Written By: Matthew Ferrara
Matthew Ferrara
How Mortgage Resolution Trust threatens the real estate industry’s very existence: Starting in Richmond, California.
Bad ideas have a habit of sticking around.
Even after being defeated in January in San Bernardino, Mortgage Resolution Trust, a for-profit investment firm started by Phil Angelides, former California Treasurer and Chairman of the Financial Crisis Inquiry Commission is trying again in Richmond, California. As we wrote last year, MRT has been shopping for a city council foolish enough to use the power of eminent domain to seize underwater mortgages and force-down the value of the loans. They benevolently claim this would “rescue” underwater homeowners “at risk of” of foreclosure. Here’s how the scheme works (courtesy of the Star Tribune),
“Richmond, working with San Francisco-based Mortgage Resolution Partners, offers $150,000 to buy a $300,000 bank loan on a house that is now worth $200,000 and is in danger of foreclosure.
If the bank agrees, the city and the company then obtain the loan at $150,000. Richmond and the company then offer the homeowner a new loan of $190,000, which, if accepted, lowers the monthly payments and improves the owners’ chances of staying.
In such transactions, the company receives $4,500 for each completed sale and splits any additional profits with the city.
If the bank refuses to sell the loan to Richmond, then the city invokes its power of imminent domain and seizes the mortgage. It would then offer the bank a fair market value for the home.”
Sounds wonderful, right? Banks get “fair market” value, homeowners are saved, the city gets half of any additional profits, and MRT earns $4,500 per deal, offering its investors upwards of 20% returns.
Financial nirvana!
Except for one thing: The underwater loans threatened with devaluation are still performing.
The homeowners are still paying each month, even if they are technically underwater. Just because there’s a statistical risk that underwater borrowers might “walk away” or strategically default on their loans, throughout the entire housing crisis, this has happened very rarely. And in Richmond, it’s not happening to the loans in MRT’s sights. So any seizure and write down would mean that lenders, banks and their investors would be taking a government-mandated loss on the value of performing loans. Just who are their investors? Greedy, mustachioed lotharios, right? Actually, no: They are pension funds, teacher’s unions, 401k funds, and ordinary people investing in real estate assets. Not to mention American taxpayers nationwide, since many of the would-be-seized loans are owned by Fannie Mae, FHA, and other GSEs.
Oh.
That’s why the Federal Housing Finance Authority (FHFA), banks, and the Securities Industry and Financial Markets Association (SIFMA) joined forces to defeat the San Bernardino version of this plan last time. They rightly saw how abuse of eminent domain would undermine the housing market, destabilize lending, and jeopardize legal investor protections like foreclosure. Governmental seizure and write-down of performing assets would drive the little remaining private lending out of the housing market for good. Nor would credit flight be constrained to California. Revenue-hungry lawmakers across the country would copy the eminent domain idea everywhere, since it doesn’t need actual blight from foreclosed, non-performing assets, just those at risk of it.
The damage to the national economy would be catastrophic.
It would probably destroy the real estate brokerage industry.
At the heart of the brokerage industry are contracts. The abrogation of lending contracts through an abuse of eminent domain law threatens the lifeblood of the housing industry: secure lending and repayment. Furthermore, many brokerages derive their primary profits from affiliated lending companies. Real estate brokerage itself is only marginally profitable. Think back to what freezing and slow credit did to the industry since 2006. Hundreds of thousands of real estate agents, appraisers, construction workers, mortgage officers left the industry. Millions more suffered huge losses to wages. Brokerages nationwide went bankrupt, taking with them thousands of managerial, administrative and support jobs. Still today, sellers feel the impact of slow credit when it comes to selling their house; and buyer mobility suffers if it attempts to chase good-paying jobs to another city or state.
Any policies, especially discretionary ones such as eminent domain abuse, risk damaging the housing industry again, alongside a huge chunk of the national economy.
Eminent domain abuse would be uncharted territory. What would be the unpredictable, unintended consequences? Could property be accurately appraised when subject to unpredictable financial conditions in its community? Could neighborhoods where loan seizure occurs become “stigmatized” in consumers’ minds? Would MLS have any value, when consumers come to realize every home (and its neighbors) were perpetually at risk of a “short sale” (by eminent domain) whenever a city ran out of money?
Internet real estate portals should consider that unreliable prices (or just another housing slow down) will slow their visitors and ad revenue, replacing IPOs with Chapter 13′s very quickly. Search itself – as a consumer concept – could change from finding dream homes to finding least-at-risk homes. How could REALTOR.COM or Zillow claim to show or estimate that? Reports and blog content that depends upon neighborhood values – schools, fire, police, etc – might lose value, too.
We’re supposed to believe that governments (and its MRT partners) would only use eminent domain for the mortgage, not the house itself. But consider how tempting it would become to stretch even further, especially as cities face budget shortages. As recently as 2005, the Supreme Court in Kelso vs New London accepted the argument that perfectly good, above-water homes could be seized and turned over to commercial entities for purposes of generating more tax revenues. It was the largest “unintended” abuse of eminent domain in United States history. Perhaps creative policymakers will devise reasons for taking homes entirely from at-risk-of-default homeowners, turning them into subsidized housing renters in the name of some public good or other.
And if you can write down loan values at whim, why not write them up for other purposes, such as taxing lender profits?
Before you let your mind wander too far, consider the reality of it today: Mortgage Resolution Trust was started by Phil Angelides, the Chairman of the Financial Crisis Inquiry Commission and former California State Treasurer. The FCIC looked into the causes of the financial crisis, triggered by housing and lending meltdowns. Its goals were to investigate things like ”fraud and abuse in the financial sector, including fraud and abuse towards consumers in the mortgage sector… [and] the legal and regulatory structure of the United States housing market…”
Ironically, few things would be more fraudulent and abusive towards consumers (investors being consumers, too) than summarily devaluing their home loans. Redefining eminent domain to include the seizure of performing financial assets undermines, not improves, the legal and regulatory structure in the housing market. Creating conditions where credit and confidence could be harmed again – starting with millions of dollars of losses to anyone who invested in loans made to Richmond – seems dangerous.
Unless you’re trying to spark a housing crisis that would make the last one seem like a seasonal slowdown?
If you’re a housing professional and you’re thinking, well, it was defeated last time, it will probably lose this time, too, don’t count on it. Even if Mortgage Resolution Trust loses in Richmond, they’re not worried: According to the Steven Gluckstern, its chairman, they are talking to more than 30 other jurisdictions nationwide. He ”… was confident that one of them would probably enact the plan…” sooner or later.
After Kelo, can you be so sure that one of those cities – on the edge of a Stockton- or Detroit-like bankruptcy – won’t jump at the potential of sharing MRT’s profits – eminent domain, the rule of law, and the housing industry be damned?