Thursday, July 5, 2012

Government Overreaching on Seizing Mortgages

The wicked never rest, and there is no rest for beleaguered citizens who are not fortunate enough to be chosen for government largesse.  The Wall Street Journal story about California cities contemplating an absurd, Kafkaesque use of eminent domain powers is truly "appalling," as described by Scott Simon, Managing Director at PIMCO.

Mortgages are private contracts between a homeowner/borrower and a financial institution/lender.  Eminent domain is typically used, for example, when a new public highway project requires a right of way which is now occupied by homes and private businesses.  The government entity's powers of eminent domain are exercised in order to construct a project which is in the interest of a larger population, including outsiders.  In exchange for exercising this right, the government entity must demonstrate need and come to some market driven settlement with the existing property owners exchanging value for giving up their homes and business locations, plus some value for the inconvenience and costs of moving.  All of this is subject to negotiation, in theory.

As it is, eminent domain powers are often abused and applied arbitrarily to property owners who don't necessarily want to play ball at the proposed settlement rates.  We have some egregious examples here in the Minnesota Nice Midwest.  The California proposal brings abuse of government power and eminent domain to  levels that should be laughed out of town or struck down in courts.  

Cities in the California case would seize individual underwater mortgage loans. After seizing the loan, via the eminent domain subterfuge, a City would use Mortgage Resolution Partners to pay a reduced amount to the lending institution.  Mortgage Resolution Partners CEO Graham Williams comes from a background of lending to low income borrowers through a program called "Neighborhood Advantage" and from subprime lender ITT Financial Services and later at Bank of America.  The smell testalyzer is flashing red already.  Mortgage Resolution Partners would then put the formerly underwater homeowner into a new, low interest mortgage insured by the FHA with equity requirements as low as 2.25% according to the Journal.  So, of course, taxpayers are again handing out a subsidy and taking risk.  In these transactions is a nice, upfront profit for the wizards who came up with the scheme.

Professors Mian and Sufi of Chicago Booth Business School did an original and well known analysis on the explosion of mortgage lending from 2002-2006 covering a sample of 238 U.S. counties. The top decile counties for the growth in household debt to income are in California and Florida.  The single largest growth in debt ratios occurred in Monterrey County, California.  The California counties had the frothiest growth in real estate values, and we know from companies like Countrywide and IndyMac, that these Zip codes were precisely the targets for aggressive mortgage origination.  Professor John Coffee of Columbia has testified about these abuses before Congress.  Now, all taxpayers will be asked to fund a bailout for these homeowners.  Why not for homeowners in the Midwest or in Westchester County or in Appalachia?

Did I mention that Roger Altman of Evercore Partners, one of the investment banks backing Mortgage Resolution Partners, served in the Clinton Administration and is raising funds for President Obama's re-election efforts?  I have to leave the room now because the smell test is over and the stench is too much.

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