A number of towns (a growing number, it would appear) are considering using eminent domain to reclaim some homes under threat of foreclosure from banks. Typically, these are homes that have gone underwater due to the '07/8 real estate bubble but still have active mortgages (a minority of them).
Of course, the banks do not want to lose money this way, but if they foreclose and sit on empty houses, will they ever even make up the lost value? How long would they have to sit on the property, and will it even increase in value (vacant homes decay over time, and renters are not always the best people to keep that from happening)?
Some of these towns face major (sub-)urban blight from residents forced to flee when the banks kick them out, so the eminent domain strategy can be seen as a community defending itself from predatory financial institutions. And the banks would be getting some capital back, probably not much less than they can realistically expect.
So if the banks are intent upon holding the line, the line formed by a problem they themselves helped create, and will not attempt to work with the borrowers instead of trying to screw them over, are they being reasonable here? Does a community have a right to protect its own integrity, perhaps even a responsibility? And does a move like this represent a threat to other private property owners?
The problem I have with this philosophically is that it punishes all banks equally, including those who did little or nothing wrong leading up to the housing crisis, as well as those that were primarily responsible. Banks as a class are not equally culpable. I only wish we had the ability to go after the guilty banks and let the others do the best they can. (Hint: we do, but we won’t.)
This kind of policy will also likely reward some homeowners who may have been complicit in the mortgage fraud they were perpetrating, as well as relatively innocent victims*.
Finally, the devil is in the details. The case that I am most familiar with is local here in the San Francisco Bay area, i.e. Richmond, California. Some of the prices they are “offering” to the banks are well below current market value. I don’t see why any homeowners should be rewarded, nor honest lenders penalized, in this way. I understand that this helps the city and all homeowners therein to maintain property values, but I don’t think that, in and of itself, is sufficient to justify the policy.
*The notion of innocent home-buyers is arguably fallacious, since at best they bet wrong on the economy vs. the amount of house they could afford to buy. I am an example of this: I bought a house in 2004 during the upward side of the bubble. Four years later I had it appraised for 25% more than I paid for it, so that I was able to re-finance. Two years after that I was under water. Fortunately, I did not lose my job so I was able to keep up the payments, and now it is once again worth more than I paid for it (in the current market). But all of this was my own fault. I find it hard to blame the bank that gave me a mortgage (1st and 2nd) even though I only had 5% to put down. I had excellent credit and a good salary, and that’s what carried me through.
Roddy
There’s also the practice of predatory lending, where loan officers directed unwary home buyers to loans they could not afford. The loan officer got a higher commission, the bank collected higher fees, and the buyer was left holding the bag. Most home buyers are not well-versed in the ins-and-outs of buying a house; not even well-educated people. Heck, a lot of people get taken by the three-card monte of automobile financing; and houses are much more complex arrangements. Considering that many of the subprime loans were made to less sophisticated buyers, I don’t think the notion of innocence is fallacious at all.
FWIW, I bought my house in 2003. I bought a house I could afford. Even though there was a rough spot several years ago after being laid off from the job that paid less than the job I’d been laid off from, I made it through. My house has never fallen below the amount I paid for it, and is currently worth about 35% more than I paid for it. I refinanced from a 30-year fixed rate to a 15-year fixed rate (at a lower APR) three years ago. I chose fixed-rate loans because rates were so low that I knew they could only go up. (Actually, they did fall after the crash; but generally they’ve been higher.)
Eminent domain should be used sparingly. If the town needs to use it to put a highway in or something else that can’t be done any other way that’s one thing. If they want to buy these houses they should pay the banks what they are worth. The banks don’t want to own homes. There shouldn’t be the need to forcibly take them unless the towns are just to cheap to pay the going rate.
I might be okay with it if the town was Eminent Domaining empty houses. As I read it, I think the bank should have a shot at selling the house and getting someone in there. If the bank can’t then ED makes more sense.
ED to save a homeowner from foreclosure is shitty. If I were a mortgage loan-type person, I’d halt all mortgages in that city or jack up the interest rates to factor in the added risk. Either of which would be bad for the town.
I have very little sympathy for the banking industry these days. The final straw came when they attacked homeowners for strategically defaulting on their mortgages by calling them “irresponsible” and “immoral” while simultaneously engaging in the very same practice they condemned. Banks are supposed to be conservative institutions in that they’re supposed to take great care in how they invest the money they’re entrusted with. They dropped the ball. They made bad loans to people who were never going to be able to pay them back.
Anecdote Time: My mother was shopping for a house in Little Rock and we came across a nice foreclosed home. It had been sitting empty for about a year, the A/C unit had been stolen, it needed a new roof and had some cosmetic problems but it seemed like a pretty solid structure. We had a hell of a time contacting the bank to see how much they wanted for the house and the number quoted was completely unrealistic given the repairs necessary and they weren’t interested in any counter offers. Seven months later and the house still hadn’t sold so we went by to look at it again. Every room smelled like mildew. At this point the house has been sitting empty for nearly four years and the longer it sits the more dilapidated it will become.
From a city’s perspective I can see why eminent domain looks attractive. These places become eyesores and they lose tax revenue as people flee from what was once a nice neighborhood to other cities. I’m not super keen on the idea of eminent domain being used this way but it seems like a more attractive alternative than to let a bank sit on a property for years at a time.
I hate how post-Kelo now communities can use EM to make policy. In my town, the city is hoping that the old broke-ass mall that has recently been bought will be revitalized. The last remaining anchor in the mall has a contract that let’s them veto certain proposals relating to changes to the mall.
This is not acceptable to the city so they are using EM to buy the anchor. There is no intent to have it be for public use but will be sold to someone more in line with city thinking. So basically the city will use EM since how dare a company stand in their way and actually abide by a contract.
Before Kelo v. City of New London, I would have said that this kind of thing is obviously un-Constitutional, but since then the “takings clause” apparently means the government can seize anything they want, for any reason they want. So this idea is merely stupid and corrupt rather than un-Constitutional.
The folks in the areas referenced by the article had better get ready for mortgage rates to go up in their area, or for people without very, very good credit to not be able to get mortgages at all. Because the evil banks who worked these folks’ destruction by lending them money have to deal with the risk of more of these shenanigans in the future.
Darn those bankers, expecting to be paid back. What monsters.
You apparently did not read the first three paragraphs of my post, wherein I discussed the relative merits of lenders (unscrupulous and honest) and borrowers (likewise both unscrupulous and honest). The paragraph you quoted was a side note that, in the scheme of things, even the most honest borrower probably ought to bear the burden of his own bad choices vis-a-vis purchasing a home he could not really afford.
Roddy
I did read your entire post. I was addressing your side note. I don’t agree with your conclusion. Reductio ad absurdum, we should not have any consumer protection laws, since the consumer should take responsibility for his purchases. Why is it the fault of the seller, if the seller puts one over on him?
Even the most honest home buyer can be (and has been) mislead by unscrupulous lenders. Why should the victim bear the burden of someone else’s scam?
I had momentarily forgotten about that terrible decision. That’s a good reminder that no matter how unattractive a candidate the Republicans put up you should vote for them. It’s always better to try and get a president that will appoint justices like Scalia to the bench.
Not getting involved in the merits of the issue (at least at this point) but my understanding - based on everything I’ve read - is that the proposal is not to use ED to seize houses which have been foreclosed and are now property of the banks, but rather to seize the mortgages themselves, on houses which have not been foreclosed.
I’m flummoxed at the idea that you can use ED to cancel a legal contractual obligation. Doesn’t the 5th amendment require “just compensation”? How can you take away a $300k mortgage, pay $150k for it and say the lender has been compensated?
I’m kind of OK with the idea of buying up foreclosed, vacant properties at the current market value, even if the bank takes a bath on it, and using the property in some pseudo public fashion. This taking of a mortgage seems way out of bounds.
This is correct, and it’s extremely important to the supposed “plan”. It’s the only way to make sure the city doesn’t lose a pile on each house, basically, because they plan to turn around and sell the mortgage back to the homeowner.
There are several major legal challenges to this and I may throw a link back to some points. However, the biggest issues are:
(A) Proponents claim that the mortgage is “worth” the lower value of the house. Courts are likely to say that the mortgage is worth the contractual loan amount plus interest, as they would in any legal or financial instance.
(B) The above points? It means the cities are probably going to lose a fortune as they’re forced to pay out much more than they want, and be tied up in court for decades even if they “win”.
(C) Doing this is likely to kneecap the lending market locally, as banks are not going to make loans to people without a lot more to back it up. Expect much higher interest, collateral, and up-front payments.
(D) This will tread directly on Fannie Mae and Freddie Mac, which means the Feds will take an immediate and direct interest. Theses two underwrite nearly every single home mortgage in the country, and they can utterly destroy your local economy. Mess with them, and you’re likely to see your local housing market erased until such time as you surrender. And this assumes the Feds don’t just shut you down.
(E) Eminent Domain afaik has never been used this way before, to acquire nonphysical property. It’s unclear if any court will really go for this.
I think the general idea is that there is a high likelihood of default since the loan is underwater, so the loan is no longer worth the face amount. As to exactly what it is worth, well that’s where you go out and find some financial expert who believes that the value is very low, and use his analysis to save yourself a lot of money. Then - if the ED holds up altogether - the owners of the mortgages go out and hire their own expert who says it’s worth a lot more, and you fight it out in court.
It doesn’t take much snap or research to realize that for years, the classic home mortgage was something like 20% down and the remainder over 30 years.
Anything better than that ought to have been looked at with an extremely critical eye, and with particular attention to the “gotchas” like balloon payments, variable interest, etc…
Saying that lenders are predatory takes all the responsibility for not being financially irresponsible idiots off the people who bought into all that BS.
Now if they were deliberately obfuscatory or outright lied about the terms of the mortgage, then that’s something different, and those people/banks should be held accountable. Saying something like “Interest rates won’t ever go up.” is reprehensible, but only a fool would believe that.
The idea that towns have no alternative but to decay into blight because of the perverse incentives of the banking industry fails every test of common sense.
By whom? By the actor who has no financial training and is participating in their first ever mortgage negotiation? Or by the actor who is financially trained and negotiates mortgages for a living?
Primarily the home-buyer. You have to be one dumb m-fer to not actually look that stuff up on something that serious and long-term.
Unless of course, you advocate going into five and six figure negotiations without having a clue how they work and trusting in people who are trying to make a buck off you? Did you just blunder into your first mortgage like some kind of hillbilly fresh off the mountain?
There’s a huge element of not having done one’s homework involved in this whole thing, even if it was people’s first time.