Sunday, November 24, 2013

Eminent Domain idea spreading

Robert Hocket, a supporter of this idiotic idea, stated last week that 20-25 municipalities in approximately 11 states (including CA, NJ, WA, OH, NY, and FL) are looking into using eminent domain to seize and rework mortgages.

He also recently wrote a paper about the idea, ironically titled "Paying Paul and Robbing No One", that a muncipality can simply force a lender (the MBS trust in this case) to accept less than the face value of a loan, and then give the borrower a break on the balance. The theory being that because the borrower is underwater, he deserves a break - while in the real world, most of us would ask him to post additional collateral if we were the lender.

Richmond CA, the first mover, has already sent offer letters to buy loans to Trustees and Servicers. A Federal judge ruled that the second suit surrounding this particular city's effort is too early to call. The Trustees' suit highlights that the purported goal of MRP is to make the loans more affordable, but modifying into current rates would actually force payments 19% higher, therefore making them MORE likely to default. Of the 624 mortgages MRP has offered to buy, the vast majority are CURRENT on their payments, 63% were originally cash-out refis, 53% have already received modifications (average payment is $1499 and average WAC is 3.05%), and losses to the MBS Trusts that Fannie Mae owns would total $17mm.

The best quote so far is from the mayor of Richmond CA, Gayle McLaughlin, who said  “We are offering to take the loans for fair market value and that’s what this is all about. To threaten redlining to our community, when they have already suffered clearly massive injustices, it’s just setting us
back.” She is offended that lenders have basically said we won't lend in your city anymore (i.e. redlining) if you don't honor lending contracts in your city anymore... mmmmkay.

*most of this is taken from a few BBG articles, except where stated otherwise. Sorry no links.


crabsofsteel said...

You may not like the idea, but it's not idiotic. Some hotshot at Long Beach wrote an option-ARM loan whose pre-reset rate was 1%. Clearly not refinancable, and a loan which should never have been allowed to exist. You bought a bond in the deal where this loan was placed, therefore, you are now the lender like it or not. A mortgage consists of three factors: balance, rate and term. You cannot modify the rate lower than 1%, you cannot extend the term beyond 30 years (unless you are Japan), so the only thing left to modify is the balance. Since that is verboten to servicers, it has to come from an outside party. Eminent domain is a very reasonable answer.

Concrete Jungle said...

The description of the loans you use to support your argument does not describe the loans in question. In the Richmond case, in fact, over half the loans have ALREADY been modified, over a third are not even underwater at all (most are not underwater that much), two-thirds have NEVER been delinquent, and over 80% are not currently delinquent.

I agree that the lender/investor should bear responsibility for losses. Further, they should MAKE it possible to reduce balances - this is generally one of the best workouts for all parties involved on loans that are actually stressed (based on my personal experience in both securities and non-securities distressed loan pools). It's not fair to say, "modify[ing] the balance... is verboten" based on an agreement that is a few decades old, at best, on the one hand, but say that it is okay to completely re-write centuries of contract law on the other hand.

Further, without changing any rules/laws/history, we have systems in place that work. If you miss a payment on a contract that you agreed to, you lose the collateral - that was the deal people signed up for. Perhaps a wily Long Island mortgage broker tricked them, lied to them, etc., and they have legal recourse, but they should seek damages through litigation.

crabsofsteel said...

Wrong Long Beach ... these guys operated out of Newport Beach CA and were bought by Washington Mutual which now belongs to JP Morgan. JPM like the other large banks have already come to settlements where they wrote some large checks which have gone to trusts to cover losses, and not to principal modification for borrowers. I don't think borrowers would get very far trying to litigate against JPM. Although your point about the Richmond pool being fairly healthy is well-taken, the end result of strict enforcement of contract law on bad contracts leads to results like Detroit or Cleveland. No municipality wants, or should want, the banks to own massive swathes of REO in their jurisdiction. I think that is Richmond's point.

crabsofsteel said...


Newark City Council has formally voted to start legal research
towards using eminent domain to seize underwater mortgages.
Newark accounts for 268 first lien loans in RMBS trusts that are
underwater but current, according to Barclays Capital figures.
The UPB of these loans is US$80m and they are expected to take a
US$24m loss if they are written down to 80% LTV.