparity was greater for Wells Fargo borrowers, as 2 percent of whites in that income group hold subprime loans and 16.1 percent of blacks.)

“We’ve known that African-Americans and Latinos are getting subprime loans while whites of the same credit profile are getting the lower-cost loans,” said Eric Halperin, director of the Washington office of the Center for Responsible Lending. “The question has been why, and the gory details of this complaint may provide an answer.”

Happy reading...

None of that establishes these banks as the guilty ones, or even establishes there is any guilt in the proposed eminent domain seizures.

You read all of that in 25 minutes?

or are you just guessing that not one of the links in the Slacktivist lists shows one iota of bank guilt in hitting ordinary people?

danivon wrote:You read all of that in 25 minutes?

or are you just guessing that not one of the links in the Slacktivist lists shows one iota of bank guilt in hitting ordinary people?

No, you are making a leap of logic. Actually, a leap of logic and a leap of justice.

First, the leap of logic: some banks did bad things; banks have loans in these towns; therefore, the banks who did bad things must be the ones who possess the loans in question which the towns are looking to, in effect, nullify.

Second, the leap of justice: suppose for a moment that every cheating bank owns every cheating home that the towns are looking to seize. That means whatever happens to those banks is: 1) deserved and 2) will have no ramifications on completely innocent parties?

And, the answer is to your query is: No, I didn't read those links. Why would I? They are possibly related to the topic at hand, but may not be at all. I suppose you could link a series of articles about Tiger Woods and Stephen Hawking as well--they could also be relevant.

So, if you didn't read the links, how do you know they are not relevant? You fatuous points about Woods/Hawking aside, do you at least concede that they are about banks being accused of ripping people off, which is not exactly completely irrelevant.

You are right that I was making a general point about how banks, but then you were asking about what if 'all towns' used the eminent domain method. All I'm saying is that banks are not exactly paragons of virtue and if they lose out I'm not exactly going to be moved to tears.

Even though I currently work with part of a bank I don't trust the beggars.

danivon wrote:So, if you didn't read the links, how do you know they are not relevant? You fatuous points about Woods/Hawking aside, do you at least concede that they are about banks being accused of ripping people off, which is not exactly completely irrelevant.

You are right that I was making a general point about how banks, but then you were asking about what if 'all towns' used the eminent domain method. All I'm saying is that banks are not exactly paragons of virtue and if they lose out I'm not exactly going to be moved to tears.

Yes, they are about banks (allegedly) ripping people off. What I see are a lot of allegations, some of which may be true.

If "all towns" used the eminent domain method, all banks would go under, crashing the system. Our financial system would have more than heartburn if we, in effect, forced a 20-50% cramdown on all loans. Plus, if there were any banks left, they would not make any further real estate loans without some kind of federal guarantee.

Even though I currently work with part of a bank I don't trust the beggars.

Some acted unscrupulously. However, the question is should towns take vengeance on our behalf?

If the federal government won't, who will?

I can't think of one bank that has not been acting unscrupulously at some point. Can you suggest one with a clean bill of health?

danivon wrote:If the federal government won't, who will?

I can't think of one bank that has not been acting unscrupulously at some point. Can you suggest one with a clean bill of health?

I think you are missing the point. If the towns do this, why would any bank, ever, make a home loan again?

As to your point, this is the most liberal federal government, including a far-left zealot Attorney General, we have had in my lifetime. If they don't think it proper to violate centuries of contract law (inherited from GB), then maybe it's really not a good idea.