Great news: Cities to apply Kelo to … mortgages

posted at 11:46 am on July 6, 2012 by Ed Morrissey

If one wanted to craft a strategy to make the home-mortgage market even less stable, increase already-unsustainable public debt, and erode private property rights even further than we have already seen, it would be hard to top a new idea from California, of all places.  Two cities have fashioned a plan to use eminent domain not to seize real estate, but to seize the mortgages on them.  Call this … Kelo meets Hugo Chavez:

Eminent domain allows a government to forcibly acquire property that is then reused in a way considered good for the public—new housing, roads, shopping centers and the like. Owners of the properties are entitled to compensation, which is usually determined by a court.

But instead of tearing down property, California’s San Bernardino County and two of its largest cities, Ontario and Fontana, want to put eminent domain to a highly unorthodox use to keep people in their homes.

The municipalities, about 45 minutes east of Los Angeles, would acquire underwater mortgages from investors and cut the loan principal to match the current property value. Then, they would resell the reduced mortgages to new investors. …

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.

Where to start on this nonsense, given to us courtesy of David Souter?  The Kelo decision gave a legal option of using eminent domain not for public use, such as roads or utility rights-of-way, but to transfer property to other private ownership.  One can imagine that a Supreme Court that had no problem establishing that precedent would suddenly get persnickety about the definition of property subject to eminent domain, not unless the court in question would like to take a second chance at getting that decision corrected and the precedent undone.

If cities began doing this, it will create a number of problems, especially in mortgage markets, which are still unstable thanks to the 2008 housing bubble crash created by government interventions over a decade in the market.  It will disincentivize future investors, who will rightly wonder just how safe their investments will be while cities have the prerogative of simply deciding how much of their investment they should be allowed to keep.  As it works now, investors take known risks on loan securities, but this will add a huge amount of uncertainty to the investment market, and it will drive capital out at a time when mortgage lenders need more capital to get into the market.  That will force lenders to raise bond yields, which will mean higher mortgage rates for borrowers, especially for those who present more risk.

Furthermore, it will hand a carte blanche to local politicians looking to curry favor with residents — and we can expect them to use it as often as they think they can get away with it.  Nothing sells like populism, and nothing in populism sells better than “sticking it to the banks,” even when the “banks” really means lots of investors, large and small, who bought mortgage-based securities for retirement funds and the like.  On top of that, the process heightens the moral hazard of government intervention, which then encourages people to take irrational and damaging risks by expecting private gain with public loss.

In short, this is the kind of policy that is not just misguided, but positively disastrous, even when the government in question is on solid financial footing — which is hardly an apt description of government in California at any level.  What happens when no one wants to buy the mortgages seized by these cities because of the instability and risks involved?  The taxpayers will be on the hook for the principal, even at the artificially-imposed new level, and when the homeowners default on those mortgages, the cities will have to maintain the properties at taxpayer expense.

American government should use eminent domain only on real property, and only for actual and explicit public use, and pay market price as compensation.  This is a violation of private property rights on every level, and a symptom of a government transforming from the traditional American model to something much more authoritarian — and incompetent.


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We sure as heck don’t want to send this one to SCOTUS now with Roberts ruling us from on high.

besser tot als rot on July 6, 2012 at 11:48 AM

Well all those newly disabled that Obama has gotten on the government dime need to live Somewhere.

portlandon on July 6, 2012 at 11:49 AM

Kelo may have been written by Souter, but it was given to us by Kennedy. You know. The guy who is a hard right conservative compared to John Roberts.

besser tot als rot on July 6, 2012 at 11:50 AM

Sort of an ironic twist, in that the same state of California just took away everything the municipalities had acquired via Kelo for redevelopment when it abolished the local Redevelopment Agencies. All those properties now are belong to the big CA.

de rigueur on July 6, 2012 at 11:50 AM

When in doubt, confiscate it. – Democrats

lorien1973 on July 6, 2012 at 11:51 AM

All those properties now are belong to the big CA.

de rigueur on July 6, 2012 at 11:50 AM

Is that like, “All your base are belong to us?”

besser tot als rot on July 6, 2012 at 11:52 AM

This process requires voiding contracts, which isn’t going to fly…

oddball on July 6, 2012 at 11:52 AM

American government should use eminent domain only on real property

Once again, HotAir comes down on the side opposed to liberty.

Dante on July 6, 2012 at 11:53 AM

Suddenly I’m hungry for some Greek food.

Ward Cleaver on July 6, 2012 at 11:53 AM

Sounds like what happened to the GM bond investors is about to happen to other investors on a national scale and the march towards marxism will be complete.

bgibbs1000 on July 6, 2012 at 11:53 AM

Time to cut through all this legal mumbo-jumbo which is crippling our society. Form a civilian corps of do-gooders known as, oh I don’t, Stazi or Gestapo or something, and use them to persuade those who don’t want to do what’s proper to change their ways.

I’m thinking that we could recruit from the public unions and find just the sort of people we need for this new corp.

Bishop on July 6, 2012 at 11:55 AM

Pelosi said they were going to seize 401(k)s and she she wasn’t kidding. Money markets, what money markets?

Wesley Mouch was unavailable for comment…

DanMan on July 6, 2012 at 11:55 AM

Sounds like government approved theft to me.

Charlemagne on July 6, 2012 at 11:55 AM

The municipalities, about 45 minutes east of Los Angeles, would acquire underwater mortgages from investors and cut the loan principal to match the current property value. Then, they would resell the reduced mortgages to new investors. …

Thus pissing off the people who understand that at debt promised by a signed note is a contract that must be satisfied. People who may want to some day sell their property will not have their value determined by the whim of the market, but by uncle Sugar.

STUPID IDEA

john1schn on July 6, 2012 at 11:56 AM

This process requires voiding contracts, which isn’t going to fly…

oddball on July 6, 2012 at 11:52 AM

Tell that to the investors in GM and Chrysler who lost big time in 2009 to BHO’s “fix”.

When lawlessness begins to be implemented as law, property rights necessarily have to go first.

Difficultas_Est_Imperium on July 6, 2012 at 11:56 AM

So – anyone done any research on what countries give us a suitable alternative?

beatcanvas on July 6, 2012 at 11:57 AM

In short, this is the kind of policy that is not just misguided, but positively disastrous – step in the right direction

forest on July 6, 2012 at 11:57 AM

Ed, if those investors you are so concenred about gives back the $750 billion Tarps funds maybe I could care about this. they won’t and I don’t. The banks signed out to this massive federal government intrusion into thier business by taking that governmental bailout. So now when it goes agains tthe banks those same people that liked tarp are against this?

Tell you the truth im against both but if the banks are going to get free money, stick it to the taxpayer and continue to hold the assets that required them to take TARP in the first place to make even more profit out of it then i could care less if the banks take a massive haircut on this. When you lay down with dogs you get up with fleas.

unseen on July 6, 2012 at 11:59 AM

This process requires voiding contracts, which isn’t going to fly…

oddball on July 6, 2012 at 11:52 AM

Why? They already did that with GM.

trigon on July 6, 2012 at 11:59 AM

They could have done this without Kelo.

For instance, the city grabs the mortgage, restructures the loan with the homeowner, sells the mortgage to a company.

If Kelo allows them to directly deal with a mortgage company off the bat, it’s a technicality here.

In real property it isn’t a technicality, which is why Kelo is a big deal in a normal situation. Cities aren’t going to blight land, build properties, and then look for a buyer of the factory. But here, there’s no real difficulty in restructuring a mortgage while it’s still held by the government.

Nessuno on July 6, 2012 at 12:00 PM

It’s just a tax. Don’t worry.

JDF123 on July 6, 2012 at 12:00 PM

Furthermore, it will hand a carte blanche to local politicians looking to curry favor with residents

Ugh, as if zoning and other approval processes don’t already give local petty tyrants too much power.

Actual quote from zoning board member upon voting to block a private development: “I don’t think it’s the best use for the property”

forest on July 6, 2012 at 12:01 PM

“Sununu is responsible for recommending David Souter to President George H. W. Bush”

“Former Gov. John Sununu (R-N.H.), a top surrogate for Mitt Romney”

Viator on July 6, 2012 at 12:01 PM

unseen on July 6, 2012 at 11:59 AM

You do know that most of the banks that received money did not want or need the cash, right?

john1schn on July 6, 2012 at 12:01 PM

This process requires voiding contracts, which isn’t going to fly…

oddball on July 6, 2012 at 11:52 AM

Tell that to the investors in GM and Chrysler who lost big time in 2009 to BHO’s “fix”.

When lawlessness begins to be implemented as law, property rights necessarily have to go first.

Difficultas_Est_Imperium on July 6, 2012 at 11:56 AM

Exactly.

I wasn’t at all sure that the Government Motors – UAW grand larceny was legal but they seem to have got away with that.

We are all Hugo Chavez now.

CorporatePiggy on July 6, 2012 at 12:02 PM

Once again, HotAir comes down on the side opposed to liberty.
Dante on July 6, 2012 at 11:53 AM

No one is saying they like it or agree with it, but it is legal. I don’t like ObamaTax, but I’d say it was outside the boundaries of even that law if the govt decided to force me to take birth control.

txhsmom on July 6, 2012 at 12:02 PM

Interesting how the drunken use (abuse) of power seems perfectly fine and legitimate in the name of “fairness” – but if this were to be considered lawful then in principle why not the reverse ? If property values increase having the mortgages re-written to the new higher value ?

This is so perverse I don’t know where to begin !

This lawlessness all began at the top with the GM bailout, AIG, etc… when fundamental contract law and property rights are under attack the entire free enterprise system will collapse.

alQemist on July 6, 2012 at 12:02 PM

What’s then to prevent California from stealing the new mortgages and homes and giving them to illegal immigrants? I suspect some cities in CA would applaud that. And even I think there’s some value in giving CA to Mexico if for no other reason than to get those crazies out of the electoral college.

Christian Conservative on July 6, 2012 at 12:03 PM

Is that like, “All your base are belong to us?”

besser tot als rot on July 6, 2012 at 11:52 AM

Exactamente.

de rigueur on July 6, 2012 at 12:03 PM

I’m sure the investors they are acquiring the mortgages from are campaign supporters, right?

There’s no way to stop these people. Elites like Souter and Roberts are giving them permission to rob us; they take no responsibility for the results of their intellectual folly.

PattyJ on July 6, 2012 at 12:04 PM

Pelosi said they were going to seize 401(k)s and she she wasn’t kidding. Money markets, what money markets?

Wesley Mouch was unavailable for comment…

DanMan on July 6, 2012 at 11:55 AM

This is why none of my money is in a retirement account.

besser tot als rot on July 6, 2012 at 12:04 PM

15% 30year fix mortgages with 30% down payment coming in 2013.

Oil Can on July 6, 2012 at 12:05 PM

I say let them do it, as long as the city isn’t able to declare bankruptcy after it fails on epic proportions.

ButterflyDragon on July 6, 2012 at 12:06 PM

You do know that most of the banks that received money did not want or need the cash, right?

john1schn on July 6, 2012 at 12:01 PM

ROFL…sure sure yet they took it. Im sure those same banks have been miffed at the FED over the last fours years has it takes their rotten assets and gives loans then money for those assets at close to 0% interest.

and the banks took the money even the ones who “didn’t really” want it because they understood without it their buddies would fail and they might lose their wealth when the bank runs started.

unseen on July 6, 2012 at 12:07 PM

More great fun in Public Policy, brought to you by the Kook-Fringe-Democrat party. And we wonder why the Frogs elected a Socialist?! They’re just trying to keep up.

Jaibones on July 6, 2012 at 12:07 PM

What’s then to prevent California from stealing the new mortgages and homes and giving them to illegal immigrants?

Christian Conservative on July 6, 2012 at 12:03 PM

Certainly not John Roberts.

besser tot als rot on July 6, 2012 at 12:07 PM

The Kelo decision gave a legal option of using eminent domain not for public use, such as roads or utility rights-of-way, but to transfer property to other private ownership.

Which is bad enough, but at least that was when you had to pay fair market price. Now if you give out a $300K loan, and only get $150K back through eminent domain, you aren’t going to do any loans.

A dark turn in our new fascist state.

rbj on July 6, 2012 at 12:07 PM

Once again, HotAir comes down on the side opposed to liberty.

Dante on July 6, 2012 at 11:53 AM

Reading comprehension is not your strong suit, is it?

Steve Eggleston on July 6, 2012 at 12:08 PM

If it is a tax, then I think you can go ahead and do it.

Wait, what are you talking about?

Herald of Woe on July 6, 2012 at 12:08 PM

A “mortgage” is actually comprised of two distinct instruments – a security instrument creating a lien on real property and a note. A note is a negotiable instrument covered by the Uniform Commercial Code that may be transferred, bought and sold. It has intrinsic value similar to bonds and government notes.

Seizing negotiable instruments under eminent domain would be a step down a very slippery slope. If notes could be seized, what about T-Bills, bearer bonds and good old dollar demoninated federal reserve notes that we call currency?

Any state venturing down such a path would pretty much lock them out of any secondary market transaction in mortgages. It is those secondary market transactions that provide liquidity to a market enhancing its market value. The effect would be that there would be little to no money available to lend in the state, and the money that was lent would be priced (i.e., interest rate) at a very high premium. And due to the scarcity of funding, chances are that the loan to value on any credit extended would be discounted to extreme levels.

If you want to see a modern example of how confiscation like this turns out, do some research on Zimbabwe.

Jim M. on July 6, 2012 at 12:08 PM

ROFL…sure sure yet they took it.

unseen on July 6, 2012 at 12:07 PM

You clearly do not know what happened.

besser tot als rot on July 6, 2012 at 12:09 PM

I heard a tidbit,that in San Bernardino County,
alot of people have up to ten mortgages!

canopfor on July 6, 2012 at 12:09 PM

unseen on July 6, 2012 at 11:59 AM

You do know that most of the banks that received money did not want or need the cash, right?

john1schn on July 6, 2012 at 12:01 PM

What’s your point? They took the money, not once, but twice, amounting to well of a trillion and a half dollar, and did not retire or forgive one single mortgage.

SWalker on July 6, 2012 at 12:09 PM

15% 30year fix mortgages with 30% down payment coming in 2013.

Oil Can on July 6, 2012 at 12:05 PM

Or worse. How can anyone still believe the political process will fix our country?

bgibbs1000 on July 6, 2012 at 12:10 PM

The second private property rights are in question or not clearly defined, the prosperity of the nation comes to a halt.

That’s one of the main problems with 3rd world countries, the property rights are murky and nobody dares to take a chance on imvesting anything because it can be all gone tomorrow.

NapaConservative on July 6, 2012 at 12:10 PM

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.

So these wonderful Mortgage Resolution “Partners” would try to bilk a bank out of $180,000, and get the FHA to back a loan so the Partners can make $25,000. What judge in his right mind would ever agree to that? And what’s to prevent the bank from foreclosing first, so they could sell the house for $150K instead of $120K?

Steve Z on July 6, 2012 at 12:11 PM

Which is bad enough, but at least that was when you had to pay fair market price. Now if you give out a $300K loan, and only get $150K back through eminent domain, you aren’t going to do any loans.

A dark turn in our new fascist state.

rbj on July 6, 2012 at 12:07 PM

It’s worse than that. The mortgage company would, in the example cited, only get the $120K the court says it’s worth.

Steve Eggleston on July 6, 2012 at 12:12 PM

ROFL…sure sure yet they took it. Im sure those same banks have been miffed at the FED over the last fours years has it takes their rotten assets and gives loans then money for those assets at close to 0% interest.

and the banks took the money even the ones who “didn’t really” want it because they understood without it their buddies would fail and they might lose their wealth when the bank runs started.

unseen on July 6, 2012 at 12:07 PM

Two of the banks that were coerced into taking money from the government paid it back with interest at the earliest possible moment. Others did take longer, but did pay back. Who hasn’t yet? Our good friends at GM.

john1schn on July 6, 2012 at 12:12 PM

And in other CA news, the boondoggle called HSR is moving forward , under the radar ofcourse

California is now just one step away from launching the nation’s first bullet train after the state Assembly on Thursday joined Gov. Jerry Brown in approving the divisive high-speed rail line, setting up a dramatic, final showdown in the Senate on Friday.

The Democrat-dominated Assembly voted 51-27, with Republicans opposed, on Brown’s $8 billion plan to begin building the $69 billion railroad early next year. Nearly $6 billion would be spent to lay the first tracks in the Central Valley while the remaining funds would lay the groundwork for bullet trains in the Bay Area and Southern California, including electrifying the Caltrain line.

http://www.mercurynews.com/california-high-speed-rail/ci_21015085/california-assembly-approves-high-speed-rail-leaving-only

burrata on July 6, 2012 at 12:12 PM

Welcome to 21st century’s Russia, folks. If you think confiscations will be limited to redistribution and political populism, I have an oceanfront property in Colorado on sale for you. It is literally a golden rain for every local politician, and once proven to be safe for the taking, it will spread across the country like a bubonic plague.

Archivarix on July 6, 2012 at 12:13 PM

It doesn’t sound as bad as all that…

I do not think it is a good idea, but this post has a lot of hyperventilating.

If you were the owner of one of the seized property interests (mortgages), you would have a right to fair compensation. If you did not like what the city was offering, you could take them to court, and if you prevailed, you would be entitled to recover your attorneys fees on top of just compensation for your property rights. So, the city will be incentivized to offer the real value of the mortgage to avoid the cost of litigation (for both sides).

So, the banks or investors are not being forced to suffer a loss that they have not already suffered. The mortgages have already lost value, they really have lost value, or this plan would not work. The problem (or benefit — depending on how you look at it) is that it forces the banks to realize the paper loss that they have suffered, as oppose to possibly holding onto their interests in the property in the hopes that property values will recover. On the plus side, the homeowner does not need to suffer through a foreclosure before the investor realizes the loss. We all know that foreclosures can artificially depress property values. So, there is the benefit.

The plan is not atrocious, but like anything run by the government, it will be poisoned by cronyism and favoritism. The plan would give more power to government, and that power would be abused.

tommylotto on July 6, 2012 at 12:13 PM

It should be noted that having this successfully implemented is a long shot for a couple of reasons, primarily because it is going to have to go through a lot of litigation before anything is resolved. Since litigation takes years, much of the landscape of the housing market is likely to be changed in that time period.

Specifically, the litigation will have to resolve the true value of the mortgage. That the mortgage is worth the difference of the current value of the house and the value of the mortgage is not at all clear.

Secondly, they will have to litigate the issue of whether seizing what is in essence a contract is legally permissible. I mentioned in a comment above that Kelo isn’t really relevant to this, and I stick to it. This use of eminent domain would be novel enough that it is going to have to blaze its own trail through the courts, which will take a long time and is certainly not guaranteed to succeed.

Nessuno on July 6, 2012 at 12:14 PM

this is why the american experiment in freedom and self rule was the exception not the rule in human history. Freedom is hard, it requires personal responibility, self sacrifice. Things only a moral people can do and stand. It is much easier to enslave entire populations than it is to tell the population it must live under the consquences of its own decisions in a immoral society.

unseen on July 6, 2012 at 12:14 PM

Ed, if those investors you are so concenred about gives back the $750 billion Tarps funds maybe I could care about this. they won’t and I don’t. The banks signed out to this massive federal government intrusion into thier business by taking that governmental bailout. So now when it goes agains tthe banks those same people that liked tarp are against this?

Tell you the truth im against both but if the banks are going to get free money, stick it to the taxpayer and continue to hold the assets that required them to take TARP in the first place to make even more profit out of it then i could care less if the banks take a massive haircut on this. When you lay down with dogs you get up with fleas.

unseen on July 6, 2012 at 11:59 AM

Minor point of order – most of those banks paid back the TARP funds. The majority of TARP funds still outstanding are in three government-held companies – Government Motors, Ally Bank (nee GMAC) and AIG (which also has significant non-TARP obligations that aren’t paid off).

Oh, and the holders of most of those mortgages are two other government-held entities (taken outside the scope of TARP) – Fannie Mae and Freddie Mac.

Steve Eggleston on July 6, 2012 at 12:16 PM

So… can eminent domain under the SCOTUS Kelo decision be used to bypass the 3.8% capital gains tax on home sales under the SCOTUS Obamacare decision?

de rigueur on July 6, 2012 at 12:17 PM

It won’t work out in the long run, and here’s why: Who would lend to a homebuyer in that area if this happens? If the local government can arbitrarily restructure the mortgage, no lender will touch that market with a ten-foot pole, *or* they’ll charge high interest rates. This will have the effect of driving property values further down (since fewer people will be able to afford the mortgage), while making homes only available to the rich–you know, the guys who can afford to either pay the high interest rates or pay cash.

Yet another Democrat-dreamed policy that ends up hurting the people they intend to help.

Mohonri on July 6, 2012 at 12:17 PM

I’m thinking that we could recruit from the public unions and find just the sort of people we need for this new corp.

Bishop on July 6, 2012 at 11:55 AM

Posters. We should put up posters, too. Lay everything out fair and square and let people know what’s right and what’s wrong. That way, everyone would know what they are supposed to do.

Axe on July 6, 2012 at 12:18 PM

What judge in his right mind would ever agree to that?

ohnJay obertsRay.

Bishop on July 6, 2012 at 12:19 PM

Who would lend to a homebuyer in that area if this happens? If the local government can arbitrarily restructure the mortgage, no lender will touch that market with a ten-foot pole, *or* they’ll charge high interest rates.

Mohonri on July 6, 2012 at 12:17 PM

Well, until the feds come in and force banks to load there, the way they forced them to give loans to unqualified buyers in poor neighborhoods during the housing bubble.

Nessuno on July 6, 2012 at 12:19 PM

Lawyer trash “buying” a $300,000 asset for $120,000, then selling the asset for $150,000 to the city, pocketing $30,000, all with the help of another piece of lawyer trash sitting on the bench.

What could go wrong? Except for some sucker who just lost half their investment, to fund yet another employment for otherwise unemployable lawyers plan.

MNHawk on July 6, 2012 at 12:20 PM

Minor point of order – most of those banks paid back the TARP funds. The majority of TARP funds still outstanding are in three government-held companies – Government Motors, Ally Bank (nee GMAC) and AIG (which also has significant non-TARP obligations that aren’t paid off).

Steve Eggleston on July 6, 2012 at 12:16 PM

Eh, are you on crack today or just grossly misinformed? All TBTF banks paid TARP loans with the money laundered through AIG’s credit default swaps, which would be a worthless pile of used dog food if not for TARP funds. Cashing those CDS sank AIG even deeper, and we the taxpayers are on the hook for it.

Archivarix on July 6, 2012 at 12:20 PM

Two of the banks that were coerced into taking money from the government paid it back with interest at the earliest possible moment. Others did take longer, but did pay back. Who hasn’t yet? Our good friends at GM.

john1schn on July 6, 2012 at 12:12 PM

really? they paid it back? wow want to buy this bridge im selling?

Banks Pay Back TARP Funds by. . .Borrowing From Treasury

All of which is to say that these banks repaid cash owed to a program run by the Treasury Department by. . . borrowing from another program run by the Treasury Department.

The Small Business Lending Fund was created last fall as part of the Small Business Jobs Act, a bipartisan piece of legislation passed last fall. The idea was to make cash available to smallish community banks (those with assets of $10 billion or less), and then give them incentives or rewards for making small-business loans, defined in this fact sheet as “certain loans of up to $10 million to businesses with up to $50 million in annual revenues.”

Here’s how it works. As with the CPP, Treasury will lend to the banks by buying preferred shares. As with CPP, the shares bear a five percent annual dividend rate. (However, Treasury won’t receive warrants in exchange for making the loans, as it did under CPP). So far, so similar. But here’s the difference. Banks that have boosted, or will boost, their lending to small businesses will pay a lower interest rate. “If a bank’s small business lending increases by 10% or more, then the rate will fall to as low as 1%. Banks that increase their lending by amounts less than 10% can benefit from rates set between 2% and 4%.” Meanwhile, those that take the cash and don’t lend will be punished. “If lending does not increase in the first two years, however, the rate will increase to 7%. After 4.5 years, the rate will increase to 9% if the bank has not already repaid the SBLF funding.”

Sounds good. But it seems like the first recipients (the deadline for application was May 16, 2011) are using the capital largely to replace more expensive CPP capital. So, for example, Eagle announced that it was using $23.25 million of the $56.6 million in SBLF funds it received to exit the CPP, effectively replacing five percent money with one percent money. As Chairman and CEO Ronald D. Paul noted: “We are also proud to note that our growth of $98 million in SBLF qualified loans over the initial reporting period has made us eligible for a dividend rate of 1.0%, the most favorable dividend rate available in the program.” First California Financial used the entire amount of its SBLF funding ($25 million) to repay CPP funds. Security Business Bancorp used nearly 70 percent of the $8.9 million in SBLF funds it received, at the low one percent rate, to pay back its CPP funds.

unseen on July 6, 2012 at 12:22 PM

They could have done this without Kelo.

For instance, the city grabs the mortgage, restructures the loan with the homeowner, sells the mortgage to a company.

If Kelo allows them to directly deal with a mortgage company off the bat, it’s a technicality here.

In real property it isn’t a technicality, which is why Kelo is a big deal in a normal situation. Cities aren’t going to blight land, build properties, and then look for a buyer of the factory. But here, there’s no real difficulty in restructuring a mortgage while it’s still held by the government.

Nessuno on July 6, 2012 at 12:00 PM

Actually, without Kelo, the city would have to pay the entire remaining balance (plus any early-payment penalty) on the existing mortgage. At that point, it becomes a policy issue with which, in my humble opinion, would still be a very poor one, not a Constitutional one.

Steve Eggleston on July 6, 2012 at 12:22 PM

More lawlessness, with the usual potential effects and outcomes.

Difficult_Est_Imperium nailed it.

unseen has an interesting point – but I take it as more of a moral one than a technical or legal one. The full horror of TARP was not just the central idea – dumping in public money/debt to maintain the status quo in the financial sector as opposed to letting there be consequences for business incompetence – but the fact that it was used to “forcibly infect” companies that had steered clear of the worst nonsense.

I fully expect an electoral tsunami come November (OK, CA will remain an impregnable island of idiocy, racism, lawlessness, greed, and incompetence in the major metros and along the coast.). But changing the name tags and reversing a few of the simpler atrocities inflicted on us by the astonishingly vile and stupid incumbents, while amusing, will not give serious citizens all that much to cheer.

The new regime, if it doesn’t make public education and nation-rebuilding (restoration of lawful processes) a big part of its agenda, will be mostly a speed bump on ride down. Now the collapse of the SCOTUS as a serious institution – completed last week – makes this even more difficult. But there it is.

IceCold on July 6, 2012 at 12:22 PM

unseen, banks are federally regulated entities. Just like with CRA, the feds said “Do this or we harass you to death.”

Unless you are ready to pick up a gun, have a heaping helping of STFU.

SDN on July 6, 2012 at 12:25 PM

Eh, are you on crack today or just grossly misinformed? All TBTF banks paid TARP loans with the money laundered through AIG’s credit default swaps, which would be a worthless pile of used dog food if not for TARP funds. Cashing those CDS sank AIG even deeper, and we the taxpayers are on the hook for it.

Archivarix on July 6, 2012 at 12:20 PM

I didn’t mention TBTF, which represents the ficticious portion of the TARP payback. The rest of the payback came from actual money (e.g. fresh equity offerings).

Being able to pull that sort of shenanigans is why the feds will never let AIG (or Ally) go.

Steve Eggleston on July 6, 2012 at 12:26 PM

This process requires voiding contracts, which isn’t going to fly…

oddball on July 6, 2012 at 11:52 AM

Oh? The government had no issues with voiding the contracts held by stockholders of GM, downgrading the value of the stocks by up to 65% when taking them, then revaluing them when giving the ownership share to the unions. A stock purchase is as much a legal contract as there is, and the Feds simply ignored it, and transferred equity to whom they chose. How would they not do likewise under this concept?

Personal property rights are being shredded before our eyes. The Declarations words loom larger and larger.

Freelancer on July 6, 2012 at 12:28 PM

And urban elitist was insisting in another thread that liberals always support civil and human rights.

gwelf on July 6, 2012 at 12:29 PM

Many of the Californians who are underwater on their mortgage are there because they used their house as an ATM (pulled out extra cash when they refinanced) and now owe more on their mortgage than they originally paid for their house.

In that case their problem is of their own creation and I have no sympathy for them.

agmartin on July 6, 2012 at 12:29 PM

I didn’t mention TBTF, which represents the ficticious portion of the TARP payback. The rest of the payback came from actual money (e.g. fresh equity offerings).

Being able to pull that sort of shenanigans is why the feds will never let AIG (or Ally) go.

Steve Eggleston on July 6, 2012 at 12:26 PM

And where, you think, did the money for those “fresh equity offerings” come in a country ravaged by liquidity crisis? They came from leveraging the existing assets of purchasers, which was only made possible by the feds backing AIG and its ilk. Welcome to the world of financial prestidigitation, bro…

Archivarix on July 6, 2012 at 12:31 PM

No one is saying they like it or agree with it, but it is legal. I don’t like ObamaTax, but I’d say it was outside the boundaries of even that law if the govt decided to force me to take birth control.

txhsmom on July 6, 2012 at 12:02 PM

What a fantastic argument, “it’s legal.” That really gets to the philosophical core, doesn’t it?

And yes, someone is saying they agree with it, notice Ed’s use of the word “should”.

Dante on July 6, 2012 at 12:31 PM

Others did take longer, but did pay back. Who hasn’t yet? Our good friends at GM.

john1schn on July 6, 2012 at 12:12 PM

What’s more, government agencies and the Federal Reserve rushed to the assistance of the banking sector by guaranteeing banks’ debt, intervening in capital markets, and slashing interest rates to zero. In essence, the government altered the banking environment so that it would be astonishingly easy for the banks to profit and thus earn their way out of trouble. As a result, critics said, the banks were being spared many difficult and painful decisions. All carrots and no stick.

its easy to pay back your “loans” when the government stacks the deck against the little guy to reward their friends who then pay you back with those funds they helped you earn…..

It almost like the government making policy to I don’t know say cut home laons by 50% for the homeowner so the homeowner can pay the banks back the reduced payment. Almost but unlike with the TARP funds the government still requires the homeowner to pay the reduce rate back with their own funds. Now when the government sets up the considertions for the homewoners to make thier payments apper out of thin air then and only then will TARP and this program be equal

unseen on July 6, 2012 at 12:31 PM

What judge in his right mind would ever agree to that?

Steve Z on July 6, 2012 at 12:11 PM

You have heard of the Kelo ruling, correct? Kelo makes all eminent domain stupidity possible. Currently this can only be beaten politically because SCOTUS already granted near unlimited authority to governments under Kelo.

NotCoach on July 6, 2012 at 12:32 PM

Look at the bright side Ed. Such a move would make contracts meaningless.

Just think of all the paper that will be saved by not having to print up contract that disclose the terms of a loan, or it’s repayment.

In other news out of Kalifornia, the state legislature of clowns has approved the sale of bonds to fund Moonbeam Brown’s “legacy” – The Bullet Train to Nowhere. It now moves to the Senate, and if approved there, let the lawsuits begin.

GarandFan on July 6, 2012 at 12:32 PM

It’s worse than that. The mortgage company would, in the example cited, only get the $120K the court says it’s worth.

Steve Eggleston on July 6, 2012 at 12:12 PM

Which means there will be no private lending — so you would have to resort to the federal government for your mortgage, putting your housing at the hands of some petty government bureaucrat, a la the Soviet Union.

November can’t come soon enough.

rbj on July 6, 2012 at 12:33 PM

It should be noted that having this successfully implemented is a long shot for a couple of reasons, primarily because it is going to have to go through a lot of litigation before anything is resolved. Since litigation takes years, much of the landscape of the housing market is likely to be changed in that time period.

Specifically, the litigation will have to resolve the true value of the mortgage. That the mortgage is worth the difference of the current value of the house and the value of the mortgage is not at all clear.

Secondly, they will have to litigate the issue of whether seizing what is in essence a contract is legally permissible. I mentioned in a comment above that Kelo isn’t really relevant to this, and I stick to it. This use of eminent domain would be novel enough that it is going to have to blaze its own trail through the courts, which will take a long time and is certainly not guaranteed to succeed.

Nessuno on July 6, 2012 at 12:14 PM

LOL what planet have you been living on? In less than a decade people will be on HOTAIR, if it still exists, debating how to tweak the national law that will make all this crap legal.

bgibbs1000 on July 6, 2012 at 12:33 PM

This can’t be done. A mortgage is a contract. The property is simply security for the loan. Article I, section 10, clause 1 of the Constitution (for what that document is worth anymore) prohibits a state from interfering in contractual obligations.

Monkeytoe on July 6, 2012 at 12:35 PM

Once again, HotAir comes down on the side opposed to liberty.

Dante on July 6, 2012 at 11:53 AM

May you never be free. May you be cursed into bondage.

Schadenfreude on July 6, 2012 at 12:36 PM

Jim M. on July 6, 2012 at 12:08 PM

Stealing of cash is already very common, and has been for about thirty years. A police officer puts his finger to the wind and says “yep, I think this money is the proceeds of a crime of some kind” and your money is gone.

slickwillie2001 on July 6, 2012 at 12:36 PM

This can’t be done. A mortgage is a contract. The property is simply security for the loan. Article I, section 10, clause 1 of the Constitution (for what that document is worth anymore) prohibits a state from interfering in contractual obligations.

Monkeytoe on July 6, 2012 at 12:35 PM

Tell it to Obama, UAW, and Chrysler bondholders.

Archivarix on July 6, 2012 at 12:37 PM

You have heard of the Kelo ruling, correct? Kelo makes all eminent domain stupidity possible. Currently this can only be beaten politically because SCOTUS already granted near unlimited authority to governments under Kelo.

NotCoach on July 6, 2012 at 12:32 PM

Kelo doesn’t make “all eminent domain stupidity possible.” It makes some stupidity possible. But a government is still bound by the idea that the seizure must be for the public good. Kelo said adding jobs to the community was sufficient.

But here the cities are going have to make the novel case that helping certain home owners–but, importantly, not their neighbors who aren’t as much in debt–is for the public good. And they are going to have to make that argument on a case-by-case basis.

Nessuno on July 6, 2012 at 12:37 PM

Sorry for the off-topic, but is anyone else getting a tv ad with voice on this website? Can’t get rid of it. Very annoying.

Paddington on July 6, 2012 at 12:38 PM

Actually, without Kelo, the city would have to pay the entire remaining balance (plus any early-payment penalty) on the existing mortgage. At that point, it becomes a policy issue with which, in my humble opinion, would still be a very poor one, not a Constitutional one.

Steve Eggleston on July 6, 2012 at 12:22 PM

And how exactly is this really any different than the State seizing the property for failure to pay property taxes and auctioning it off?

SWalker on July 6, 2012 at 12:39 PM

This can’t be done. A mortgage is a contract. The property is simply security for the loan. Article I, section 10, clause 1 of the Constitution (for what that document is worth anymore) prohibits a state from interfering in contractual obligations.

Monkeytoe on July 6, 2012 at 12:35 PM

In other words, just b/c the mortgage owed is $300k, that has nothing to do with the value of the property. The property only secures the mortgage. Thus, to the extent that the bank forecloses and sells the property at a loss, the mortgagee still owes the bank the difference.

So, in this situation, if the gov’t was allowed to do it, the person would get to keep their home, but would still owe the bank the remainder of the money.

This actually almost works to the bank’s advantage – the bank does not have to spend the money foreclosing on and selling the house, but gets the fair market value of the house from the gov’t, and then can still pursue the individual to collect the difference.

The only downside for the bank is the chance that the property comes back up in value significantly. I.e., had the bank waited a year or two to foreclose/sell, they may have made more from the sale.

Monkeytoe on July 6, 2012 at 12:39 PM

So… can eminent domain under the SCOTUS Kelo decision be used to bypass the 3.8% capital gains tax on home sales under the SCOTUS Obamacare decision?

de rigueur on July 6, 2012 at 12:17 PM

… You know …

Is this what the world is like when the Sophists’ joy of argument — any plausible argument — is the ideological foundation of the Judiciary? I mean as opposed to the back-water idea that the law means something in particular to begin with.

Sort of downstream from deconstructionism and relativism is … this.

I’m never going to get this idea out. I don’t have enough flexibility with the necessary terms of art. :)

Aborting.

Axe on July 6, 2012 at 12:39 PM

SDN on July 6, 2012 at 12:25 PM

yeah because only a gun will solve the problems for you. no wonder the federal government controls the population the smarts in this country have gone downhill By your logic then the banks are federally regulated entities. entites by the way which own these loans that the government will seize and give them back to the bank at a reduced rate. But since the banks are federaly regulated entities they will be required to take these new loans and like it much like they were “required” to take the TARP loans. So since they are federally regulated entites by your logic the bank has to forget the entire 200 year concept of contract law in this country and just do what the government tells them. Got it…
It all makes sense now. /

unseen on July 6, 2012 at 12:39 PM

Stealing of cash is already very common, and has been for about thirty years. A police officer puts his finger to the wind and says “yep, I think this money is the proceeds of a crime of some kind” and your money is gone.

slickwillie2001 on July 6, 2012 at 12:36 PM

Yet another thing to thank the war on drugs for.

Nathan_OH on July 6, 2012 at 12:39 PM

So if I understand this correctly, the banks will be taking the hit on the difference? And they’re okay with that?
Also, I don’t get the craziness over houses that are underwater. In practical terms (in terms of investment it’s another story) nothing is changed. You keep paying your mortgage the same as usual. Unless you want to sell your house, then it’s an issue but then you don’t sell.

hopeful on July 6, 2012 at 12:40 PM

Welcome to the world of financial prestidigitation, bro…

Archivarix on July 6, 2012 at 12:31 PM

To paraphrase the infamous phrase – Been here, doing that, still waiting for the T-shirt.

Steve Eggleston on July 6, 2012 at 12:43 PM

Who in their right mind would underwrite a new mortgage knowing that it could be later Keloed? Just too risky.

Good luck getting a mortgage once this starts happening.

dczombie on July 6, 2012 at 12:45 PM

So, the banks or investors are not being forced to suffer a loss that they have not already suffered. The mortgages have already lost value, they really have lost value, or this plan would not work. The problem (or benefit — depending on how you look at it) is that it forces the banks to realize the paper loss that they have suffered, as oppose to possibly holding onto their interests in the property in the hopes that property values will recover. On the plus side, the homeowner does not need to suffer through a foreclosure before the investor realizes the loss. We all know that foreclosures can artificially depress property values. So, there is the benefit.

The plan is not atrocious, but like anything run by the government, it will be poisoned by cronyism and favoritism. The plan would give more power to government, and that power would be abused.

tommylotto on July 6, 2012 at 12:13 PM

I agree mostly with this, except I’m not sure it is constitutional because they are not “taking” a property but attempting to void a contract, which the constitution prohibits. To the extent they can do this and take the property for whatever value, that does not cancel the mortgage. The remainder of the mortgage would simply become an uncollateralized loan. The mortgagee would still be responsible for the difference between the original mortgage and the gov’t buying price. So not sure what it really does to help the person. they’ll likely still have to declare bankruptcy.

Monkeytoe on July 6, 2012 at 12:45 PM

So if I understand this correctly, the banks will be taking the hit on the difference? And they’re okay with that?
Also, I don’t get the craziness over houses that are underwater. In practical terms (in terms of investment it’s another story) nothing is changed. You keep paying your mortgage the same as usual. Unless you want to sell your house, then it’s an issue but then you don’t sell.

hopeful on July 6, 2012 at 12:40 PM

I doubt the banks will be happy with taking the hit, but this isn’t exactly the America your father grew up in anymore. In the ObamiNation, one doesn’t honor one’s agreements when one can use the force of government to alter the deal, and since the ‘Rats need every vote they can buy, they’re more than open to altering the deal.

Steve Eggleston on July 6, 2012 at 12:46 PM

So if I understand this correctly, the banks will be taking the hit on the difference? And they’re okay with that?
Also, I don’t get the craziness over houses that are underwater. In practical terms (in terms of investment it’s another story) nothing is changed. You keep paying your mortgage the same as usual. Unless you want to sell your house, then it’s an issue but then you don’t sell.

hopeful on July 6, 2012 at 12:40 PM

Everything you just said seemed completely normal and sensible.

Weird.

Axe on July 6, 2012 at 12:47 PM

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