Gideon Kanner recently asked "Whatever Happened to Condemnation of Underwater Mortgages?"
Watch this November 23, 2012 interview with the chairman of Mortgage Resolution Partners for the views from the outfit that proposed the idea of using eminent domain to take underwater mortgages. He says the idea is "not dead at all ... but it's a fair characterization to say it's moving slowly." When asked whether there is any jurisdiction in which it will defintely happen, he responded that there are places where MRP is "actively working" with government, and he is "highly confident" that it will happen.
In a classic case of burying the lede, be sure to pay attention at the 5:15 mark where he notes that "this is about economics ... they own a piece of paper, it has a value. You might argue about what that value is or isn't, but they [the bondholders] know when somebody forecloses, the value of that paper goes down." (Cue photos of anxious looking families sitting across the desks of unseen bankers.) Maybe we missed something, but isn't the proposal to take performing underwater mortgages? To us, this means the biggest Achilles Heel of this proposal is the valuation of those property interests, and just how much all of this is going to cost when Just Compensation is determined. Seems to us that no one has really made a compelling case that MRP's calculations are even in the ballpark.
When asked about the Obama Administration's "coolness" to the proposal (see 4:00 mark), he claims that the Administration has been "silent," and not cool. Really? We thought the Federal Housing Finance Agency back in August weighed in, stating: "FHFA has significant concerns about the use of eminent domain to revise existing financial contracts and the alteration of the value of the companies' securities holdings." Doesn't sound like "silence" to us. Doesn't even sound "cool.' Sounds downright icy. Has the Adminstration changed its position in the interim, or was the FHFA's statement just pre-election posturing?
See also the 6:40 mark where he states that "achieving principal reduction by whatever means we can get there" is the goal, asserting that the proposal will benefit everyone and will be "good for the bondholder." Can someone tell us how exactly taking a note that is paying and providing cash flow is "good?" We're not being snarky: if you have an idea, please tell us.
Which leads finally to the Money Question at the 7:00 mark at the end of the interview -- why are they proposing this? His answer:
I will be ecstatic, as will my investors, if we have caused to move this debate to get a solution here. I'd be more ecstatic if we made money, because making money is a good thing -- I like being an American, I like being an entrepreneur -- but when we all first came together we didn't say oh, let's figure out a way to make money, let's solve a problem. We said hey, let's figure out how we can solve this problem, if you solve problems, you know what, you tend to make money.
Even taking this at face value -- yes, investors get together all the time and sit around trying to figure out how to solve problems with making money only as the extra gravy -- he doesn't explain how using emient domain to take these performing mortgages will somehow create wealth where the presumed problem is the lack of value. These sound bytes remind us of New London redevelopment agency''s statement that happy days would be here again, if only we could take Susette Kelo's home. That case should have taught us that when private investors come to government and tell it how to solve all of its problems, and all the government need contribute is its power of eminent domain -- this is a recipe for failure, and a scheme that we should watch with jaded eyes.
