Thoughts on Foreclosure and Eminent Domainby Tim Manni
I was thinking about the plan laid out in Foreclosure Assistance Through Eminent Domain?, in which the National Community Reinvestment Coalition (NCRC) urged Congress to adopt their large-scale loan mod program by seizing mortgages via eminent domain:
…the NCRC believes that by utilizing the government’s power of eminent domain, “legal impediments regarding the complexity of selling loans held in securitized pools” can be avoided. Under the plan, eminent domain eliminates an investor’s say in the loan mod process, since the government would purchase the property directly.
This scheme is so unwieldy, and rests upon so many questionable assumptions, that it’s guaranteed to be all but unworkable.
For starters, a government program that relies upon “compulsory purchases of troubled loans” so that reluctant parties “would not need to be persuaded to participate” — don’t you just love that wording? — is bound to end up in court, and never mind bland assurances that this would “avoid lawsuits from disgruntled investors.” One can infer that the NCRC anticipates lawsuits over the the lowballing of the investments, which is a not uncommon issue with eminent domain cases. There’d be lawsuits a-plenty.
Ms. Olick (the writer of the piece which inspired the original post) notes that “The sticky part is proving that a mortgage is in fact a piece of real estate”. It isn’t, of course; it’s a contract between the lender and the borrower. Eminent domain can be, and has been, used to rewrite contract law — but while most contracts deal with a discrete entity, there are an unknown number of holders of the mortgage contracts in question, since they’ve been sliced and diced into heaven knows how many mortgage-backed securities. There’d be a lot of “disgruntled investors” — more than enough for a class-action suit, I’d guess. In fact, the complexity of such securities is a big reason why the original intent of the TARP program — to buy toxic securities — was deemed unworkable.
The NCRC plan also assures us that once seized, these contracts can be modified to the borrower’s advantage — a dubious proposition given the lack of success which has been already noted in existing loan-mod programs. The NCRC attempts to address this by proposing a low-interest second mortgage to be paid off when the property is sold, but this just ignores the fact that loan mods fail when the property value falls further than it already has — leaving the borrower even more underwater than he already is.
There are other serious flaws as well, but never mind — this won’t fly.
We agree that responsible homeowners who need help should get some — the operative word being responsible. To date, most of the loan-mod programs have been unwilling to sort out the responsible ones from the investors and ‘flippers’ who knew, or should have known, that they couldn’t afford the deal they took. That should change.
And we repeat that we’d like to see some relief for all of the homeowners who aren’t in trouble — yet — but who are struggling with their household budgets. Right now, if they want help, they need to get into trouble. That’s a perverse incentive for those who responsibly took out an affordable mortgage and have been responsibly making their payments all this time. Don’t they deserve something more than the bill for those other borrowers? Maybe the ’stimulus’ package will offer something.