The Right Opinion

CA Cities Consider Seizing Mortgages

Well-connected political cronies to benefit from eminent domain.

By Arnold Ahlert · Jul. 6, 2012

In a move best described as an unholy alliance between over-reaching government and crony capitalism, some local government officials in California are exploring ways to invoke eminent domain in order to restructure mortgages for underwater homeowners. California's San Bernardino County and two of its largest cities, Ontario and Fontana, would seize mortgages from the private investors who currently own them, cut the loan and principle to the current property value, and resell them to new investors. The deal would be run by a venture capital firm called Mortgage Resolution Partners, that in turn has hired investment banks Evercore Partners and Westwood Capital to raise funds from private investors. Evercore's founder and leader is Roger Altman. Altman was Deputy Treasury Secretary under President Clinton, and is a current fundraiser for Barack Obama's re-election campaign.

Eminent domain allows a government to forcibly seize property and then re-use it, under the auspices that such re-use ostensibly constitutes a public benefit. A typical example might be taking a piece of private property and re-using it to help facilitate a road-building project, or new housing. When such property is seized, the former owners are entitled to compensation, the amount of which is usually determined by a court.

The word “ostensibly” is critical here because the Supreme Court, in what many consider one of the worst rulings of the modern era, vastly expanded the definition of eminent domain in 2005. In 1998, the drug company Pfizer constructed a new facility in the city of New London, Connecticut. New London officials, anticipating the additional business the new plant would bring into the community, attempted to purchase 115 homes nearby so they could sell the land to commercial developers. 15 homeowners resisted. The city cited eminent domain and seized the land.

In the case known as Kelo v. New London, the Supreme Court ruled in favor of the city. The Court's majority reasoned that a city may claim private property under the Fifth Amendment, so long as it does so as part of a clear economic development plan intended to benefit the community as a whole. Sandra Day O'Connor's dissent illuminated the implications. “Any property may now be taken for the benefit of another private party, but the fallout from this decision will not be random. The beneficiaries are likely to be those citizens with disproportionate influence and power in the political process, including large corporations and development firms.”

Enter Evercore Partners and its well-connected founder and co-chairman, Roger Altman. As the Wall Street Journal explains, the “highly unorthodox” use of eminent domain, as it has been characterized, goes something like this:

For a home with an existing $300,000 mortgage that now has a market value of $150,000, Mortgage Resolution Partners might argue the loan is worth only $120,000. If a judge agreed, the program's private financiers would fund the city's seizure of the loan, paying the current loan investors that reduced amount. Then, they could offer to help the homeowner refinance into a new $145,000 30-year mortgage backed by the Federal Housing Administration, which has a program allowing borrowers to have as little as 2.25% in equity. That would leave $25,000 in profit, minus the origination costs, to be divided between the city, Mortgage Resolution Partners and its investors.

In other words, a group of new investors, hiding behind the combined power of government and crony capitalists, aim to bludgeon the current owners of the existing loans. Their rationale is the idea that homeowners who owe more than their houses are currently worth constitute a “blight” on their respective communities, thus triggering eminent domain. They further argue that such seizures would help homeowners shed debt loads that depress economic activity in their respective communities, and prevent foreclosures that reduce tax revenues for local governments.

That such homeowners freely entered into a contract to acquire such debt? That many local governments, especially in California, have made over-spending an integral part of their agenda for years? In the age where self-entitlement and moral hazard are now openly encouraged – and often underwritten by government – such considerations are apparently anachronistic.

“A number of cities, mayors, city managers have come to me and said, 'How soon can we get in?'” said Greg Devereaux, San Bernardino County's chief executive. “We think it would be irresponsible, given the size of the problem in our county, not to at least explore it,” he added. Why California in particular? “California legal precedent and political posture favor the program and constitute an ideal proving ground,” said Mortgage Resolution Partners, in a document presented to investors and reviewed by The Wall Street Journal. In other words, the most politically progressive state in the nation gives us our best shot to re-write eminent domain statutes. The same document outlines a plan in which a $5 billion initial effort in California can grow as large as revamping three million mortgages in a $500 billion, multi-state effort.

Reuters columnist Daniel Indiviglio explains the downside. “A California county's new plan to seize underwater mortgages from investors may be the most dangerous housing market intervention yet. If it catches on, bondholders could face billions in losses–and taxpayers, too, if local authorities start targeting loans backed by the federal government. That would whack up mortgage costs and may leave Washington as the only lender…Of course, the threat of this program might light a fire under bondholders and servicers that have been sluggish to modify mortgages up to now. But the costs of this coercion would easily outweigh the benefits.”

The key word here is coercion, and lenders know it. “The only people who take a loss on this are the holders of the mortgage-backed securities. We're already formulating strategies for banks interested in fighting this," said Brian Murray, an attorney who heads the Issues and Appeals practice for the law firm Jones Day. Mr. Murray then got to the meat of the issue. "We believe the U.S. Supreme Court has made it clear that a taking has to be for a public purpose,” he said. “When this whole venture was set up to make money for this investor organization, that doesn't sound like a public purpose.”

That's because it isn't. The scheme is nothing more than crony capitalist thuggery aided and abetted by spendthrift government officials. It will no doubt be applauded by morally suspect homeowners, who will be alleviated of living with the consequences of their own freely-made decisions. And all of it will be coated with a patina of respectability to obscure one simple reality: this is nothing more than an attempt to legalize seizing property from one private entity, and giving it to another one.

On June 19, the San Bernardino county Board of Supervisors approved a joint powers authority (JPA) with the cities of Ontario and Fontana. The first public meeting of the JPA is this month. County CEO Greg Devereaux said no program will be approved without a thorough vetting and public approval. Yet who's kidding whom? 43.4 percent of homeowners in the county have mortgages that are underwater. The idea that they would somehow refuse to accept a proposal that saddles a third party with their outstanding debt is ludicrous. Furthermore, Mortgage Resolution Partners has hired Cornell University law professor Robert C. Hockett, as a consultant. Mr. Hockett maintains seizing private property from investors in mortgages is “a classic public use. There is no more classic textbook case than urban blight,” Hockett said. Unsurprisingly, he cited Kelo v. New London as his justification.

In New London, Pfizer closed its facility four years after the Supreme Court decision. The land where former housing was bulldozed to pave the way for the anticipated “high end” development, costing the city and state $78 million in the process, now sits vacant. Since the 2005 decision, several states have enacted stronger eminent domain laws to protect property owners. Castlecoaltion.org published a report card on those states. California received a D-minus, cited as a state where “no meaningful reform was seriously considered,” and “abusive redevelopment statutes continue to leave all property owners at risk.” That report was published in 2007, before the current housing crisis began.

In other words, before yet another opportunity taken by Democrats and their crony capitalist allies to “never let a crisis go to waste” presented itself.

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7 Comments

JoeThePimpernel in NOYB, NOYB said:

Well, plank #1 of Karl Marx's Communist Manifesto IS "The abolition of private property rights," so they are just living up to their vows.

Friday, July 6, 2012 at 9:08 AM

Don in Victorville, CA said:

"...Of course, the threat of this program might light a fire under bondholders and servicers that have been sluggish to modify mortgages up to now."
This is the crux of the issue. Bondholders and servicers who were more than happy to make a fortune on nothing short of fraud and deception during the first decade of this century, then accepting government bailouts so that they wouldn't lose their shirts and then refusing for years to offer any kind of assistance to those of us left holding the bag with underwater mortages. Trust me. If I had been given an honest appraisal of the housing market as it existed in 2005, I would never have purchased a new home. Bondholders and servicers were responsible for leading hundreds of thousands of homeowners into the false assumption that the housing market was not only healthy, but profitable. For that, they should, and they are, paying the price.

Saturday, July 7, 2012 at 11:22 AM

Jim in Western NC said:

@ Don - I'm with you on your assessment!

PS- I used to live in nearby Apple Valley from the late 60s through 70s.

Sunday, July 8, 2012 at 12:37 AM

sunforester in left coast said:

As a California resident with seven empty foreclosed houses within three blocks of my home in a relatively new working/middle-class neighborhood, I can definitely say there is blight. However, I cannot see how a new owner of these properties can possibly turn those houses around. They are already being offered for rock-bottom prices by the bank, with no takers.

Everybody in my neighborhood who can leave the state for better prospects has already gone. Nobody wants to move here any more. There is no economy to speak of, except for what is supported by government employee paychecks, some variation of welfare, or pension income. All the kids in my town have left this place behind for better opportunities or live with their parents. California is the worst place in this country for opportunity, unless you are a Silicon Valley hedge fund raking in all those green energy billions from Obama. California is manufacturing its own blight every day - extending the law to strip mortgage holders of their rightful but distressed properties only serves to accelerate that blight.

I cannot see how eminent domain will fix the problem for which it is touted. California is shooting itself in the head with its deep antagonism against business, and wholesale looting of everything that moves to pay for its exorbitant union benefits and endless hordes of welfare recipients. In California's suicidal obsession for robbing Peter to pay Paul, all the Peters sensibly are leaving, with nothing left to pay off greedy, insatiable Paul.

What I do see as the goal of this eminent domain scheme is to provide a ready but sleazy source of extra cash for municipalities struggling to postpone their inevitable economic collapse. The practice of eminent domain is shaking the piggy bank for the last coins that can fall out, but then there will be no more. The decent thing for California to do is to stop its thuggery, but I don't think anything like that will happen until it hits rock bottom, just like my neighbors' home prices.

Sunday, July 8, 2012 at 2:32 PM

SoCalbornNowinTX in TheOtherRepublic replied:

Only three States other than the original 13 have every been considered their own Countries....TX, CA, and HI....TX still remember that...HI sold out from day one but currently has a separatist segment...CA grew to the 5th largest economy in the World and providing 1/4 of food to the USA..a powerhouse of greatness and natural beauty and resources...at least up until the 1960's when all the hippies moved in, sat down, and began to KILL our State....it took them 50 years, and CA is still the 8th largest economy in the World...but it is on the slippery slope to destruction.. I pray for my home and that of my family...but I listened to God's voice and now I am in TX...
I still rent my home in CA because it is upside down in value by 30%, and I put 25% down...I did my mortgage right...and this program would help me but this is GARBAGE...this program is a scam to buy votes and control people... GO TO H@!! San Bernadino and MRP...San Bernadino is a CESSPOOL of a city anyway...that is why nobody lives there...not because of housing problems or predatory banks....the city is a 3rd world ghetto....

Monday, July 23, 2012 at 12:40 PM

Tab in Clemson said:

As a word of encouragement to Californians: the most basic right of American citizens is the right to protection of private property. You must stand against those who would take your homes. Any move by a group like Mortgage Resolution Partners in South Carolina would be met with one answer, the one protected by the Second Amendment. To arms, Californians!

Monday, July 9, 2012 at 1:50 PM

jksisco in irvine, ca said:

California is the cess pool of Progressivism gone wild, Charlie Sheen wild!

Monday, July 9, 2012 at 6:00 PM