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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unseen on July 6, 2012 at 12:31 PM

Good points all. Ever since TARP, I’ve essentially regarded the banks as government-run entities. It’s just some of them don’t know it yet.

Doomberg on July 6, 2012 at 12:48 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

think of it this way – if you buy a new car and drive it off the lot, it usually is worth less than you paid for it as of that moment. So, say you get in a huge accident totaling the car. Your insurer pays you the current value of the car, which is less than you owe on it. You have to make up the difference to the lender. You don’t get to walk away because the car is total.

The transaction was the loaning of the money. The property (car/real estate) is merely the collateral. So, even absent the property, you still owe the loan.

Monkeytoe on July 6, 2012 at 12:48 PM

So, the banks or investors are not being forced to suffer a loss that they have not already suffered.

tommylotto on July 6, 2012 at 12:13 PM

Yes they are. The owner of the debt is holding a promise to repay $300,000. Period.

MNHawk on July 6, 2012 at 12:49 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

Damn good question, which is why I was disappointed that North Dakota voters refused to get rid of their state property tax.

Steve Eggleston on July 6, 2012 at 12:49 PM

Archivarix, you reminded me of another point (a macro one) that arises yet again here. The insane (really no other word for it, aside from “reckless”) funny-business going on in earnest since 2008 in the financial sector – not just public laws via Congress and the WH but the much larger shenanigans by the Fed – makes any rational analysis of comparatively limited “ideas” like this difficult. The Fed and its friends in other central banks have succeeded in basically debasing not just the dollar, but the credibility and very meaning of much of the financial system.

All of this to achieve a nano-second of “stability” – redefined to mean “every entity and person in the biz gets to keep their current position and assets and cashflow”. Not stability to the system in any real market sense.

Solvency problems cannot be fixed via liquidity interventions – all that happens is the very system itself starts to lose the confidence of rational actors.

Axe – well said. This gets back to the SCOTUS collapse last week. The purest form of lawlessness is not 1994 in South Central LA, nor even a Syrian civil war. It’s the quiet, business-like, much-admired destruction of the meaning of words and the very concept of “law”. That really occurs from the top down – it’s not smashing windows and grabbing a TV during a riot, or even a gang marking out territory and the police fearing to enter (a la the banlieus – spelling? – around major French cities).

IceCold on July 6, 2012 at 12:49 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

ah grasshopper you don’t fully understand how progressives work yet. If this happens and banks do whatyou say the city/county will simply pass a aw saying if you do any banking within the county you must offer homeloans and then if the banks flee and set up shop on the borders of that county the county will simply call up their marxist brothers in the state capital that will require all banks that do any type of banking evenan atm withdrawl fee in the state of CA to also offer homelaons. and if that drives them away to say AZ or NV then the marxst brothers in CA will call up their marxist brothers in DC and have them pas a law that all bank in the USa have to offer homelaons.

unseen on July 6, 2012 at 12:49 PM

Good luck getting a mortgage once this starts happening.

dczombie on July 6, 2012 at 12:45 PM

Obama will pay the mortgage …..

burrata on July 6, 2012 at 12:51 PM

So, the banks or investors are not being forced to suffer a loss that they have not already suffered.

tommylotto on July 6, 2012 at 12:13 PM

Yes they are. The owner of the debt is holding a promise to repay $300,000. Period.

MNHawk on July 6, 2012 at 12:49 PM

And gov’t cannot erase that debt.

The Contract Clause appears in the United States Constitution, Article I, section 10, clause 1. It states:

No State shall enter into any Treaty, Alliance, or Confederation; grant Letters of Marque and Reprisal; coin Money; emit Bills of Credit; make any Thing but gold and silver Coin a Tender in Payment of Debts; pass any Bill of Attainder, ex post facto Law, or Law impairing the Obligation of Contracts, or grant any Title of Nobility.

Thus, under Kelo the gov’t may be able to pull of this scheme of taking the property and then selling it back to the current homeowner with new financing.

But all that will accomplish is removing the collateral from the original loan. It will not distinguish the person’s obligation to repay the difference.

To some extant, banks may even welcome this. If the govt’s actual give fair market value for the properties, it saves the banks tons of money in processing foreclosures through the courts and then selling the properties. The banks can then go after the mortgagee for the difference to the extent the person can repay.

the big risk for the banks in this scenario is that the property skyrockets back up in value in a year or two and then the banks lost the opportunity to sell the properties at a higher price.

Monkeytoe on July 6, 2012 at 12:53 PM

For the life of me, I will never understand, wanting the Government to be involved. Are our citizens really this foolish? How much pain, before the majority awaken, and realize the harm done by an unregulated Government?

Bmore on July 6, 2012 at 12:53 PM

Steve Eggleston, I think there’s a lot more to the North Dakota situation than “hey, let’s do away with taxes, money is falling from the sky!!!”.

Oil riches have destroyed most jurisdictions and countries that didn’t handle them well. Meaning, don’t just throw all common sense out the window and decide to live off the black stuff coming out of the ground. Moreover – you don’t fund ongoing and routine expenses from volatile sources of income – basic common sense and public finance.

CA and a few other states have such insanely “progressive” income tax incidence that their state revenues gyrate wildly with small macroeconomic changes – because a tiny portion of the economy is paying most of the taxes.

I believe the funding arrangements in North Dakota made the tax proposal a very dubious idea from a very reasonable point of view.

IceCold on July 6, 2012 at 12:54 PM

Monkeytoe on July 6, 2012 at 12:53 PM

“distinguish” should have been “extinguish”

Monkeytoe on July 6, 2012 at 12:54 PM

Good points all. Ever since TARP, I’ve essentially regarded the banks as government-run entities. It’s just some of them don’t know it yet.

Doomberg on July 6, 2012 at 12:48 PM

I think TARP just clarified who owned who in the relationship that FDR formed with the banks and bankers. Those that thought hey controlled the levers of power got a rude awaking in 2008

unseen on July 6, 2012 at 12:55 PM

I have problems with that whole idea.

Think about it! If the property is only WORTH 120k, then why would anyone finance a 145k mortgage for it? It sounds like you have an obvious example of soaking the buyer here. Either that or you robbed the seller.

You MIGHT have a case for reducing the mortgage to the actual value of the property. But Banks already have an incentive to do that in that it would spare them the cost of foreclosure and resale. And it would server no public purpose.

OBQuiet on July 6, 2012 at 12:56 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

That’s a fundamental misunderstanding of what these commune…er, communities want to do. They want to “buy” the mortgage at a discount, have it declared “paid-in-full” with respect to the bank, and then refinance a lowered amount with (presumably) a different mortgage company.

Steve Eggleston on July 6, 2012 at 12:56 PM

IceCold on July 6, 2012 at 12:54 PM

Noted.

Steve Eggleston on July 6, 2012 at 12:57 PM

How much pain, before the majority awaken, and realize the harm done by an unregulated Government?

Bmore on July 6, 2012 at 12:53 PM

I really don’t think they have the tools nor the ability to awaken any longer. They have embraced the long cold of enslavement and found its a jealous lover.

unseen on July 6, 2012 at 12:58 PM

That’s a fundamental misunderstanding of what these commune…er, communities want to do. They want to “buy” the mortgage at a discount, have it declared “paid-in-full” with respect to the bank, and then refinance a lowered amount with (presumably) a different mortgage company.

Steve Eggleston on July 6, 2012 at 12:56 PM

yeap they want to be minifeds.

unseen on July 6, 2012 at 12:59 PM

All of this to achieve a nano-second of “stability” – redefined to mean “every entity and person in the biz gets to keep their current position and assets and cashflow”. Not stability to the system in any real market sense.

IceCold on July 6, 2012 at 12:49 PM

Stability of the yearly bonuses on Wall Street, that’s what they strove to achieve. Too bad OWS mutated (under the not-so-gentle prodding from DNC) into an unwashed drug-addled hippie gang; the original idea behind it was as solid as that of the Tea Party.

Archivarix on July 6, 2012 at 1:02 PM

I have problems with that whole idea.

Think about it! If the property is only WORTH 120k, then why would anyone finance a 145k mortgage for it? It sounds like you have an obvious example of soaking the buyer here. Either that or you robbed the seller.

You MIGHT have a case for reducing the mortgage to the actual value of the property. But Banks already have an incentive to do that in that it would spare them the cost of foreclosure and resale. And it would server no public purpose.

OBQuiet on July 6, 2012 at 12:56 PM

Let’s run through the numbers again…

- Original mortgage – $300,000
- Current balance on the mortgage – Somewhere north of $150,000
- Current value of the property – $150,000
- Court-mandated seizure of the mortgage – $120,000
- New mortgage on the property – $145,000 (assuming the home”owner” could come up with $5,000 – and I’m sure the city would be glad to “help” meet that 3.33% down payment)

Steve Eggleston on July 6, 2012 at 1:03 PM

IceCold on July 6, 2012 at 12:49 PM

Thank you. :) You cleaned it up for me. It’s chaos, with due process. Exactly what I was trying to sketch in my brain thing.

Axe on July 6, 2012 at 1:03 PM

That’s a fundamental misunderstanding of what these commune…er, communities want to do. They want to “buy” the mortgage at a discount, have it declared “paid-in-full” with respect to the bank, and then refinance a lowered amount with (presumably) a different mortgage company.

Steve Eggleston on July 6, 2012 at 12:56 PM

Again, this runs afoul of the The Contract Clause appears in the United States Constitution, Article I, section 10, clause 1. It states:

No State shall enter into any Treaty, Alliance, or Confederation; grant Letters of Marque and Reprisal; coin Money; emit Bills of Credit; make any Thing but gold and silver Coin a Tender in Payment of Debts; pass any Bill of Attainder, ex post facto Law, or Law impairing the Obligation of Contracts, or grant any Title of Nobility.

But, I have no doubt our supreme leaders on SCOTUS can interpret that to mean that the gov’t can step in an impair contract obligations.

But, the reality is, if they are not “taking” the real property, but instead are “taking” the mortgage, then the gov’ts will never win. When taking, the gov’t has to pay fair market value. Fair market value for a $300,000 mortgage is $300,000 regardless of the value of the property being used for collateral.

Thus, the gov’ts will have to pay the mortgage in full.

Of course, this is all with the caveat that the Courts can “interpret” things to be completely insane. But under current precedent, this would never stand. If they “take” the property and not the mortgage, then the mortgagee still owes the difference.

If they take the Mortgage, they have to pay the fair market value, which is the amount owed pursuant to the loan.

Monkeytoe on July 6, 2012 at 1:05 PM

Economic idiocy rarely ends well. Compounded with an open invitation for investment fraud and you have an impending disaster.

pat on July 6, 2012 at 1:08 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

Damn good question, which is why I was disappointed that North Dakota voters refused to get rid of their state property tax.

Steve Eggleston on July 6, 2012 at 12:49 PM

This is California, and Tax forfeitures are already following right behind foreclosures. So if anything my best guess here is that Kelo is being applied for the sole reason of stemming the loss of tax revenues resulting from the current foreclosure rates.

If you bothered to read what they are proposing this whole scam is based on the notion essentially of the State of California stepping in and acting as a binding arbitrator with the ability to forgive debt and restructure loans to fit the new debt structure. Basically this is State enforced loan reduction.

They are not talking about seizing these houses from the homeowners forcing them out on the street and selling the houses to new homeowners, (I’m not saying that that won’t end up happening) what they are talking about is seizing the mortgages from the lenders, reducing the amount owed and selling them back to the same homeowner under an new reduced loan structure.

Why are they dong this? Well as nearly as I can tell because the most common practice here in California is, once your mortgage lender or bank informs you that they are foreclosing on you, the home owner simply quits making any payments, and then refuses to move out of the house. Because of California’s laws regarding the eviction process it can take upwards of 5 years to actually get a homeowner off the property they were purchasing.

That’s 5 years of no money being paid to the mortgage company and 5 years of ZERO Tax revenue from the property in question. California’s government is flat a$$ broke, seriously hardcore broke. This is most likely about restoring the Tax revenue stream that these foreclosures have disrupted.

SWalker on July 6, 2012 at 1:09 PM

Monkeytoe on July 6, 2012 at 1:05 PM

Put another way, I think these communities, and many commenting here, are confusing the value of the collateral with the value of the loan.

There are often loans given out with no collateral. there are loans given out with collateral of lower value than the amount of the loan. There are loans given out with collateral of higher value than the amount of the loan.

The value of the collateral does not effect the value of the loan.

If I owe you $100,000, it doesn’t matter whether the collateral is worth $10k or $1 mill. I still owe you $100,000.

All the collateral is, is something tangible that I have priority interest in to sell/repossess, whatever to protect my investment of loaning you money.

Thus, the idea that the communities can only pay $150,000 on a $300,000 loan b/c of the value of the collateral flies in the face of contract law.

The courts would have to re-write contract law, takings law, and constitutional law for this to succeed.

I’m not saying they won’t do it. But I don’t think it is likely.

Monkeytoe on July 6, 2012 at 1:10 PM

For the life of me, I will never understand, wanting the Government to be involved. Are our citizens really this foolish? How much pain, before the majority awaken, and realize the harm done by an unregulated Government?

Bmore on July 6, 2012 at 12:53 PM

I really don’t think they have the tools nor the ability to awaken any longer. They have embraced the long cold of enslavement and found its a jealous lover.

unseen on July 6, 2012 at 12:58 PM

Heh. Unseen waxed poetic. :) But, Bmore, it isn’t “the people.” It’s the cliche cronies in cliche crony capitalism. The bank gets shafted, the little guy gets “mortgage refinancing” by a loving democrat — but track the money and look who gets paid. The loving democrat and his or her friends.

That would leave $25,000 in profit, minus the origination costs, to be divided between the city, Mortgage Resolution Partners and its investors.

Sarah Jessica was smiling because she is one of the enlightened good guys and has nothing to fear, what with a phone and some numbers on it.

Axe on July 6, 2012 at 1:16 PM

Ed and Allah:

Please please please PLEASE stop the ads on the right sidebar that have videos that start when you load the page and are not muted. I open new pages in new tabs and try to have music going from itunes, the last thing I want to do is try to find the source of whatever is playing and stop it. It should be defaulted to MUTE!!!!!

Also stop having pages reload after 5 minutes, that is really annoying too, especially when you are in the middle of watching a video link!

/end rant

OhioBuckeye7 on July 6, 2012 at 1:17 PM

If such mortgages are selling for $0.50 on the dollar, then fair market value can be determined to be $150,000.

Additionally, if the property is only worth $150,000 and the borrower has no ability to pay anything in excess of the value of the property, then a $150,000 valuation could certainly be determined by a judge.

blink on July 6, 2012 at 1:12 PM

You are correct that the fair market value of the loan may be less than the pay-off value, depending on the market for re-sale of the loans. but that is not the same thing as the value of the collateral – which is what everyone on this thread is claiming.

As to your second point – no. Not correct. A judge cannot determine that you only owe $150,000 on a $300,000 loan b/c the collateral is only worth $150,000 and you can’t pay any more. It does not matter what you can pay. You owe what you owe. I may not be able to collect on what you owe, but a judge cannot reduce it simply b/c he wants to. Your ability to pay only matters in bankruptcy court.

The only kind of court that can do that is a bankruptcy court. Which is fine, if the person wants to declare bankruptcy, they can. but a standard judge cannot lower an amount owed based on ability to pay.

Monkeytoe on July 6, 2012 at 1:17 PM

I can’t help thinking, day by day, how much the Obama Administration echos the early parts of the Italian Fascism of the late 19-teens and 20s. Even the racial aspects – while turned on their head – are there.

WashingtonsWake on July 6, 2012 at 1:20 PM

the only kind of court that can do that is a bankruptcy court. Which is fine, if the person wants to declare bankruptcy, they can. but a standard judge cannot lower an amount owed based on ability to pay.

Monkeytoe on July 6, 2012 at 1:17 PM

Or value of collateral. It’s irrelevant to the loan.

Monkeytoe on July 6, 2012 at 1:20 PM

“Obama Administration” is really the wrong phrase, it’s really the modern American Liberalism. I don’t think “Liberalism” is at all liberal in any sense of the word. This neo-natal fascio-marxism is brutal to watch explode from the womb of American Heritage.

WashingtonsWake on July 6, 2012 at 1:21 PM

No, I didn’t say that a judge could determine that you owe less.
I said that a judge could determine that the fair market value of the loan is less.
I’m not arguing that the law would withstand judicial scrutiny. I’m merely arguing that a judge could most certainly determine that the fair market value of a loan is less than the face amount of a loan.
blink on July 6, 2012 at 1:20 PM

An unrestrained judiciary becomes a scourge on the economy then. Judges and Bureaucrats are now in a position to determine the value, life and liberty of each and every citizen.

Of course, if anyone challenges this, they can call it a ‘Tax’ on homeowners who declined to sell their property at the demand of government. Congress – and presumably other legislatures – have the right to tax non-actions.

WashingtonsWake on July 6, 2012 at 1:25 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.”

…the INSANITY probably won’t end there. What about the $280,000 the investors lost ? Expect bailout bernanke and/or TAX CHEAT tiny tim geithner to then come to the rescue and give the investors $280,000 of our tax money to prevent their “too big to fail” collapse – thus shafting all Americans for the housing problems in the people republic of california.

TeaPartyNation on July 6, 2012 at 1:25 PM

Bio on the chairman of the company proposing this “solution”.

Steven M. Gluckstern
Chairman
In addition to serving as Mortgage Resolution Partner’s Chairman, Gluckstern currently serves as Chairman of Ivivi Health Sciences LLC, a privately financed San Francisco based medical technology firm.

Previously, Gluckstern was a general partner of…

Previously, Gluckstern was a general partner of Azimuth Trust Company LLC, an alternative asset management firm that Gluckstern co-founded in 2002 and served as its CEO until 2005.

From 1993 to 1998 and from 2001 to 2002, Gluckstern held a range of executive and financial positions within the Swiss-based Zurich Financial Services Group. In 1998, he co-founded Capital Z Partners. This alternative asset/private equity management firm managed over $4 billion in two global funds. In 1988, Gluckstern also co-founded Centre Reinsurance, the first specialty financial reinsurer, with $250 million of venture capital, making it one of the largest start-ups of its kind.

Prior to Centre Reinsurance, Gluckstern worked for investor Warren Buffett and served as General Manager of reinsurance operations of the Berkshire Hathaway Insurance Group, President of Columbia Insurance Company, and Senior Vice President of National Indemnity Company. Earlier he was Chief Financial Officer of Healthco Inc., the then largest distributor of dental products in the world. He started working in the business world as an investment banker at Lehman Brothers.

Prior to his time in business, Gluckstern spent seven years as a teacher and school administrator.

Gluckstern holds a BA in Psychology and Natural Sciences from Amherst College, an Ed.D in Administration and Organizational Change from The University of Massachusetts at Amherst, and an MBA from Stanford University Graduate School of Business where he was an Arjay Miller Scholar.

and of the CEO….

Graham Williams
Chief Executive Officer
Williams has provided executive level leadership, direction and insight to four large consumer finance companies. His vast experience in startups spans three companies where he was President or CEO and also the first employee hired.

During his time as Senior Vice President and Director…

During his time as Senior Vice President and Director of Residential Lending at Bank of America in the 1990′s, Williams recruited and led a team that improved the bank’s national mortgage origination ranking to 5th from 100th in four years. He also created the bank’s award-winning low-income housing initiative, “Neighborhood Advantage”, and developed credit policy, pricing models, capital markets and portfolio management tools. As CEO of a $4 billion federal savings bank during his tenure with ITT Financial Services, Williams has also managed regulated entities.

While serving as Sr. Vice President of Risk Management at GE Capital, Williams provided leadership, direction and insight necessary to anticipate and monitor the risks associated with an evolving global customer base in a $250 billion portfolio of mortgage assets and insurance products. He also led GECC’s prudent growth in mortgage originations, driving annual mortgage production from $5 billion to over $20 billion in just 18 months.

Williams earned an MBA in Finance while attending the University of Southern California on a fellowship. At California Polytechnic University, he graduated cum laude in Finance, Insurance and Real Estate.

Oil Can on July 6, 2012 at 1:25 PM

Monkeytoe on July 6, 2012 at 1:05 PM

You know it and I know it, which is why the locals are trying to stretch eminent domain to cover the seizure of the mortgage/lien, and then use a local court elected by the same people who benefit from a lowball offer to impose said lowball offer. Given the current makeup of SCOTUS, and their willingness to say that if any part of the Constitution allows a government action, it’s “constitutional” even if a different part expressly prohibits said action, I can’t rule out the likelyhood that they’ll succeed.

Steve Eggleston on July 6, 2012 at 1:26 PM

Fake redo’s will only break it twice as badly. Soon they will have even less worth.

Bmore on July 6, 2012 at 1:26 PM

But if the “market” for such loans thinks that you can’t pay any more than the value of the collateral, then it’s quite possible that the fair market value of such loans will only be worth the value of the collateral – or even less than the value of the collateral since it will cost money to realize the value of the collateral (due to administrative and legal expenses).

Think about it this way. Let’s say a public company, ABC Company, has only one assets – a $100 million loan on a property that was purchased for $100 million. Now, let’s say that the real estate market has made it obvious that the property is now only worth $50 million and that it’s obvious that the borrowing entity has no other method for repaying the loan. Now, I would expect that ABC Company’s stock would trade down to a market cap of $50 million. Right?

blink on July 6, 2012 at 1:18 PM

The “market” for a loan is not looking at individuals and their ability to repay – other than generally in a pool of similar loans from similar areas. In other words, the mortgage market does not look at individual loans and individual mortgagees and determine what they can pay. They look at like properties and like credit risks and what they will pay for a bundle of loans like that.

So, lets say there are 10 types of home mortgages that are sold, from 1 being loan less than collateral value and people who can obviously make payments to 10 underwater mortgages with risky borrowers. Let’s call this loan a 7. You look to what the market is doing as to those loans to determine fair market value. I.e., what can the bank sell this loan for on the open market. If it is at 80% value, so be it. That is fair market value.

What you are describing is the court looking over this specific property and making a very specific analysis of what this property is currently worth and then combing over the borrowers finances to determine what they can pay and coming up with a value for the loan.

that would not be fair market value. That is akin to bankruptcy, which a court cannot do. The value of the loan is not the value of the collateral. It is the value it can be sold right now on the actual loan market (not what the judge thinks its worth) or it is the face value of the loan (not the value of the collateral).

Monkeytoe on July 6, 2012 at 1:28 PM

Information on company…

http://mortgageresolutionpartners.com/

Mortgage Resolution Partners helps communities. Our efforts serve to keep as many homeowners with underwater mortgages in their homes as possible, aiding in the stabilization of local housing markets and economies. Implementation of the MRP mortgage resolution approach by local government partners acts as a catalyst for similar programs in other communities and for broader policy changes, helping to alleviate the US mortgage crisis.
.

Oil Can on July 6, 2012 at 1:31 PM

Except that Kelo doesn’t run up against the bankruptcy code. Kelo allows a judge to determine the fair market value of an asset and seize such assets in exchange for that value – outside of bankruptcy – if certain conditions are met. LA seems to be arguing that the same “community interest” conditions are met for this law as they are for Kelo.

blink on July 6, 2012 at 1:23 PM

You are missing my point. You are claiming that the “fair market value” can be determined on a person’s ability to pay. That is not correct. At least not in the sense you are using it.

The way you are using it is bankruptcy. Deciding what a person’s obligation to repay a loan is based on their ability to pay.

The mortgage market does not get so fine into each individual borrowers ability to pay. It is more of a big picture risk factor assigned to certain loans, that is all. You are arguing that a judge can actually look at an individuals ability to pay and determine the loan value based on that. Which is what bankruptcy is for. It would never fly.

Monkeytoe on July 6, 2012 at 1:31 PM

This approach seems eminently reasonable.

And constitutional!

After all, it’s essentially a tax!

You just need to look at it from the right angle …

/s

RedPepper on July 6, 2012 at 1:34 PM

I’m not arguing that the law would withstand judicial scrutiny. I’m merely arguing that a judge could most certainly determine that the fair market value of a loan is less than the face amount of a loan.

blink on July 6, 2012 at 1:20 PM

I don’t disagree that the judge can determine the value of the loan is less than the face amount. I disagree that it will be based on the value of the collateral or the person’s ability to repay in a specific sense. It will depend instead on what the current market for similar types of loans is. In other words, the judge cannot say “b/c the property is only worth 1/2 and the person is poor, the loan is only worth 1/2″. If the person is poor, and the property is worth 1/2 the loan, but similar mortgages are selling on the market at 80% – then 80% has to be the fair market value of the loan, regardless of the collateral value or the person’s actual ability to repay.

Monkeytoe on July 6, 2012 at 1:35 PM

So if I understand this Kelo/Marxist…oops, Kelo/mortgage game, they are merely treating houses in the identical manner in which Obama treated the very public General Motors property. First they confiscated it using the autocratic powers of the almighty government and then they give it to a friend for a lesser sum? (underwater mortgages or underwater union pensions are the same thing, aren’t they?)and then the benevolent government power claims credit for having saved the property?

See, who needs God anymore with infinite power of the Godless men available and eager to help their fellow man?

Thanks again John Roberts for your conservative votes.

Don L on July 6, 2012 at 1:37 PM

Doesn’t eminent domain only apply to real estate?

No. The power of eminent domain applies to every kind of property, including real estate, tangible personal property (goods), and intangible personal property (loans and other contracts).

Can the government acquire performing loans, or only defaulted loans?

As long as it is acting to further a public purpose, a government may acquire any kind of loan including performing, delinquent or defaulted loans. A government may purchase underwater performing loans to further a number of purposes — as years of crisis have proven, negative equity is the single greatest predictor of future default, and it creates harm even absent default (including reduced homeowner investment in property maintenance and dislocation in the local property sales market and worker mobility because of restrictions on short sales).


What rights will the loan owners have?

The trusts that currently hold the mortgage loans will have the right to receive the fair market value of the loans. This includes the right to a trial to determine the fair value of the loans if the trusts disagree with the government’s valuation.

etc. :)

From Oil Can’s link, the FAQ.

Axe on July 6, 2012 at 1:40 PM

What is the fair market value of a loan, and how will you determine it?

Fair market value is the price that a willing buyer would pay a willing seller, neither under any obligation to buy or sell. Similar sales of troubled loans in the secondary market exist and are good evidence of fair value. These sales occur at a significant discount to the fair value of the home because of the “foreclosure discount” — the market’s recognition of the cost in time, money and effort to foreclose on the homeowner and thereafter to maintain and sell the property. We will use these market data points and supplemental methods including discounted cash flow modeling.

etc. (done)

Axe on July 6, 2012 at 1:41 PM

Specific criterion such as the net worth of the borrower are always used to determine the market value of bonds and loans.

blink on July 6, 2012 at 1:40 PM

Really, when mortages are re-sold, the current net worth of the borrower is part of the package? How does a bank do that when I originally took out the loan 5 years ago and don’t bank with that institution? Where do they get the information as to my current net worth when they re-sell the mortgage?

I don’t think you understand how the mortgage re-sale market works. Nobody investigates each individual borrowers net worth, property value, etc. They are bundled together and assigned a general risk factor.

You are mistaking the judge for the market. The judge cannot sit as the market. If I come in with evidence that I can put this mortgage on the market right now and sell it at 80%, it does not matter one iota what the person’s ability to repay is or the collateral value is.

You are confusing refinancing, wherein a bank checks your records, your credit score, your assets, etc. with the market between banks in selling mortgages. It is 2 different things.

Monkeytoe on July 6, 2012 at 1:47 PM

Everything you just said seemed completely normal and sensible.

Weird.

Axe on July 6, 2012 at 12:47 PM

Wow, no one has ever called me normal or sensible before. Too bad we can’t apply those qualities to our government at all levels.

hopeful on July 6, 2012 at 1:47 PM

So if I understand this Kelo/Marxist…oops, Kelo/mortgage game, they are merely treating houses in the identical manner in which Obama treated the very public General Motors property. First they confiscated it using the autocratic powers of the almighty government and then they give it to a friend for a lesser sum? (underwater mortgages or underwater union pensions are the same thing, aren’t they?)and then the benevolent government power claims credit for having saved the property?

See, who needs God anymore with infinite power of the Godless men available and eager to help their fellow man?

Thanks again John Roberts for your conservative votes.

Don L on July 6, 2012 at 1:37 PM

You pretty much got it, though the UAW got their shares of GM and Chrysler for nothing more than donations to the DemocRAT cause. In fact, in GM’s case, they got it for less than nothing as they have now recovered over 100% of what GM owed them pre-bankruptcy, and are on track to do the same overall.

Steve Eggleston on July 6, 2012 at 1:58 PM

Reading comprehension is not your strong suit, is it?

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

It is much better than yours.

Dante on July 6, 2012 at 2:00 PM

CorporatePiggy on July 6, 2012 at 12:02 PM

SCOTUS ruled that it was legal. However legal, ethical and moral are not synonyms.

chemman on July 6, 2012 at 2:07 PM

It is much better than yours.

Dante on July 6, 2012 at 2:00 PM

It’s easy when you only read a third of one sentence.

Steve Eggleston on July 6, 2012 at 2:07 PM

they have now recovered over 100% of what GM owed them pre-bankruptcy, and are on track to do the same overall

Steve Eggleston on July 6, 2012 at 1:58 PM

See how much more efficient life can be when you are sitting at both ends of the negotiating table?

Snark, but too bitter for a smiley.

Axe on July 6, 2012 at 2:08 PM

Is that the landlord, Mr. Roeper from Three’s Company?

michaelthomas on July 6, 2012 at 2:15 PM

I would love to see them try to sort out who they are stealing the mortgages from considering the mess that MERS made of the entire recording of mortgages.

Nathan_OH on July 6, 2012 at 2:27 PM

… who needs… to worry about the government?/
.
.
.
…F R E E D O M…!!!

KOOLAID2 on July 6, 2012 at 2:31 PM

…F R E E D O M…!!!

KOOLAID2 on July 6, 2012 at 2:31 PM

*clink*

Axe on July 6, 2012 at 2:34 PM

Ed this wouldn’t destabilze the mortgage market…it would destroy it along with every other lending market in our country. What lender would ever again lender money when a state could seize that promissory note and unilaterally negotiate it’s terms?

Without the prmoise to repay secured by the property, the covenenat is broken and no lender will even lend again.

DrW on July 6, 2012 at 2:37 PM

I’m not known for being overly bright but isn’t a mortgage a contract? Doesn’t contract law trump eminent domain?

E9RET on July 6, 2012 at 2:37 PM

I think I get what blink is saying, thought it takes a bit of head-twisting to get there. (S)He and Monkeytoe seem to be talking past each other a bit, without meaning to.

The idea here is not about the contract value of the loan, which Monkeytoe is correct to say that is owed regardless of the value of the collateral. But the government uses eminent domain to seize property and recompense the owner of the property.

In this case, the property is the loan and the owner is the note holder, i.e. the bank. So the government seizes the loan from the bank, thereby relieving them of ownership, gives them what a judge deems “fair market value” of the loan itself – without regard for what was owed – and then does what it will with the mortgage, from the sound of it, rewriting it to the value of the lot and creating a new mortgage agreement with the house-haver based on that new formula.

The two possible outcomes would be a). that the bank can still go after the homeowner for the balance of the contract or b). the government can say you don’t OWN this loan any more and therefore have no leverage to go after the homeowner. You got recompensed for the seizure of your property and that ends your affiliation with it.

This is what blink means by fair market value: it’s of the loan, not the collateral securing it. It kinda takes the mortgage situation to a meta level, which is what seems to be causing the conflicting ideas here.

That said, I do think the arguments to its negation of contract law are correct, and whether the courts end up agreeing or not, that will probably be the basis on which people sue to get rid of this ludicrous law.

The Schaef on July 6, 2012 at 2:39 PM

John Roberts is on the case.

Valiant on July 6, 2012 at 2:42 PM

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

The banks don’t operate in a free-market vacuum, free from government influence, interference, and outright coercion. Remember ‘redlining’?

And the banks are holding those toxic assets because TARP wasn’t used to buy out toxic assets.

Remember that some of the banks were forced to take TARP funds, and others didn’t take any at all, yet all banks and investors (it isn’t just banks that hold MBS) will get screwed.

Furthermore, these are CONTRACTS. I don’t care who holds the contract – if they didn’t break any laws in obtaining the contract, the government has no right to come along and have it modified.

First it will be the ‘banks’ because it’s popular to do it. Then it will be other people who hold mortgages because they are rich, and landlords because they are ‘ripping of renters’.

blindside on July 6, 2012 at 2:42 PM

Where to start on this nonsense, given to us courtesy of David Souter?

And eventually some Democrap will come up with a bill designed to tax us for eschewing something besides health insurance. See how that works?

Akzed on July 6, 2012 at 2:45 PM

I can’t help thinking, day by day, how much the Obama Administration echos the early parts of the Italian Fascism of the late 19-teens and 20s. Even the racial aspects – while turned on their head – are there.

WashingtonsWake on July 6, 2012 at 1:20 PM

If I may digress briefly from the topic at hand for a moment, I’d like to respectfully disagree with this statement. In fact, Italian fascism was mainly devoid of the racist elements found in the German ‘national Socialist’ variety. Fascism in all its various implementations was very nationalistic (one of the principal differences between fascism and the other major socialist movement of the 1920s, Marxism/Communism which tended to be anti-nationalistic, seeing nationalism as an obstacle to the Communist dream of world workers united), but unlike the German variant, it was not overtly racist. Italian fascism also was not anti-Jewish, although there were some anti-Catholic elements.

StoneHeads on July 6, 2012 at 2:46 PM

On the plus side, this will likely be used to keep liberals in their crumbling liberal cities and states along with conservatives who were too dumb to get the hell out while they still could.

mintycrys on July 6, 2012 at 2:48 PM

Can we build walls around those cities and cut off all communication with the outside world?

blindside on July 6, 2012 at 2:53 PM

Additionally, if the property is only worth $150,000 and the borrower has no ability to pay anything in excess of the value of the property, then a $150,000 valuation could certainly be determined by a judge.

blink on July 6, 2012 at 1:12 PM

So I could buy a car I can’t afford, then use this process to prove I can’t pay for it and its worth less than I owe, and then a judge could say I only have to pay the current market value.

Thats great news. I’m placing an order for a gigantic motorhome today!

BobMbx on July 6, 2012 at 3:01 PM

Nathan_OH on July 6, 2012 at 2:27 PM

I second that emotion.

DevilsPrinciple on July 6, 2012 at 3:06 PM

Specific criterion such as the net worth of the borrower are always used to determine the market value of bonds and loans.

blink on July 6, 2012 at 1:40 PM

Wrong. The specific criteria you speak of determines the creditworthiness of the borrower (the ability to repay the loan). Without government intervention, the poor person would not qualify to purchase a home he can’t pay for.

What a horror that is.

BobMbx on July 6, 2012 at 3:08 PM

Only if Kelo was applied – meaning that this can only be done if a judge agrees that it’s in a local community’s best interest to purchase the loan on your car. I doubt that argument could ever be made.

blink on July 6, 2012 at 3:06 PM

The process as described puts cash in the coffers of the local community and the re-financer. It doesn’t seem to matter what the borrowed funds are for. As long as the state gets their cut (best interest), the standard is met.

BobMbx on July 6, 2012 at 3:11 PM

Oh, and for Blink, you should watch Dr. Zhivago.

That’s where the policies of the current administration are headed.

“A workers paradise”

BobMbx on July 6, 2012 at 3:17 PM

2. The local government wants to seize loans from the lender at “fair market value.” The FMV will depend upon the borrowers ability to repay the loan. The less ability to repay, the closer the value of the loan will be to the value of the property.

Btw, is California one of those homestead (or whatever it’s called) states that don’t allow lenders to attack borrowers beyond property seizure?

blink on July 6, 2012 at 3:16 PM

And if the homeowner is unemployed? Whats the value of the home?

$0.00?

BobMbx on July 6, 2012 at 3:19 PM

No, it doesn’t. It merely reduces foreclosure risk which reduces risk that homes in foreclosure will stagnate a community and cause blight.

The same can’t be argued for a car that you’re unable to afford anymore.

blink on July 6, 2012 at 3:18 PM

Bolded portion:

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.

“public good”.

BobMbx on July 6, 2012 at 3:22 PM

I love the scene where he’s told that his house is big enough for multiple families, and he said, “yes, this is much more just.”

Thats called “surviving the purge”. Quick thinking.

Its my favorite movie. I saw it first when I was 4 or 5.

BobMbx on July 6, 2012 at 3:25 PM

No judge would accept that as meeting the “public good” criteria of Kelo.

blink on July 6, 2012 at 3:27 PM

Are you sure about that?

trigon on July 6, 2012 at 3:32 PM

I guess the only thing I’m really wondering is whether they will inadvertently collapse the lending markets, or whether this is deliberate.

trigon on July 6, 2012 at 3:35 PM

Why are you confusing the value of the home with the value of the loan?

The value of the loan is what is written in the “Amount Borrowed” block.

If you loaned your bud $20, and he got fired and could only get a job flipping burgers, how much does he owe you?

BobMbx on July 6, 2012 at 3:41 PM

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

beatcanvas on July 6, 2012 at 11:57 AM

I’m looking at buying a Greek island……..

GWB on July 6, 2012 at 3:41 PM

No judge would accept that as meeting the “public good” criteria of Kelo.

blink on July 6, 2012 at 3:27 PM

Side bar: Since the premise of “public good” did not materialize on the Kelo property (in fact, IIRC its just a vacant lot having been abandoned by the developer), wouldn’t that tend to negate the value of a Kelo argument in an eminent domain proceeding?

If I was defending in a such a case, I might just ask the plaintiff “since you brought it up, how did that work out?” so the judge (or jury) could here the result of the case that generated the case before them.

BobMbx on July 6, 2012 at 3:47 PM

Monkeytoe on July 6, 2012 at 12:53 PM

I don’t think you understand what they are doing. They are taking over the mortgage from the bank, and giving the bank $.50 on the dollar for it. The homeowner no longer owes the bank anything. The bank just took a 50% hit. And don’t think judges will stop this – at least not the judges they will allow to sit on these cases in CA.

GWB on July 6, 2012 at 4:11 PM

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