From the same witch's cauldron that brewed municipal ordinances that force lenders to maintain property they don't own, erupts another blatant attempt by local politicians to create buzz that they're actually accomplishing something useful for voters. What they're actually accomplishing is something quite different.
A handful of local officials in California who say the housing bust is a public blight on their cities may invoke their eminent-domain powers to restructure mortgages as a way to help some borrowers who owe more than their homes are worth.
Investors holding the current mortgages predict the move will backfire by driving up borrowing costs and further depress property values. "I don't see how you could find it anything other than appalling," said Scott Simon, a managing director at Pacific Investment Management Co., or Pimco, a unit of Allianz SE.
What s free market proponent finds "appalling" a statist finds "liberating."
Proponents say this would help residents shed debt loads that are restraining economic growth, while preventing foreclosures that are eroding the tax base. But unlike the beneficiaries of most recent mortgage-modification efforts, who must show hardship, these borrowers would have to be current on their payments to participate. And the program initially would focus only on mortgage-backed securities that aren't federally guaranteed—about 10% of all outstanding U.S. mortgages.
It would help only 10% of mortgagors, and not those most in need of help--those who can't pay their current mortgages. For the 10%, it's a sweet deal. The "government" (i.e., the taxpayers) takes the loss today of the "underwater" portion of the loan balance and the borrowers get all the upside. At least with TARP, the banks had to give the government preferred stock and a warrants "kicker," so the government could share in the theoretical upside as the economy recovers. In this case, the government stretches the power of eminent domain and seizes mortgages from lenders and socializes all the losses with no upside. The theory that helping a tiny minority of underwater borrowers will stabilize real estate values seems a reach, and not only to me.
A letter sent last week to city leaders from 18 trade associations, led by the Securities Industry and Financial Markets Association, warned that such a move "could actually serve to further depress housing values" by making banks less willing to lend.
The creators of this concept are a bunch of left-wing retreads from the Clinton administration and their fellow travelers, including former head of the RTC, and current Obama fund raiser, Roger Altman. Economist Madeline Schnapp thinks she's on to their real agenda, which she thinks has much more to do with turning control of real estate valuations over to the government than it does with "stabilizing real estate values."
TrimTabs' Schnapp doesn't like that rather than allowing the free market to determine the price of housing for private individuals, "government entities are using government coercion to determine, by fiat, housing prices and use the vehicle of eminent domain to remove property rights from private individuals."
"The government, not the free market, is now the arbiter of what is fair 'for the common good' all because a handful of local officials say the housing bust has created a public blight," Schnapp said. "This process has the potential to become highly political and by extension corrupt."
As former Obama White House Chief of Staff (and current Chicago Mayor) Rahm Emanuel famously declared, "You never let a serious crisis go to waste. And what I mean by that it's an opportunity to do things you think you could not do before."