Stabilize Home Mortgage Borrowers with Eminent Domain

[sbd]

Monday, September 29, 2008

Stabilize Home Mortgage Borrowers with Eminent Domain

By Lauren E. Willis

Edward Leamer’s “trickle up” economic plan is a good start, but if a downward spiral is a serious possibility in the economy right now, we need not a trickle but a flood. We need to quick-take homes by eminent domain, prepay mortgage balances that are not extinguished (mortgage debt beyond the market value of the home would be extinguished), and sell the homes back to the homeowners using fixed-rate mortgages with affordable monthly payments. This would eliminate today’s mortgage debt overhang, staunch foreclosures, and restore liquidity and stability in our financial markets.

To halt the Great Depression, the federal government nullified all clauses in contracts that pegged debt to the price of gold. By taking these contracts off the gold standard, debts were reduced by roughly 40 percent. Economist Randall Kroszner, now a governor on the Federal Reserve Board, examined the effects of this sweeping debt reduction and found that both stocks and bonds responded favorably. Investors and creditors decided that the elimination of debt overhang and the avoidance of threatened corporate bankruptcies more than offset the cost to creditors of receiving 60 cents on the dollar. And the taxpayer did not pay a penny.

This trick could only be performed once, now that gold clauses are out. But we still have a potent weapon against the crisis: eminent domain.

Eminent domain is the power of government to take private property for a public purpose, so long as the owner is paid just compensation. Eminent domain can be used to correct deficiencies in the market, particularly when they threaten public tranquility and welfare.

How would this work? Upon petition of the homeowners, the government would take primary residences at risk of foreclosure and then sell the homes back to the homeowners at current prices.
Because just compensation in eminent domain is measured by the market value of the property, today’s fire-sale home prices would be a boon to this plan. Lenders and investors would receive the lesser of the mortgage balance or the amount paid by the government as just compensation. Unlike newly-invented securities and other financial instruments, homes have been appraised for a very long time and objective criteria can establish market value.
For homeowners with mortgages that are underwater, the effect would mirror the debt reduction achieved when Congress nullified the gold clauses. Home values would bottom out quickly, and households looking to buy would see lower house prices.

Families that can not afford a mortgage even with a balance reduced to market price will lose their homes, but will not have the additional burden of a foreclosure or bankruptcy on their credit histories.
While some commentators seem to think that the $700 billion bailout will provide homeowners with a kinder, gentler federal government lender, the bailout primarily contemplates buying not individual mortgages, but shares of securities backed by pools of mortgages and other complex financial instruments. Unless the government buys all the shares in a pool—an unlikely proposition given that owners are spread around the globe—it will lack authority to do workouts with homeowners whose mortgages are in the pool.

The thousands of families falling into foreclosure and bankruptcy each day will continue for years, with the limited capacity of loan servicers and courts prolonging the problem. The social costs of foreclosure will roll on, increasing the tax burdens and decreasing the quality of life for all households, renter, former homeowner and current homeowner alike.

Eminent domain has the virtues of the Wall Street bailout plan without the vices.
Financial firms and other investors could no longer delay realizing losses on their mortgage backed securities and similar financial assets, but simultaneously would bring in cash from mortgage prepayments. These payments would pump liquidity back into the financial system to be lent out again.
Taxpayer money would not be spent paying Wall Street a speculative price for unmarketable financial instruments, but instead would pay market prices for houses. Investors would receive precisely what their investment contracts provided for in case of prepayments, rather than whatever they can convince their friends at the Treasury Department to dole out. Most importantly, the underlying mortgage debt overhang problem would be addressed.

This is not to say that this plan is cost-free. But so long as the government underwrites the mortgages well, with monthly payments the borrowers can afford and are therefore likely to pay, banks and investors will buy the mortgages at close to what the government pays. Using a streamlined quick-take process to take eminent domain over the houses, appraise them, buy them from and sell them back to the homeowners, give Wall Street the money it is owed, and underwrite the new, affordable mortgages and then sell them, will cost far, far less than $700 billion. Even if the government spent $10,000 on each of the approximately 5 million mortgages expected to go into foreclosure in the next three years, the cost would be $50 billion.

As the Wall Street bailout plan recognizes, a crisis that sweeps the country requires a solution of like scope. Like the abrogation of the gold standard clauses, eminent domain is a blunt instrument, one that inevitably will be overly generous to some and will hurt others. But hurting the ordinary taxpayer to be overly generous to well-heeled banks and other sophisticated investors, without even addressing the underlying mortgage debt overhang and foreclosures, is not the answer. Eminent domain would stabilize Main Street and Wall Street.

Lauren E. Willis is an Associate Professor of Law at Loyola Law School Los Angeles and an expert on the regulation of consumer financial products, including home mortgages.

[EconProf]

This plan may be the best of a bunch of awful plans. As believers in the rule of law, capitalism, and personal responsibility, we are all appalled at the steps the government has taken and will continue to take to “fix” this problem.
The virtues of this program are that it is efficient–gets the breathing room directly to the idiot borrowers, stabilizes the housing market which may otherwise overreact on the downside in a viscious circle, and whacks upside the head the equally dumb lenders with a quick principal reduction.
It is efficient because it avoids the waste of foreclosures, trashed houses, empty & idle housing stock sitting and deteriorating, and family upheavals.
Let’s face it Piggs, the government is going to waste a lot of our money no matter what. You want revenge? It’ll cost you. Let’s get this boondogle over as quickly and cheaply as possible.

[EconProf]

This plan may be the best of a bunch of awful plans. As believers in the rule of law, capitalism, and personal responsibility, we are all appalled at the steps the government has taken and will continue to take to “fix” this problem.
The virtues of this program are that it is efficient–gets the breathing room directly to the idiot borrowers, stabilizes the housing market which may otherwise overreact on the downside in a viscious circle, and whacks upside the head the equally dumb lenders with a quick principal reduction.
It is efficient because it avoids the waste of foreclosures, trashed houses, empty & idle housing stock sitting and deteriorating, and family upheavals.
Let’s face it Piggs, the government is going to waste a lot of our money no matter what. You want revenge? It’ll cost you. Let’s get this boondogle over as quickly and cheaply as possible.

[EconProf]

This plan may be the best of a bunch of awful plans. As believers in the rule of law, capitalism, and personal responsibility, we are all appalled at the steps the government has taken and will continue to take to “fix” this problem.
The virtues of this program are that it is efficient–gets the breathing room directly to the idiot borrowers, stabilizes the housing market which may otherwise overreact on the downside in a viscious circle, and whacks upside the head the equally dumb lenders with a quick principal reduction.
It is efficient because it avoids the waste of foreclosures, trashed houses, empty & idle housing stock sitting and deteriorating, and family upheavals.
Let’s face it Piggs, the government is going to waste a lot of our money no matter what. You want revenge? It’ll cost you. Let’s get this boondogle over as quickly and cheaply as possible.

[EconProf]

This plan may be the best of a bunch of awful plans. As believers in the rule of law, capitalism, and personal responsibility, we are all appalled at the steps the government has taken and will continue to take to “fix” this problem.
The virtues of this program are that it is efficient–gets the breathing room directly to the idiot borrowers, stabilizes the housing market which may otherwise overreact on the downside in a viscious circle, and whacks upside the head the equally dumb lenders with a quick principal reduction.
It is efficient because it avoids the waste of foreclosures, trashed houses, empty & idle housing stock sitting and deteriorating, and family upheavals.
Let’s face it Piggs, the government is going to waste a lot of our money no matter what. You want revenge? It’ll cost you. Let’s get this boondogle over as quickly and cheaply as possible.

[EconProf]

This plan may be the best of a bunch of awful plans. As believers in the rule of law, capitalism, and personal responsibility, we are all appalled at the steps the government has taken and will continue to take to “fix” this problem.
The virtues of this program are that it is efficient–gets the breathing room directly to the idiot borrowers, stabilizes the housing market which may otherwise overreact on the downside in a viscious circle, and whacks upside the head the equally dumb lenders with a quick principal reduction.
It is efficient because it avoids the waste of foreclosures, trashed houses, empty & idle housing stock sitting and deteriorating, and family upheavals.
Let’s face it Piggs, the government is going to waste a lot of our money no matter what. You want revenge? It’ll cost you. Let’s get this boondogle over as quickly and cheaply as possible.

[DWCAP]

Foregive me if I am wrong, but wouldnt this bankrupt our lending services just the same?

Our whole problem is Banks cant get their money back from past loans. If they loose too much money, they go under. This plan just forces them to take the loses now under, instead of over time as people default.

Minus the social costs, I dont understand how this fixes the problem. Again the only option is for the GOV to willingly take it in the shorts and have taxpayers foot the bill by overpaying in the ED takeover and then underselling the loan back. Otherwise our banks go under and stop lending for fear of not being repaid as weak banks die in the forced ED takeovers. Companies die due to no lending. Unemployment shoots up. Stocks dive as companies fail. Etc etc etc. It is no different.

We have two choices.
1) taxpayers foot the bill for the banks looses and everyone pays for the bubble, even the responsible who did not partake. Considering the size of this bubble, the cost is far higher than anyone wants to admit.
2) Banks foot the bill, weak ones go under, lending tightens, weak companis go under, and we go into a recession that punishes overly risky lending/borrowing (and some good unlucky ones too)

Currently we are doing both.

[DWCAP]

Foregive me if I am wrong, but wouldnt this bankrupt our lending services just the same?

Our whole problem is Banks cant get their money back from past loans. If they loose too much money, they go under. This plan just forces them to take the loses now under, instead of over time as people default.

Minus the social costs, I dont understand how this fixes the problem. Again the only option is for the GOV to willingly take it in the shorts and have taxpayers foot the bill by overpaying in the ED takeover and then underselling the loan back. Otherwise our banks go under and stop lending for fear of not being repaid as weak banks die in the forced ED takeovers. Companies die due to no lending. Unemployment shoots up. Stocks dive as companies fail. Etc etc etc. It is no different.

We have two choices.
1) taxpayers foot the bill for the banks looses and everyone pays for the bubble, even the responsible who did not partake. Considering the size of this bubble, the cost is far higher than anyone wants to admit.
2) Banks foot the bill, weak ones go under, lending tightens, weak companis go under, and we go into a recession that punishes overly risky lending/borrowing (and some good unlucky ones too)

Currently we are doing both.

[DWCAP]

Foregive me if I am wrong, but wouldnt this bankrupt our lending services just the same?

Our whole problem is Banks cant get their money back from past loans. If they loose too much money, they go under. This plan just forces them to take the loses now under, instead of over time as people default.

Minus the social costs, I dont understand how this fixes the problem. Again the only option is for the GOV to willingly take it in the shorts and have taxpayers foot the bill by overpaying in the ED takeover and then underselling the loan back. Otherwise our banks go under and stop lending for fear of not being repaid as weak banks die in the forced ED takeovers. Companies die due to no lending. Unemployment shoots up. Stocks dive as companies fail. Etc etc etc. It is no different.

We have two choices.
1) taxpayers foot the bill for the banks looses and everyone pays for the bubble, even the responsible who did not partake. Considering the size of this bubble, the cost is far higher than anyone wants to admit.
2) Banks foot the bill, weak ones go under, lending tightens, weak companis go under, and we go into a recession that punishes overly risky lending/borrowing (and some good unlucky ones too)

Currently we are doing both.

[DWCAP]

Foregive me if I am wrong, but wouldnt this bankrupt our lending services just the same?

Our whole problem is Banks cant get their money back from past loans. If they loose too much money, they go under. This plan just forces them to take the loses now under, instead of over time as people default.

Minus the social costs, I dont understand how this fixes the problem. Again the only option is for the GOV to willingly take it in the shorts and have taxpayers foot the bill by overpaying in the ED takeover and then underselling the loan back. Otherwise our banks go under and stop lending for fear of not being repaid as weak banks die in the forced ED takeovers. Companies die due to no lending. Unemployment shoots up. Stocks dive as companies fail. Etc etc etc. It is no different.

We have two choices.
1) taxpayers foot the bill for the banks looses and everyone pays for the bubble, even the responsible who did not partake. Considering the size of this bubble, the cost is far higher than anyone wants to admit.
2) Banks foot the bill, weak ones go under, lending tightens, weak companis go under, and we go into a recession that punishes overly risky lending/borrowing (and some good unlucky ones too)

Currently we are doing both.

[DWCAP]

Foregive me if I am wrong, but wouldnt this bankrupt our lending services just the same?

Our whole problem is Banks cant get their money back from past loans. If they loose too much money, they go under. This plan just forces them to take the loses now under, instead of over time as people default.

Minus the social costs, I dont understand how this fixes the problem. Again the only option is for the GOV to willingly take it in the shorts and have taxpayers foot the bill by overpaying in the ED takeover and then underselling the loan back. Otherwise our banks go under and stop lending for fear of not being repaid as weak banks die in the forced ED takeovers. Companies die due to no lending. Unemployment shoots up. Stocks dive as companies fail. Etc etc etc. It is no different.

We have two choices.
1) taxpayers foot the bill for the banks looses and everyone pays for the bubble, even the responsible who did not partake. Considering the size of this bubble, the cost is far higher than anyone wants to admit.
2) Banks foot the bill, weak ones go under, lending tightens, weak companis go under, and we go into a recession that punishes overly risky lending/borrowing (and some good unlucky ones too)

Currently we are doing both.

[SD Realtor]

EconProf I see absolutely no merit in this plan with respect to selling the home back to the original homeowners.

I agree with the first part of the plan which would be to take the home away from the homeowners using emminent domain.

However in no way whatsoever should the home be “given” back to the homeowner on any terms. The home should be sold on the open market. If the current homeowners want to buy it then they can compete with anyone else.

The rate of recidivism with regard to rampant consumerism is quite high. I work with so many people who are SO qualified with respect to gainful employment, strong downpayment money, who have simply elected to be prudent over the past few years. These people would form a much strong base to the homeownership pyrmaid rather then current overburdened base owner.

I am very disturbed by this “family upheaval” that everyone keeps writing about. Renting a home is not an upheaval. I don’t like it but it is not the end of the world and to sensationalize it is crazy. Pity the poor homeowner who HELOCd himself to foreclosure so now he has to suffer through the upheaval of foreclosure so he has nowhere to park his boat.

So yes, I like the first part of the idea but a much stronger implementation of what to do after the home is taken should be considered. If the home is taken through emminent domain then the deal with the original owner would be they get to walk with no ding to the credit and if the home sells for more then they owe then they get the profit.

The better lesson for them will be that they learn to live within thier means. What a treat.

[SD Realtor]

EconProf I see absolutely no merit in this plan with respect to selling the home back to the original homeowners.

I agree with the first part of the plan which would be to take the home away from the homeowners using emminent domain.

However in no way whatsoever should the home be “given” back to the homeowner on any terms. The home should be sold on the open market. If the current homeowners want to buy it then they can compete with anyone else.

The rate of recidivism with regard to rampant consumerism is quite high. I work with so many people who are SO qualified with respect to gainful employment, strong downpayment money, who have simply elected to be prudent over the past few years. These people would form a much strong base to the homeownership pyrmaid rather then current overburdened base owner.

I am very disturbed by this “family upheaval” that everyone keeps writing about. Renting a home is not an upheaval. I don’t like it but it is not the end of the world and to sensationalize it is crazy. Pity the poor homeowner who HELOCd himself to foreclosure so now he has to suffer through the upheaval of foreclosure so he has nowhere to park his boat.

So yes, I like the first part of the idea but a much stronger implementation of what to do after the home is taken should be considered. If the home is taken through emminent domain then the deal with the original owner would be they get to walk with no ding to the credit and if the home sells for more then they owe then they get the profit.

The better lesson for them will be that they learn to live within thier means. What a treat.

[SD Realtor]

EconProf I see absolutely no merit in this plan with respect to selling the home back to the original homeowners.

I agree with the first part of the plan which would be to take the home away from the homeowners using emminent domain.

However in no way whatsoever should the home be “given” back to the homeowner on any terms. The home should be sold on the open market. If the current homeowners want to buy it then they can compete with anyone else.

The rate of recidivism with regard to rampant consumerism is quite high. I work with so many people who are SO qualified with respect to gainful employment, strong downpayment money, who have simply elected to be prudent over the past few years. These people would form a much strong base to the homeownership pyrmaid rather then current overburdened base owner.

I am very disturbed by this “family upheaval” that everyone keeps writing about. Renting a home is not an upheaval. I don’t like it but it is not the end of the world and to sensationalize it is crazy. Pity the poor homeowner who HELOCd himself to foreclosure so now he has to suffer through the upheaval of foreclosure so he has nowhere to park his boat.

So yes, I like the first part of the idea but a much stronger implementation of what to do after the home is taken should be considered. If the home is taken through emminent domain then the deal with the original owner would be they get to walk with no ding to the credit and if the home sells for more then they owe then they get the profit.

The better lesson for them will be that they learn to live within thier means. What a treat.

[SD Realtor]

EconProf I see absolutely no merit in this plan with respect to selling the home back to the original homeowners.

I agree with the first part of the plan which would be to take the home away from the homeowners using emminent domain.

However in no way whatsoever should the home be “given” back to the homeowner on any terms. The home should be sold on the open market. If the current homeowners want to buy it then they can compete with anyone else.

The rate of recidivism with regard to rampant consumerism is quite high. I work with so many people who are SO qualified with respect to gainful employment, strong downpayment money, who have simply elected to be prudent over the past few years. These people would form a much strong base to the homeownership pyrmaid rather then current overburdened base owner.

I am very disturbed by this “family upheaval” that everyone keeps writing about. Renting a home is not an upheaval. I don’t like it but it is not the end of the world and to sensationalize it is crazy. Pity the poor homeowner who HELOCd himself to foreclosure so now he has to suffer through the upheaval of foreclosure so he has nowhere to park his boat.

So yes, I like the first part of the idea but a much stronger implementation of what to do after the home is taken should be considered. If the home is taken through emminent domain then the deal with the original owner would be they get to walk with no ding to the credit and if the home sells for more then they owe then they get the profit.

The better lesson for them will be that they learn to live within thier means. What a treat.

[Author]

Posts