Great idea, hope it spreads. Joe Nocera:
There are few counties in America in as rough shape as San Bernardino County in California. During the housing bubble, the good times were very good. But then came the bust.
Today, San Bernardino County has one of the highest unemployment rates in the nation: 11.9 percent. Home prices have collapsed. Astonishingly, every second home is underwater, meaning the homeowner owes more on the mortgage than the house is worth. It is well documented that underwater mortgages have a high likelihood of defaulting — and, eventually, being foreclosed on. It has also been clear for some time that the best way to keep troubled homeowners in their homes is by reducing the principal on their mortgages, thus lowering their debt burden and more closely aligning their mortgage with the actual value of the home.
Which is why Greg Devereaux, the county’s chief executive officer, found himself listening intently when the folks from Mortgage Resolution Partners came knocking on his door. They had spent the previous year kicking around an intriguing idea: have localities buy underwater mortgages using their power of eminent domain — and then write the homeowner a new, reduced mortgage. It’s principal reduction using a stick instead of a carrot.
I know. When you first hear this idea, it sounds a little crazy. Eminent domain to take a mortgage? But the more closely you look at it, the more sense it starts to make. It would be a way to break the logjam that keeps mortgages in mortgage-backed bonds — securitizations — from being modified. It could prevent foreclosures. And it could finally stabilize housing prices.
[…] The securitization industry is up in arms about this proposal. In late June, after the plan was leaked to Reuters, some 18 organizations, including the Association of Mortgage Investors, wrote a threatening letter to the San Bernardino board of supervisors claiming that the plan would inflict “significant harm” to homeowners in the county. For his part, Devereaux insists that no final decision has been made. But, he says, “this is the first idea that anyone has approached us with that has the potential to have a real impact on our economy.” Other cities are watching closely to see what happens in San Bernardino.
We’re four years into a housing crisis. Nothing has yet worked to stem the terrible tide of foreclosures. It’s time to give eminent domain a try.
Ah, the poetic justice of it!!
I have been wondering this since the beginning. Since the crash was (supposed to be, we were told) based on the fact that bad mortgages were causing the bank structure to collapse, why not pay the bailout at the bottom and use the TARP money to pay off mortgages, buy the houses and then re-negotiate some kind of payback loan to the government? Wouldn’t this have saved the day by putting a firm foundation under the banking structure? And people could have saved their houses, solving a huge social problem.
Why, instead, did we put all the money into the TOP of the structure, helping nobody but the bankers and leaving a rotten collapsing social foundation of misery.
I know the president was concerned that some immoral, profligate, unworthy house owner might get something he didn’t deserve, but did Jamie Dimon and John Corzine deserve every cent that they got on the deal?
Please compare and discuss. Short essay.
Several locales in Florida and other states having been doing this for a few years now. The problem is that a whole bunch of people have just walked away from their homes and left the area. The percentage of people still living in homes that could benefit from such a program is quite low. As an aside, in Florida the homeless are now identifying abandoned homes, listing them on Craigslist and renting them out to tourists by the month. Maybe the homeless everywhere could start doing that for some extra cash?
The reason the foreclosure industry is up in arms is that this approach would have the same effect as the ‘cramdown’ of mortgage values rejected out of hand by Congress and the White House. When governments foreclose under eminent domain, they offer, as prescribed by law, only the ‘fair market value’ for the property. That is, they can only pay what the homes are worth now, not what listed as the inflated value of the Banksters credit default swaps. Basically lien holders will take a significant haircut under this method. About time I say, but you can bet that an absolute pile of money will be offered to the officials involved to kill it.
@Ron: “Basically lien holders will take a significant haircut under this method.”
Well, the banksters can take a financial haircut, or wait until the tumbrels start rolling and get a more serious ‘haircut’. Their choice.