DMG,
My replies to you.
a) I don't really see someone as a homeowner if they have zero equity or less. Equity levels change as values change. In 2006, everyone who had bought the year before had over 15% equity, even if they used a 100% loan to value. So zero equity could be simply a "temporary" condition. (Of course, that does not address risk level.)
b) There is a difference between underwater and being delinquent or in default. Underwater, I guess, is none of my business as long as they are making the required payments. I think you deal with situations where they are not. Herein is the problem with that. Underwater "begs" delinquency. At 140% LTV, strategic defaults come into play. At 120% LTV borrowers who are financially stressed behave differently and will make mortgage payments based upon the perceived future. For example, prior to the Crisis, borrowers made sure to pay the mortgage first and let other debt go delinquent. Once the Crisis hit, borrowers began to pay the other debt and to let the mortgages go delinquent, especially if Negative Equity existed.
c) The central problem with delinquent, underwater properties in default is that government rules make it difficult and sometimes impossible for a lender to take back a property. This is actually not true. HAMP and other programs did delay the foreclosure process timeline, but all one needed was a Negative NPV Test result, and the foreclosure could continue. In reality, for the servicers, delaying foreclosure was profitable compared to foreclosing. As well, the terms of Trusts and even the GSEs caused delays, not government regulations.
d) That the lender took a bad risk and made a bad loan and the property won't cover their costs is not my problem or concern. But there is another problem with this statement. In most cases, it was government programs designed to encourage housing that caused a large part of the problem. Granted, by 2005, things had gotten totally out of hand, but if lenders did not make loans to sub standard borrowers, there could be liability from Government Regulatory actions like discrimination and disparate impact. So it is not a yes/no decision.
e) A mortgage IS the right to take back a property in default. If it can't be taken back in a reasonable time, process and cost, it is an unsecured loan. When the collateral means nothing, that is when loans don't get made, hurting everyone. Again, the rules of foreclosure are the problem, not market fluctuations or anything else. Not true. The loan is not unsecured at that point. Losses are incurred, but there is still recovery of funds no matter how long the foreclosure action has gone on. So it is not unsecured. (Courts have not ruled on that except in the case of 2nd mortgages, and there are now cases overturning that argument in the BK courts.) As to your when the "collateral means nothing" statement, you are making the assumption that collateral has no value based upon your preceding statement. But loans don't get made if there is no collateral. So how can people otherwise be "hurt"?
f) Instead of fixing the central problem caused by government rules, we establish new government powers. Agreed. Dodd Frank needs to be revamped or repealed and the CFPB disbanded.
g) Assuming you cannot change the rules tying the hands of lenders to get back their rightful collateral and the strategy you suggest is perfectly executed, I can see how a bad situation is dealt with and resolved. I will cover this and the rest below.
g) On the flip side of giving government the power to take private property for private purposes without limits are all the moral hazards that come with that and eventually take down all great, centrally planned economies:
1. With expanded government power comes expanded government corruption. Without a doubt.
2. Large industrial and economic players can buy that power for their own benefit. And they do. The richest counties in the United States are mostly in the DC area. Buying power isn't a small industry; it has become our largest industry.
3. Government officials can sell that power for their own benefit.
4. People without power get Trumped on, like of Suzette Kelo in New London, Vera Coking in Atlantic City, and Nancy MacGibbon in Minneapolis.
5. When victims of eminent domain get 'fair market value' for what is taken from them, they don't get fair market value.
6. And when government powers have no limit, well, we don't know and can't even imagine all of where that will lead...
Donald Trump is a great "negotiator", (he says). The victim examples listed above did not consent to entering into "negotiations with Trump or Trump-like entities. Assuming they owned their property, paid their taxes, followed the laws, kept up their homes, paid their mortgages and all that, do they have a right of privacy? Do they have a right to be left alone? Are these rights what the constitution calls unenumerated rights that areprotected by the 9th amendment in the constitution? Of course they are. Is this a small matter? No.
Now back to the 5th amendment:
" If such “economic development” takings are for a “public use,” any taking is, and the Court has erased the Public Use Clause from our Constitution, as Justice O’Connor powerfully argues in dissent. Ante, at 1—2, 8—13. I do not believe that this Court can eliminate liberties expressly enumerated in the Constitution "
- Justice Clarence Thomas in dissent on Kelo
And if you feel the opposite, you believe the Court can eliminate liberties expressly protected in the constitution. You are President Trump appointing judges who will do just that.
Each case must be examined and determined upon the merits of the claim. There is no one rule of law that can cover every situation. (I have not read the cased of ED that you cite in depth, so I don't have an opinion on them specifically.)
As to Richmond, I do have specific knowledge of this.
When I first heard about ED and Richmond, I was viscerally opposed to the idea. I was astounded by the claim like you are with ED. But that did not last.
On a Saturday morning about two years ago, Martin Andelman of Mandelman Matters and I had a long phone conversation. He wanted to discuss ED and Richmond with me. He supported the concept and I was totally against it. Towards the end, I agreed to look at the issue closely.
Since I lived about 40 miles away, I took a drive to Richmond, going into the different areas where ED was being considered. As I looked around, while literallly in fear for my life, I saw how the Crisis had totally destroyed the city in many ways. After this look, I began to really consider alternatives.
Richmond, which has always been a "hellhole", was even worse then. Incredibly high unemployment, 20% of homes were vacant and awaiting foreclosure. Home values dropped to under $200k and often $120k, 65% of the city was severely underwater. Gangs everywhere. The common person could not leave. Heavy delinquency on loans about 25%. Anything that a person could conceive, was happening in Richmond. (Camden NJ and other cities also.)
I began to run financial and default algorithms to see how bad it really was. The results were stunning:
Essentially, all of the vacant homes were "gone". A foreclosure on the property, considering what was needed to bring the home back to livable status and to sell afterwards meant that there would be very little "recovery" of funds. In most cases, the loss on the loans would be greater than 75%, yet the servicers would not modify the loan. The loans in delinquency and default were in the same situation. Losses were such that an investor would lose the majority of money invested and would recover little.
I then ran the numbers based upon ED and paying 80% fair Market Value to the Investor. (The rest would be for new loan costs, commissions, and 5% equity to the homeowner.) In every case, the Investor would recover more money than what would be achieved through foreclosure. Plus they would not have to try and find buyers for homes in a "dangerous" area.
An additional advantage for the Investor was he was now out from under a loan in a bad area. This was something that could not even be accomplished with a modification, so for the Investor, all would be great.
The new Investor would be taking a loan whereby they knew all the risks. It would be fully disclosed, and the loan would be underwritten to a strong standard with the homeowner having a true ability to repay the loan. Both would benefit greatly.
The city then would benefit from a cleaning up of the foreclosure crisis. Tax bases would increase. Crime would decrease. city costs would decrease from the associated problems. Businesses and employment could even increase.
This was a win-win situation for all. But the Big Banks, the Mortgage Banker Association and other groups wanted nothing to do with it. They feared that it would trickle down to other cities, even ones that did not have all the problems of Richmond. (There were reasons for why this would not happen.) So they go to Congress and get legislation enacted to prevent ED in Richmond and other cities.
What I am trying to present is that every case of ED is specific to the facts and must be viewed in that manner. Yes, there is a chance of government going too far, but with a legitimate government, this can be countered if the government is not "bought and paid for" by lobbyists.
Trump admits to "using" government programs and laws to benefit himself. If it is legal, why not if the facts of the case show a clear benefit to the community of the action? If it is just about "greed", then that is different. But the difference is that Trump admits that he does this, but he also realizes that there are ways to prevent the abuses.
FYI, in 1964, I lived in San Bernardino. I remember the home we lived in and thousands other being taken under ED for a freeway to be built. Probably Fair Market Value was paid. The new freeway did serve a great benefit to the city and economic conditions. Yet today, it would be fought to the bitter end.
