CA Cities Consider Seizing Mortgages

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“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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  • well now

    This articles explains the essence of communism, which is freely practiced in CA. Taking private property from one and giving it to another who is connected to the "Party"

    • UCSPanther

      Get lost, spammer.

  • Barbara

    The one owner was debt free. She lost her property because she had a great view of the river. They did move her house down the road but she had her lot stolen.

  • cynthia curran

    Well, you republicans in Ca bitch and whine but the Dems got a big hold on the state because of Ronnie Reagan legalizing a lot of hispanics that where in the state illegality back in 1986 and these houses are own by those that were legalized or there children or grandchildren. Also, George H Bush cut the defense budget that destroy thousands or jobs of people that voted Republican that moved out in the 1990's. In fact the Gop use to have big majorities in Orange and San Diego and were not that far behind in La which mean't that they were able to get things like prop 187 and so forth in the old days.

    • stevefraser

      Moonbeam will be the last Gringo gov.

  • Oleg

    I can see this scheme going upside down in no time flat, even if it does survive a court challenge. For one thing every lending institution that would take a bath with such a scheme will close down shop state of California except for the outfit behind this racket. Speaking of rackets the organizations behind this back door expropriation scheme maybe contarvening RICO statutes depending on what properties are expropriated, how, when, and why. Lets say that Mortgage Resolution Partners made campaign donations and or gave out some sort of gift or benefit to local government officials to invoke imminent domain (expropriation) on a property, then M.R.P would constitute a racketeering influenced corrupt organization would it not?
    The stupidity of this is that if they wanted to get ahold of properties on the cheap and resell them there is already a legal process called forclosure. If someone wanted to reform the forclosure laws to speed up the process, or allow banks to rent out forclosed houses on a temporary basis rther then leave them vacant, or even offer rent to own deals to those same tenants, then that would be a much better way to go. Such things are done in Canada all the time, but in Canada the minimum down payment is now 5% down on a maximum 25 year mortgage, 25% down on an investment property like a condo. But seizing properties from a lender and then reselling the property and offering a 30 year mortgage at 2.5% down is a formula for the real estate market ending up right back where you started 5 to 10 years from now, that is if it even gets off the ground.

  • HPD

    When eminent domain is use to forcibly "take' private property from one private citizen and give it to another private citizen, whether it be an individual or a corporation, then that is simply theft…
    This was another bad decision from the Supreme Court in a, now, long line of bad decisions..

    • stevefraser

      Kelo, care of Judge Souter.

  • WilliamJamesWard

    What is America coming to that such swindeling goes on and by government and is
    approved by the Courts. It should make us all shamefaced, we really need to change
    our government, and look at just what our schools are teaching those who are so
    absent in moral judgement and taking positions of authority. Cleaning house takes
    on a whole new meaning………………………………….William

  • Pkorman

    This is not communism. It reads like a form of hardcore fascism, to me. Oleg is correct. The mortgage contracts call for foreclosure and this reading of eminent domain, politically agitated by Altman, should be repelled in both the civil and criminal systems. This official perversion of the law will be answered by the laws of economics and human nature, which do not operate at the whim of corrupt politicians and their cronies.

    • stevefraser

      Fascism is in effect communism, the worship of the State, with private property. Fascism is not "the corporate control of the State" (this was Stalin's very successful propaganda)…..See J. Goldberg's "Liberal Fascism".

    • Oleg

      I think you are quite correct, the one definition I heard of in relation to how Facism differs from Communism is that they allow private property but the state tells you what to do with it even though you pay for that property and it's upkeep. Under Communism there is no private property, the state owns and maintains it. However as is usually the case under Communism the state stole or exproproiated the property from it's former owners, who often met and untimely end in the basement of a secret police headquarters or a prison camp. This is quite clearly Facistic in nature, the government doesn' like what the rightful owner of the property is doing with that property so they decided to expropriate it and hand it to their connected friends.
      I'm not sure how the Supreme Court ruling would apply to this situation since the financial gain of a select and connected few could hardly be argued to be in the public interest, since there is already a well established legal process to clear out bad debts. There have also been proposals to clear up underwater mortgages by encouraging lenders to negotiate with mortgage holders to write off most of the debt on these underwater morgages, but again that would be a legal process involving only the interested parties. Unlike the New Haven case they are using political machinations solely to interfere with private legal contracts as a entrepreneurial enterprise, if any local government officials are benefiting financialy from doing this, I.E sharing in the profits with Mortgage Resolution Partners, it is the very definition of racketeering so how would a court give legal blessing to this?