Thursday, August 8, 2013

Government's Abuse of Eminent Domain: Richmond, California Grabs Current Residential Mortgages

When we wrote about this issue over a year ago, most observers dismissed governments using eminent domain to seize residential mortgages as a tempest in a teapot. Instead, the whole issue has come to the fore in the summer doldrums, just before the coming September Congressional confrontations about sequesters, the budget and debt limits which will really color the 2014 election cycles.  Naturally, the first front has been opened in California, home to one of the biggest pots of electoral and popular votes.

On August 7th, Bank of New York Mellon filed a motion for Declaratory and Injunctive Relief against the City of Richmond, California.  Here's a link to the complaint.

BNYM calls this "a case about the misuse of public power for private benefit," which in effect "rents out" the City's powers of eminent domain for the private profit of Mortgage Resolution Partners, a for-profit group masquerading as a community action group and funded by well heeled investment banks like Evercore Partners, which was founded by former Clinton administration staffer Roger Altman, who is also a major fundraiser for President Obama.

The "Seizure Program" will purchase mortgages, including current mortgages, at deep discounts to fair market value, refinance the mortgages for the existing homeowners, while generating fees for the City of Richmond and its financiers.  The financing investment banks will receive the Federal guarantees for the new mortgages, which will then be packaged and sold, the big paydays for the investment banks.

The trusts which now own the seized mortgages will take their hit, as will investors in pension plans and mutual funds which own MBS.  So in part, this is a government sponsored transfer of wealth from one set of investors, public and private, to a selected set of private investors.

As the complaint states, "...the Seizure Program actually targets performing loans and does nothing to help homes in foreclosure."  Yet, slide presentations attached as exhibits trumpet the community action nature of the program to save the City of Richmond money by forestalling expensive foreclosures while keeping people in their homes.  Well, if the homeowners are current, they were staying in their homes anyway.  The propaganda would make a Russian blush.

The document says the the city has offered to initially purchase 624 loans, 85% of which are not in any stage of foreclosure.  81% are current or have not received any notice of default.  90% of BNYM's 105 loans in this initial pool are not in any stage of foreclosure.

The relevant language of the Fifth Amendment reads, "...nor shall private property be taken for public use without just compensation."  As Professor Mary Ann Glendon of Harvard Law School points out, what began as a notion of the just compensation being solely for a public use became "silly putty" in the hands of the courts.  Glendon cites retired Supreme Court Justice Sandra Day O'Connor who wrote, "where the exercise of eminent domain power is rationally related to a conceivable public purpose, the Court has never held a compensated taking to be proscribed by the Public Use Clause."

"Keeping people in their homes," saving municipal funds and preserving jobs in the local community are all part of the propaganda for the Seizure Program, so MRP and its government enablers have thought this out well.  From as early as the 1790's however, jurists recognized that use of the eminent domain clause should never be used to generate "taking" schemes which merely transferred wealth from one group to another. Unfortunately, that is exactly what is coming down now as this scheme begins to be implemented.

Major fixed income investors like PIMCO and BlackRock have awakened out of their slumber, intoxicated and flush from the longest bond bull market in history, to protest the scam.

The stench has returned worse than before.


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