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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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