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.