{"id":1228,"date":"2013-08-21T06:30:02","date_gmt":"2013-08-21T10:30:02","guid":{"rendered":"http:\/\/www.dougsbriefcase.com\/blog\/?p=1228"},"modified":"2013-08-23T08:29:23","modified_gmt":"2013-08-23T12:29:23","slug":"richmond-seizure-program-dangerous-idea-from-a-dangerous-city","status":"publish","type":"post","link":"https:\/\/www.dougsbriefcase.com\/blog\/richmond-seizure-program-dangerous-idea-from-a-dangerous-city\/","title":{"rendered":"Richmond Seizure Program: Dangerous Idea From a Dangerous City"},"content":{"rendered":"
\"Richmond<\/a>

Rich\u00admond (CA<\/span>) has a dan\u00adger\u00adous idea: uncon\u00adsti\u00adtu\u00adtion\u00adal\u00adly seiz\u00ading pri\u00advate invest\u00adments. (Cred\u00adit: popphoto.com)<\/p><\/div>\n

Rich\u00admond (CA<\/span>) once was ranked among the nation\u2019s most dan\u00adger\u00adous cities<\/a>.  If city fathers have their way, it will become the most dan\u00adger\u00adous city for res\u00adi\u00adden\u00adtial mort\u00adgage investors.<\/p>\n

The city gov\u00adern\u00adment in recent weeks offered to buy 624 mort\u00adgages from investors at dis\u00adcount\u00aded prices.  Mort\u00adgage bond trustees act\u00aded quick\u00adly to try to stop the city from tak\u00ading the next step, using its pow\u00ader of emi\u00adnent domain to take the mort\u00adgages away from the investors that own them.  They have asked a fed\u00ader\u00adal judge to block the seizure.<\/p>\n

The Rich\u00admond Seizure Pro\u00adgram rep\u00adre\u00adsents the government\u2019s lat\u00adest incur\u00adsion into a hous\u00ading mar\u00adket that remains trou\u00adbled years after the real estate bub\u00adble burst.  While the mar\u00adket has shown ample signs of recov\u00adery over the last year, fore\u00adclo\u00adsures remain at high lev\u00adels and mil\u00adlions owe more on their hous\u00ades than they are worth.  The banks that orig\u00adi\u00adnat\u00aded these under\u00adwa\u00adter mort\u00adgages usu\u00adal\u00adly no longer own them, hav\u00ading sold them to gov\u00adern\u00adment-spon\u00adsored enti\u00adties or oth\u00ader banks, who bun\u00addled them into secu\u00adri\u00adties and sold them to investors.<\/p>\n

Richmond\u2019s pro\u00adgram would work some\u00adthing like this.  Say a home\u00adown\u00ader owes $400,000 on a home that is cur\u00adrent\u00adly worth only $300,000.  The gov\u00adern\u00adment of Rich\u00admond would use its emi\u00adnent domain pow\u00ader to seize the mort\u00adgage from the own\u00aders of the secu\u00adri\u00adty, pay\u00ading a price that it deems fair.  The city will rely on its bank\u00ading part\u00adner, Mort\u00adgage Res\u00ado\u00adlu\u00adtion Part\u00adners (MRP<\/span>), a pri\u00advate invest\u00adment fund, to raise mon\u00adey to buy the loans from bond trusts at the price estab\u00adlished by the city.  MRP<\/span> would then orig\u00adi\u00adnate a new FHA<\/span>-insured loan with a prin\u00adci\u00adpal bal\u00adance more con\u00adsis\u00adtent with the home\u2019s cur\u00adrent mar\u00adket value.<\/p>\n

Richmond\u2019s action is the brain\u00adchild of Cor\u00adnell Uni\u00adver\u00adsi\u00adty Pro\u00adfes\u00adsor Robert Hock\u00adett, who has long advo\u00adcat\u00aded gov\u00adern\u00adment seizure of under\u00adwa\u00adter mort\u00adgages.  I crit\u00adi\u00adcized his pro\u00adpos\u00adal in a pre\u00advi\u00adous post and he was very gen\u00ader\u00adous in engag\u00ading me in a back-and-forth<\/a>.<\/p>\n

Hock\u00adett argues that if the gov\u00adern\u00adment seized under\u00adwa\u00adter mort\u00adgages and wrote down the prin\u00adci\u00adpal, every\u00adone would win: home\u00adown\u00aders would get more afford\u00adable month\u00adly pay\u00adments, com\u00admu\u00adni\u00adties would have few\u00ader fore\u00adclo\u00adsures and less blight, and investors would get bet\u00adter-per\u00adform\u00ading mort\u00adgages.  But if writ\u00ading down the prin\u00adci\u00adpal ben\u00ade\u00adfits both bor\u00adrow\u00ader and lender, why don\u2019t lenders do it?  Because mort\u00adgages that have been bun\u00addled into secu\u00adri\u00adties and sold in the mar\u00adket\u00adplace are owned by such a broad swath of indi\u00advid\u00adu\u00adals and insti\u00adtu\u00adtions \u2013 pen\u00adsion funds, uni\u00adver\u00adsi\u00adties, foun\u00adda\u00adtions, for\u00adeign gov\u00adern\u00adments \u2013 that it is impos\u00adsi\u00adble for them to act col\u00adlec\u00adtive\u00adly.  The gov\u00adern\u00adment should address this \u201cmar\u00adket fail\u00adure\u201d by act\u00ading as a col\u00adlec\u00adtive agent, seiz\u00ading the mort\u00adgages, pay\u00ading investors a fair price, issu\u00ading new loans on more favor\u00adable terms to home\u00adown\u00aders, and sell\u00ading these loans on the open market.<\/p>\n

I argued that there is no \u201cmar\u00adket fail\u00adure.\u201d  Gov\u00adern\u00adment should not involve itself in help\u00ading (if it is indeed help\u00ading) investors who have lost mon\u00adey on mort\u00adgage-backed secu\u00adri\u00adties or in get\u00adting bor\u00adrow\u00aders out from under their mort\u00adgages. Investors who bought secu\u00adri\u00adties backed by sour\u00ading loans are free to hold them or sell them at a loss; home\u00adown\u00aders who bor\u00adrowed more than their home is now worth should either con\u00adtin\u00adue mak\u00ading pay\u00adments or default.  I also object\u00aded to gov\u00adern\u00adment using the \u201ctak\u00adings clause\u201d of the Fifth Amend\u00adment to seize pri\u00advate prop\u00ader\u00adty.  That clause restricts the pow\u00ader to seize prop\u00ader\u00adty for \u201cjust com\u00adpen\u00adsa\u00adtion\u201d to instances where the prop\u00ader\u00adty is required for \u201cpub\u00adlic use\u201d (e.g., a new road, a mil\u00adi\u00adtary base, a school, or the like).  Pro\u00adfes\u00adsor Hock\u00adett wants gov\u00adern\u00adment to use this pow\u00ader pri\u00admar\u00adi\u00adly to ben\u00ade\u00adfit pri\u00advate actors (investors and under\u00adwa\u00adter home\u00adown\u00aders), as well as the local gov\u00adern\u00adment, an uncon\u00adsti\u00adtu\u00adtion\u00adal use of gov\u00adern\u00adment pow\u00ader, in my judgment.<\/p>\n

I also ques\u00adtioned whether pri\u00advate investors would actu\u00adal\u00adly ben\u00ade\u00adfit from gov\u00adern\u00adment seizure.  That ques\u00adtion has now been answered, at least with respect to the Rich\u00admond Seizure Pro\u00adgram.  Two banks that issued the secu\u00adri\u00adties that include mort\u00adgages that the gov\u00adern\u00adment intends to seize \u2013 Wells Far\u00adgo and Deutsche Bank \u2013 have asked a fed\u00ader\u00adal judge to nix the project<\/a>.  Their com\u00adplaint states:<\/p>\n

Defen\u00addants Rich\u00admond and MRP<\/span> seek to enrich them\u00adselves through a prof\u00adit-dri\u00adven scheme under which Rich\u00admond would use its emi\u00adnent domain pow\u00aders, and the threat of emi\u00adnent domain lit\u00adi\u00adga\u00adtion, pri\u00admar\u00adi\u00adly to seize per\u00adform\u00ading res\u00adi\u00adden\u00adtial mort\u00adgage loans \u2026 at steeply and unjus\u00adti\u00adfi\u00adably dis\u00adcount\u00aded prices that do not reflect the cur\u00adrent val\u00adue of the loans, and then refi\u00adnance those loans with new fed\u00ader\u00adal\u00adly insured loans for amounts sub\u00adstan\u00adtial\u00adly above the amounts paid by Rich\u00admond to seize the home\u00adown\u00aders\u2019 exist\u00ading loans (pp. 18\u201319<\/a>).<\/p><\/blockquote>\n

The suit alleges that the Rich\u00admond Seizure Pro\u00adgram, far from being a win-win-win, is a zero-sum \u2013 home\u00adown\u00aders and the city gov\u00adern\u00adment ben\u00ade\u00adfit at the expense of investors.  Here it is impor\u00adtant to dis\u00adtin\u00adguish what Rich\u00admond is try\u00ading to do from what Pro\u00adfes\u00adsor Hock\u00adett advo\u00adcat\u00aded.  Accord\u00ading to the fil\u00ading, investors would be paid 80 per\u00adcent of the home\u2019s mar\u00adket val\u00adue<\/em>,<\/span> not 80 per\u00adcent of the loan prin\u00adci\u00adpal<\/em>.  That is an impor\u00adtant dis\u00adtinc\u00adtion. For exam\u00adple, investors who own a $400,000 mort\u00adgage on a house worth $300,000 would be paid $240,000 by the gov\u00adern\u00adment (80 per\u00adcent of the home\u2019s val\u00adue).  That rep\u00adre\u00adsents a $160,000 loss on the $400,000 mort\u00adgage, a 40 per\u00adcent hit.  I\u2019m not sure that Hock\u00adett had loss\u00ades of that mag\u00adni\u00adtude in mind when he devised his proposal.<\/p>\n

But if investors lose, the City of Rich\u00admond and its part\u00adner MRP<\/span> win.  Although they would pay just $240,000 (80 per\u00adcent of the home\u2019s mar\u00adket val\u00adue) to investors, they would issue a new mort\u00adgage of $285,000 (95 per\u00adcent of the home\u2019s mar\u00adket val\u00adue). MRP<\/span> and the city would then sell the new mort\u00adgage to the Fed\u00ader\u00adal Hous\u00ading Admin\u00adis\u00adtra\u00adtion (FHA<\/span>) and divide the $45,000 prof\u00adit, accord\u00ading to the filings.<\/p>\n

In addi\u00adtion to com\u00adplain\u00ading about gov\u00adern\u00adment and MRP<\/span> prof\u00adit\u00ading from the seizure, the banks object to the city\u2019s selec\u00adtion of which mort\u00adgages to seize.  Pro\u00adfes\u00adsor Hockett\u2019s writ\u00adings sug\u00adgest that gov\u00adern\u00adment would seize the mort\u00adgages of bor\u00adrow\u00aders who are like\u00adly to default.  Accord\u00ading to the fil\u00ading, Rich\u00admond is doing the oppo\u00adsite: seiz\u00ading under\u00adwa\u00adter loans that are not like\u00adly to go bad.<\/p>\n

\u201c<\/span>The Pro\u00adgram prin\u00adci\u00adpal\u00adly tar\u00adgets per\u00adform\u00ading loans \u2013 i.e., the loans of home\u00adown\u00aders who have been mak\u00ading their month\u00adly pay\u00adments for years despite being \u2018under\u00adwa\u00adter,\u2019 and who have good cred\u00adit rat\u00adings, as opposed to those loans that are in default or at seri\u00adous risk of default.  The Pro\u00adgram tar\u00adgets per\u00adform\u00ading loans because they are not at seri\u00adous risk of default<\/strong> and there\u00adfore can be eas\u00adi\u00adly re-financed with a new Fed\u00ader\u00adal Hous\u00ading Admin\u00adis\u00adtra\u00adtion (\u201cFHA<\/span>\u201d) insured loan\u201d (pp. 10\u201311<\/a>,<\/span> empha\u00adsis in original).<\/p><\/blockquote>\n

The com\u00adplaint alleges that the city gov\u00adern\u00adment and its bank\u00ading part\u00adner are seiz\u00ading mort\u00adgages that are unlike\u00adly to default because such loans are the eas\u00adi\u00adest to sell to the fed\u00ader\u00adal government\u2019s own mort\u00adgage insur\u00adance enti\u00adty, assur\u00ading a quick prof\u00adit.  If true, that would seem to under\u00admine the program\u2019s express pur\u00adpose, which is to pre\u00advent home\u00adown\u00aders who have fall\u00aden behind on their pay\u00adments from being forced into foreclosure.<\/p>\n

The Rich\u00admond Seizure Pro\u00adgram, the banks argue, is an uncon\u00adsti\u00adtu\u00adtion\u00adal exer\u00adcise of gov\u00adern\u00adment pow\u00ader by the city of Rich\u00admond.  It does not meet the Fifth Amendment\u2019s require\u00adment that gov\u00adern\u00adment tak\u00adings be for \u201cpub\u00adlic use\u201d; nor do the city\u2019s dis\u00adcount\u00aded pay\u00adments for the mort\u00adgage meet the \u201cjust com\u00adpen\u00adsa\u00adtion\u201d requirement.<\/p>\n

The mat\u00adter is now in the courts.  What will hap\u00adpen if the judges rule in favor of Rich\u00admond?  Expect gov\u00adern\u00adment seizure of pri\u00advate mort\u00adgages to go viral.  MRP<\/span> already has made pitch\u00ades to oth\u00ader Cal\u00adi\u00adfor\u00adnia cities, as well as to Newark (NJ<\/span>) and Seat\u00adtle (WA<\/span>) (p. 13<\/a>).  If Rich\u00admond wins its case, oth\u00ader cities will sure\u00adly launch their own pro\u00adgrams.  Gov\u00adern\u00adments at all lev\u00adels are peren\u00adni\u00adal\u00adly starved for cash, and seiz\u00ading mort\u00adgages promis\u00ades instant prof\u00adit.  Far from antag\u00ado\u00adniz\u00ading vot\u00aders by rais\u00ading their tax\u00ades, this new source of rev\u00adenues could actu\u00adal\u00adly win the votes of those who ben\u00ade\u00adfit from low\u00ader month\u00adly payments.<\/p>\n

In addi\u00adtion to the law\u00adsuit, the pro\u00adgram faces oth\u00ader head\u00adwinds.  The Fed\u00ader\u00adal Hous\u00ading Financ\u00ading Agency may direct Fan\u00adnie Mae and Fred\u00addie Mac, which it over\u00adsees, not to do busi\u00adness in any com\u00admu\u00adni\u00adty whose gov\u00adern\u00adment seizes pri\u00advate mort\u00adgages.  The reg\u00adu\u00adla\u00adtor also has ques\u00adtioned whether the FHA<\/span> would insure mort\u00adgages <\/a>that cities take from pri\u00advate investors.  With\u00adout the FHA\u2019s par\u00adtic\u00adi\u00adpa\u00adtion, the pro\u00adgram most like\u00adly would become unworkable.<\/p>\n

The resis\u00adtance of gov\u00adern\u00adment reg\u00adu\u00adla\u00adtors to this par\u00adtic\u00adu\u00adlar inter\u00adven\u00adtion in the hous\u00ading mar\u00adket is unusu\u00adal.  Gov\u00adern\u00adment intru\u00adsion into that mar\u00adket has been mas\u00adsive, with the Fed sup\u00adpress\u00ading inter\u00adest rates and buy\u00ading up $1.3 tril\u00adlion <\/a>in mort\u00adgage-backed secu\u00adri\u00adties, Trea\u00adsury tak\u00ading over Fan\u00adnie and Fred\u00addie and ply\u00ading them with $187 bil\u00adlion<\/a> in tax\u00adpay\u00ader mon\u00adey to keep them afloat, and var\u00adi\u00adous fed\u00ader\u00adal enti\u00adties launch\u00ading mul\u00adti\u00adple pro\u00adgrams to write down mort\u00adgage bal\u00adances for dis\u00adtressed homeowners.<\/p>\n

These var\u00adi\u00adous inter\u00adven\u00adtions have fall\u00aden short of expec\u00adta\u00adtions.  Aver\u00adage hous\u00ading prices, accord\u00ading to the Case-Shiller 20-city index, are still 28% below<\/a> where they stood sev\u00aden years ago at their July 2006 peak.  Sales of new and exist\u00ading homes con\u00adtin\u00adue to lag lev\u00adels reached before the hous\u00ading crash.  Mort\u00adgage write-down pro\u00adgrams have proven a dis\u00adap\u00adpoint\u00adment.  Last month, the gov\u00adern\u00adment report\u00aded that near\u00adly half the home\u00adown\u00aders who in 2009 had their mort\u00adgages reduced under one of these pro\u00adgrams \u2014 Home Afford\u00adable Mod\u00adi\u00adfi\u00adca\u00adtion Pro\u00adgram (HAMP<\/span>) \u2014 had default\u00aded on their new loans<\/a>.  And the Trea\u00adsury Depart\u00adment has now giv\u00aden two states  per\u00admis\u00adsion to use mon\u00adey from anoth\u00ader pro\u00adgram that was designed to help peo\u00adple stay in their homes (the \u201cHard\u00adest Hit Fund\u201d) to tear the homes down instead<\/a>.<\/p>\n

Nev\u00ader\u00adthe\u00adless, gov\u00adern\u00adment con\u00adtin\u00adues to inter\u00advene.  And while banks are hard\u00adly in a posi\u00adtion to com\u00adplain about gov\u00adern\u00adment doing favors for pri\u00advate actors \u2013 the Fed gave Deutsche Bank $2.6 bil\u00adlion<\/a> as part of the AIG<\/span> bailout, to cite but one exam\u00adple \u2014 they have it right in this case.<\/p>\n

The Rich\u00admond Seizure Pro\u00adgram is a dan\u00adger\u00adous\u00adly uncon\u00adsti\u00adtu\u00adtion\u00adal idea.  The courts should strike it down.<\/p>\n","protected":false},"excerpt":{"rendered":"

Rich\u00admond (CA<\/span>) once was ranked among the nation\u2019s most dan\u00adger\u00adous cities.  If city fathers have their way, it will become the most dan\u00adger\u00adous city for res\u00adi\u00adden\u00adtial mort\u00adgage investors.<\/p>\n","protected":false},"author":3,"featured_media":1238,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"nf_dc_page":"","wp_typography_post_enhancements_disabled":false,"_jetpack_newsletter_access":"","_jetpack_dont_email_post_to_subs":false,"_jetpack_newsletter_tier_id":0,"_jetpack_memberships_contains_paywalled_content":false,"_jetpack_feature_clip_id":0,"_jetpack_memberships_contains_paid_content":false,"nfd_image_url":"","nfd_onboarding_generated":"","footnotes":"","jetpack_publicize_message":"","jetpack_publicize_feature_enabled":true,"jetpack_social_post_already_shared":true,"jetpack_social_options":{"image_generator_settings":{"template":"highway","default_image_id":0,"font":"","enabled":false},"version":2},"jetpack_post_was_ever_published":false},"categories":[18,371,343,15],"tags":[281,503,507,289,484,505,290,485,509,286,504,506,502,499,501,282,500,288,508],"class_list":["post-1228","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-economy","category-federal-reserve-economy","category-government-power","category-public-policy","tag-bailouts","tag-bubble","tag-deutcshe-bank","tag-eminent-domain","tag-fannie-mae","tag-fha","tag-fifth-amendment","tag-freddie-mac","tag-hamp","tag-housing-market","tag-mortgage-resolution-partners","tag-mortgage-backed-securities","tag-mortgages","tag-richmond-ca","tag-richmond-seizure-program","tag-robert-hockett","tag-seizure","tag-underwater-mortgages","tag-wells-fargo"],"aioseo_notices":[],"aioseo_head":"\n\t\t\n\t\n\t\n\t\n\t\n\t\t\n\t\t\n\t\t\n\t\t\n\t\t\n\t\t\n\t\t\n\t\t\n\t\t\n\t\t\n\t\t\n\t\t\n\t\t