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Here are some interesting articles pertinent to Richmond’s plan to rescue underwater mortgages by eminent domain. The bank’s efforts to stop the plan may be just posturing that will last only until discovery starts in the lawsuit, which is something the banks will not want to be subjected to.
Now we hear that “Fannie Mae and Freddie Mac may be barred from buying home loans in cities that are threatening to use ‘eminent domain’ legal powers to seize mortgages, their regulator said on Thursday.” Well, Fannie Mae and Freddie Mac are basically criminal enterprises that President Obama plans to close down: “For too long, these companies were allowed to make big profits buying mortgages, knowing that if their bets went bad, taxpayers would be left holding the bag,” the president said. “It was ‘heads we win, tails you lose.’ ”
This is all so hypocritical and cynical, as the giant lenders, who were bailed out by taxpayers, circle the wagons to make sure their victims, ordinary people and cities like Richmond, have no way to dig themselves out of the hole the lenders created.
Unbelievable.
 Eminent domain is the taking of private property by the government to advance a public purpose. The property owners must be given the market value (as best it can be determined), but they have no choice in the sale. For example, if a city is building a flood control project, and one of the fifty property owners involved refuses to sell, the city can force the sale in order to make the project happen. No single property owner can hold the community hostage. Eminent domain can’t be invoked for just anything, however, and governments have lost in court when there were other options available to them, when they didn’t pay enough compensation, or when the project wasn’t important enough to merit such a taking.
If you don’t know much about eminent domain, you’re about to learn, thanks to the city of Richmond, California.
Richmond is a working class town on the east side of the San Francisco Bay, mostly African-American and Hispanic, whose residents have incomes and educational levels below the California state average and higher than average poverty levels (Census figures here). Oh, and they’ve got a big problem with underwater mortgages. Residents of Richmond say that they have tried, without success, to have their mortgages adjusted. City officials are worried that walk-aways or foreclosures will devastate an already struggling area, and have decided to enter the fray.
Richmond, working with Mortgage Resolution Partners, has offered to purchase 624 mortgages that are seriously underwater, and has threatened to force the sales by invoking eminent domain. They would then rework the terms of the loans to match the current property value (with MRP doing the financing), and set the homeowners back up in their own homes.
As you might guess, the banks are not thrilled with this. The purchase offers are based on the actual value of the properties, which is at a discount compared with the paper values, and the banks don’t want to give that up. Also, banks are used to doing the seizing, not being seized themselves. Worst of all, what will happen when word gets around to other cities who are in the same boat?
With approval from Fannie Mae and Freddie Mac, various banks that service and/or own these loans have filed suit, joined by investment firms like PIMCO, and BlackRock. The Federal Housing Finance Agency (Fannie and Freddie’s regulator) filed a notice in the Federal Register [pdf] last year when this approach first began to be raised, noting their concerns and opposition to what Richmond is doing:
Among questions raised regarding the proposed use of eminent domain are the constitutionality of such use; the application of federal and state consumer protection laws; the effects on holders of existing securities; the impact on millions of negotiated and performing mortgage contracts; the role of courts in administering or overseeing such a program, including available judicial resources; fees and costs attendant to such programs; and, in particular, critical issues surrounding the valuation by local governments of complex contractual arrangements that are traded in national and international markets.
Note, please, that FHFA’s mission is to protect Fannie and Freddie, and through them, the secondary mortgage market. It’s not to protect consumers from predatory mortgage practices or communities from being devastated by rapacious financial industry folks. As the LA Times noted, Fannie et al. are bothered by the use of eminent domain because it might hurt their bottom line:
The use of eminent domain is “a serious issue that has the potential to unsettle investors in mortgage securities,” Fannie Mae Chief Executive Timothy J. Mayopoulos said Thursday.
Um, that’s kind of the point. Eminent domain has done what nothing else — including federal so-called regulators — has managed to do: get their attention.
Now things turn to the courts, and this is where things get very, very interesting. If the banks and investment community were unsettled by the threat of eminent domain, they’re going to love what happens next: discovery.
That one little word is the key to this whole fight, from the standpoint of Richmond. That’s the process by which Richmond’s lawyers can demand that the banks and investment firms turn over evidence and submit their officers and employees for questions under oath. In other words, they have to open their books.
That’s not going to make the banks happy at all.
For starters, I’d expect Richmond to force the bondholders to prove they have standing, by requiring them to provide proof that they hold the mortgage. They’ll demand that they turn over the whole MERS chain of ownership, and demand that each step in the ownership chain be proven. (Got any robosigned documents in those files?) But that’s just for starters.
The overall structure of Richmond’s eminent domain argument is pretty straightforward:
(1) These overinflated mortgages have caused significant portions of the city to become potentially blighted and pose serious problems to the city if the banks foreclose on them — or even if they merely threaten to foreclose — and the owners of the property move out. [See "Detroit"]
(2) The homeowners have tried repeatedly — without success — to rework the mortgages, both with the banks who service the loans and through various federal programs, but the incentives to the servicer banks are to prolong the process, not to refinance/rework the loan, and so they delay and deny relief, while investors in RMBSs are similarly disinclined to take a haircut on their paper profits.
(3) The City of Richmond, therefore, is left as the agent of last resort, and is taking this action to preserve the city itself.
This is where things the lawyers for Richmond will have fun as they conduct their discovery. The banks, Freddie, and Fannie want their money on these loans, but they also want to keep their records to themselves. Forcing them to choose between the loans and their shoddy bookkeeping is a nice legal lever. Initially, I’d bet that they’d come to an agreement to rework a certain amount of these loans, in exchange for no discovery. On second thought, however, they’d be worried that if one city can get them to do this, there’d be a whole line of cities following in their wake.
Can you say “pick your poison”?
Do the banks really want outside lawyers documenting their atrocities when it comes to how they marketed their loan products in the minority community? Do they want their shoddy recordkeeping on public display? Do they want their delay-and-deny, “we lost your file” approach to various loan modification programs laid out for all the world to see?
Right now, the banks and Fannie/Freddie/FHFA are trying to get Richmond to back down. That’s their best hope. If Richmond holds firm (and MRP has pledged to pay all the legal bills), it’s going to be a terrible horrible really bad year for the banksters.
Which, as I noted several years ago, might make a number of local bankers and credit unions very, very happy. Big banks threatening to redline entire communities will not endear themselves to their current customer base, let alone new customers. Yes, the local banks and credit unions better get their advertisements ready, because things may get very ugly with the big banks very quickly.
Popcorn, anyone?
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photo h/t to Jeffrey Turner and used under Creative Commons Attribution 2.0 Generic license.
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House finance regulator mulls action on "eminent domain" mortgage seizures
Thu Aug 08 20:03:38 UTC 2013 |
By Margaret Chadbourn
WASHINGTON (Reuters) - Fannie Mae and Freddie Mac may be barred from buying home loans in cities that are threatening to use "eminent domain" legal powers to seize mortgages, their regulator said on Thursday.
The Federal Housing Finance Agency, which oversees the firms, recently said it is discussing legal action against the city of Richmond, California, to try to prevent the city from using eminent domain to seize mortgages of residents who owe more than their properties are worth in a bid to keep them in their homes.
On Wednesday, an investor group filed a federal lawsuit against the northern California city in a bid to stop the plan.
The lawsuit was filed in a northern California court by mortgage bond trustees Wells Fargo and Deutsche Bank on behalf of an investor group that includes Pacific Investment Management Co, or PIMCO, BlackRock Inc and DoubleLine Capital LP.
The use of eminent domain powers to restructure distressed mortgages has been debated by communities for more than a year and has been controversial with Wall Street banks and bond investors from the start.
Alfred Pollard, FHFA's general counsel, said in a memorandum posted on the agency's website on Thursday that the uncertainty surrounding the use of eminent domain raises several issues, including its possible impact on the mortgage market and potential losses that Fannie Mae and Freddie Ma could incur.
"There is a rational basis to conclude that the use of eminent domain by localities to restructure loans for borrowers that are "underwater" on their mortgages presents a clear threat to the safe and sound operations of Fannie Mae, Freddie Mac and the Federal Home Loan Banks as provided in federal law," Pollard wrote.
The FHFA is weighing its legal options in any municipalities that approve loan restructuring programs. The agency is also considering preventing Fannie and Freddie from purchasing loans in those communities using eminent domain as a strategy for restructuring distressed mortgages.
Both Fannie and Freddie, operating under federal conservatorship since they were taken over by the government in 2008 during the financial crisis, are some of the biggest buyers of private home-loan bonds. If eminent domain plans went forward, they would risk losses on bond investments.
Eminent domain is a well-tested power by local government to get a court order to take over a property it deems either blighted or needed for the public good. Historically cities have used the power to force the sale of properties if they obstruct the construction of a project deemed beneficial to the wider community, such as a road or bridge.
(Reporting By Margaret Chadbourn) |
Obama Outlines Plans for Fannie Mae and Freddie Mac
Obama's Ideas to Help Homeowners: The president outlined his plans to help responsible Americans own homes and addressed he bipartisan effort to overhaul the mortgage finance giants Freddie Mac and Fannie Mae.
By JACKIE CALMES
PHOENIX — President Obama hailed both this city’s and the country’s comeback from the housing bust on Tuesday, and said it was now time to reduce the federal role and risk in the mortgage market “to make sure the kind of crisis we went through never happens again.”
Readers shared their thoughts on this article.
He proposed to “wind down” Fannie Mae and Freddie Mac, for the first time outlining his approach to overhauling the two giant mortgage-finance companies that were taken over by the government when they failed nearly five years ago. The companies, which Mr. Obama described in an appearance here as “not really government, but not really private sector,” recently began to repay taxpayers.
“For too long, these companies were allowed to make big profits buying mortgages, knowing that if their bets went bad, taxpayers would be left holding the bag,” the president said. “It was ‘heads we win, tails you lose.’ ”
Since early 2011, the administration has voiced support for overhauling Fannie Mae and Freddie Mac, which long benefited from an implicit government guarantee. Years ago the companies came to symbolize a self-dealing Washington culture beneficial to both parties, and especially Democrats, but Mr. Obama’s remarks on what comes next were his most specific. For several years, the administration held back from revamping the mortgage-finance system for fear of rattling a weakened market.
Mr. Obama on Tuesday endorsed the thrust of bipartisan legislation from a Senate group that would “end Fannie and Freddie as we know them.” The so-called government-sponsored enterprises for decades bought and sold mortgages from financial institutions to provide money for the banks to keep lending to home buyers.
Under Mr. Obama’s principles, which he said were reflected in the Senate bill taking shape, Fannie Mae and Freddie Mac would further shrink their portfolios and lose the implicit guarantee of a federal government bailout. Instead, private investors would be most at risk, with the government a secondary guarantor.
“First, private capital should take a bigger role in the mortgage markets. I know that sounds confusing to folks who call me a socialist,” Mr. Obama said, drawing laughs and applause. “I believe that our housing system should operate where there’s a limited government role,” he added, “and private lending should be the backbone of the housing market.”
The president said that any measure he signed into law “should preserve access to safe and simple mortgage products like the 30-year, fixed-rate mortgage.”
“That’s something families should be able to rely on when they’re making the most important purchase of their lives,” he said.
Senator Mark Warner, Democrat of Virginia who is part of the bipartisan effort on the Senate banking committee, welcomed the president’s endorsement. “It’s good to see additional momentum,” he said in a statement.
Brian Gardner, a senior vice president in Washington at Keefe, Bruyette & Woods, wrote to clients that Mr. Obama’s address on mortgage finance was “important because the administration has not discussed it in some time.” Despite the presidential push, he said, Congress is not likely to approve a bill before 2015.
Separate legislation in the Republican-controlled House would remove the government from the mortgage market, including from the decision whether to keep providing the 30-year mortgage. But Mr. Gardner wrote that even “many free market proponents acknowledge that the government will play some backstop role in a future system” and be compensated for it.
After years in which the formerly formidable Fannie Mae and Freddie Mac and their Congressional allies blocked proposals requiring some kind of fees or risk premiums, Mr. Obama is calling for an assessment to be paid to the government on the value of mortgage-backed securities.
Under his proposals, the revenue from an assessment would help finance aid for borrowers and the construction of houses and rental properties that lower-income Americans could afford.
Mr. Obama’s focus was homeownership. But he emphasized the need for more affordable rental housing more than he had before. Advocates have called for a “rebalance” of government subsidies, which they say have too long been skewed toward homeownership and mostly benefit the affluent.
“In the run-up to the crisis, banks and the government too often made everyone feel like they had to own a home, even if they weren’t ready and didn’t have the payment,” Mr. Obama said. “That’s a mistake we shouldn’t repeat,” he said. “Instead, let’s invest in affordable rental housing.”
Mr. Obama purposely spoke in Phoenix, where weeks after taking office he first announced his ideas for providing relief to homeowners and stemming foreclosures. Here, as in much of the nation, home values and sales are up, and foreclosures are down. Before arriving at a high school gym packed with an enthusiastic crowd, he visited a housing construction company that has quintupled its work force since the bust.
But as he often does, Mr. Obama tempered his celebration of better times, and his administration’s role in helping to reach them, with acknowledgment that the recovery was not complete.
“The truth is, it’s been a long, slow process,” he conceded. “But during that time we’ve helped millions of Americans save an average of $3,000 each year by refinancing at lower rates. We’ve helped millions of responsible homeowners stay in their homes, which was good for their neighbors because you don’t want a bunch of foreclosure signs in your neighborhood.”
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