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Beware Private Equity Guys Bearing Gifts: Eminent Domain Mortgage Scam Hit with Well-Deserved Lawsuit

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Eminent domain, a well-established practice by which local governments forcibly purchase property to facilitate projects for the community’s good, could have been an elegant way to deal with long-standing problems facing distressed borrowers in mortgage securitizations. For instance, delinquent mortgages could be bought out of securitizations and sold to investors who would modify them. Localities could also ue it to clear up zombie title or buy distressed real estate (where the mortgage securitization is holding blighted homes because the servicer is holding off on recognizing losses).

But as we’ve written, the private equity firm Mortgage Resolution Partners looks to be well on its way to getting the good uses of eminent domain torpedoed by getting some not-too-swift municipalities to sign up for its self-serving scheme. One indicator of how dubious the MPR program is that investors who have been complacent in the face of all sorts of abuses by originators and servicers, have roused themselves to act in a unified manner and push back against the MRP plan, in the form of a suit filed in Federal court in California on Wednesday.

Key to understanding why this plan is a terrible idea and why investors are outraged is that there is a large gap between MRP’s well-funded messaging and how its program would actually work. The key thing to understand is that MPR’s plan isn’t about helping distressed borrowers. If communities wanted to condemn delinquent or defaulted mortgages, they don’t need MRP. It wouldn’t be hard to find dozens of hedge funds and other investors to bid on them and their aim would be to restructure the loans. And investors would be delighted to see this happen. Investors and homeowners lose in foreclosures. Both would do better with a modification, provided the borrower still has a reasonable income. It’s the servicers who win by continuing to wring servicing, foreclosure-related, and junk fees out of the securitizations.

MRP’s initial effort was with several government entities in the San Bernardino, California area. They signed up with a plan to condemn performing mortgages, meaning ones where borrowers were paying on time. MRP and the San Bernardino cohort tried passing off the canard that because the homes were underwater, the mortgage was worth less than the value of the house. No, sports fans, with a collateralized loan, the collateral is a backup source of value. It reduces losses in the event of default. You look to the borrower payment stream as the primary source of value. These were all seasoned mortgages, five years or more of current payments. These are borrowers who are clearly committed to keeping their homes and have income to do so. An arm’s length transaction would allow for some risk of default due to death, disability, or job loss, so a mortgage with a face amount of $300,000 would not go for $300,000. But if you have a current borrower with a solid payment history, you wouldn’t expect it to fetch much less than $250,000.

But the MRP scheme relied on condemning those mortgages at a large discount to their value by the bait and switch of claiming the mortgage value was based strictly on the value of the home, which is inaccurate, and then arguing for a discount from that. Look at how much the investors get ripped off, per this summary from Nick Iimiraos of the Wall Street Journal last year:

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.

The difference between my working figure of $250,000 and $120,000 is a whole chunk of change. You can see why investors are irate.

And remember, these investors aren’t for the most part hedgies. They are state and local governments, hospitals, Fannie, Freddie, and to a lesser degree, foundations and endowments. Thus when these investors fall short, the taxpayer often picks up the tab in terms of increased taxes or local fees of various sorts. You’d wind up paying for this scheme in the end, whether you recognize it or not.

And why did the math have to work that way? MRP was going to arbitrage the government by refi-ing the condemned mortgages into FHA loans. As we wrote last year:

…the very act of condemning with an intended takeout at a higher price via a Federal government program smells an awful lot like a scheme to defraud. Clearly the ability to refi ad a much higher price than the condemnation price is proof in and of itself that the condemnation price was too low.

The San Bernandino effort was shut down, mainly for reasons of local consternation (various officials had cut a deal with MRP in private and had not made required disclosures on a timely basis). But MRP is back, this time with Richmond, a town in California that the recovery bypassed. How can you not like the headline: feisty mayor bucking big bad guy financiers? And that’s the hope, that you won’t go beyond the headline.

The Wall Street Journal reports on a lawsuit just filed by two major securitization trustees (Wells and Deustche) at the behest of bond heavyweights that include Blackrock, Pimco, Fannie and Freddie. The suit was prompted by Richmond sending letters asking to buying 624 mortgages on homes in the jurisdiction and saying they’d condemn them if the servicers did not cooperate. The key bit is that 444 of these loans are current. You’d think if Richmond wanted to make sure that they’d get this program off to a good start (as in have the right optics) they’d be proposing to condemn only delinquent or defaulted mortgages. The fact that over 2/3 are current is another indicator that this scheme works economically for MRP only if a large majority are current.

Other warts: the San Bernandino, and we assume this version, did NOT touch Fannie and Freddie mortgages (MRP was concerned that they’d besubject by Federal pre-emption from action by state authorities). We have been told by Vince Fiorillo, head of DoubleLine Capital, one of the plaintiffs, that the plan also steers clear of mortgages with second liens, which includes home equity lines of credit. So even if this plan were everything it was promised to be, it would in fact only help a subset of borrowers, and that by targeting the type of mortgages where investors would be less likely or able to fight back (Fannie and Freddie are presumably among the instigators of this suit not in their capacity as mortgage guarantors, but by virtue of owning subprime mortgage bonds in their investment portfolio).

Last year, we had also spoken to California attorneys who specialize in eminent domain, and they read the MRP program as running afoul of several requirements of eminent domain in that state (a big one being valuation, California require that the municipality pay over market value and has property-owner-friendly methods for determining what market value is). But the opponents to MRP are advancing a legal argument that would be applicable in all states, so that if they prevail in this action, the odds of any other local entity taking up this program would be thin indeed. From the Wall Street Journal:

The lawsuit alleges that the proposed use of eminent domain is unconstitutional because it benefits a small group of Richmond citizens at the expense of out-of-state investors, violating the law on interstate commerce. The lawsuit also argues that loans aren’t being seized for a valid public purpose—a key criterion for a city that invokes eminent domain.

MRP’s defenses are pretty strained:

An MRP representative said it was confident its proposal is “entirely within the law.” “No investor in any trust will be made worse off by the sale of any loan,” said a company spokesman.

The suit by contrast, alleges that investors will lose $200 million or more on the Richmond operation alone. If this litigation proceeds (as in Richmond does not lose nerve and fold), it appears that the MRP contention that buying current mortgages on underwater homes at a meaningful discount to the value of the house will be subject to pretty harsh scrutiny. There’d be no basis for a claim that investors would lose money if MRP really were buying mortgages at market value.

That’s clearly nonsense. Pretty much any mortgage professional who is not on or hoping to get on MRP’s meal ticket would say so. The one point that Richmond does have right is that the servicers (and more important, the trustees who are supposed to discipline or fire the servicers when they aren’t doing their job) haven’t done mortgage mods. But that 444 out of 624 mortgages being current belies the idea that this program is really about mods, as opposed to buying local votes with out-of-area investor money.

Notice that the unhappy investor side filed this suit in Federal court. I would assume if they were to lose the Federal suit, they are not precluded from then fighting suits in state court alleging violations of eminent domain precedents in California.

So all in all, we have what looks like a sorry: a promising mechanism for cutting the Gordian knot of bad incentives in securitizations that will probably wind up being nixed for legitimate uses thanks to an overreach by a private equity fund. Well played.

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35 comments

  1. ozajh

    “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”

    I think that’s putting the most kindly interpretation on matters, where only (!) the MBS investors get hosed.

    What’s to stop the private financiers from turning around and buying the property THEMSELVES from the city at the reduced valuation plus some markup, then coming to some “equitable” arrangement with the homeowner similar to existing rent-to-buy scams worldwide.

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  2. SA

    MRP’s actual goal is unclear to me from the press articles. Assume they prevail and are allowed to pursue this scheme. They will then have to pay fair market value for the mortgages — each mortgage will be a separate eminent domain court case to determine the value — so I don’t believe they have any intention of buying at a discount to FMV. I suspect their game is a little different: buy at FMV, then modify the performing loans as little as possible to capture a windfall on the payment stream. Sure, knock 100k off the outstanding balance on a 300k loan purchased for 150k, MRP will be printing money. With the non-performing loans, wait, foreclose, and turn into rentals — but it’s the performing loans they really want.

    Why politicians are idiotic enough to believe in the private sector tooth fairy is beyond me.

    1. Yves Smith Post author

      No, they have offering documents and they have very clearly described what they intend to do to the media. They have consistently said they will buy the mortgages at what they are trying to claim is a FMV but by their own repeated statement HAS to be a discount to the value of the home because the exit is a FHA refinance (which has LTV limits). So the price at which they buy the mortgage is dictated by their return targets and their split with the municipality.

      They are most assuredly not buying PERFORMING mortgages at fair market value. I could line up investors all day who would pay more than what they are proposing to pay.

      In Richmond, they are planning to buy some non-performing mortgages. I suspect they’ll just flip them to hedgies who will modify them. That is one part they have not discussed in any detail.

      I’m not sure why you insist on saying they will do something different than what they’ve said they will do, particularly since they have formal offering documents (as in they can’t go around making it up as they go along).

      1. SA

        Why? Because California law requires a court hearing to determine FMV in eminent domain cases! The highest valuation wins — and by proposing a discount from FMV, they cannot prevail.

        1. Yves Smith Post author

          Except it’s also really costly to investors to fight this scheme on a loan-by-loan basis, which is what MRP is relying on, that investors won’t fight them in the trenches. That is why investors have launched a suit to get this killed on a broader basis.

      2. Tokai Tuna

        “I could line up investors all day who would pay more than what they are proposing to pay. ” And you don’t see any problem with that, you know, on a moral level, or some such?
        Where’d they get there money, the old fashioned way?

        1. Yves Smith Post author

          I’d put my mother’s money into it at $5 over the prices MRP is proposing to pay per mortgage on performing mortgages. All day. Sight unseen. Real investors who had a look would pay more. I could list this on my site and get better prices than MRP is offering.

          You seem to forget that insurance companies, public pension funds (as in state and local government employees) and endowments (like Pew Trust, the Levy Foundation, and private colleges) are big investors in hedge funds.

          And why should you get angry about cutting out a middleman (MRP) who is ripping off mortgage investors (who are heavily the same list of suspects above) to get mortgage investors who’ve lost boatloads a better deal?

  3. Kevin S

    I’ve done a bit of reading lately on MRP, as the private-label RMBS market is an issue near and dear to my heart. I get what you are saying, but here are some facts that I think were missed or glossed over:

    1) From my understanding of the RMBS trusts, it is incredibly problematic to refi the performing loans, both due to the terms of the trust, and the chain of title
    2) Eminent domain is difficult, if not impossible, to use on Agency RMBS; has to be private label
    3) MRP pulls a fixed amount from each resolved mortgage, $4k if I’m not mistaken, which rather effectively caps their upside
    4) Everything I have read on the matter indicates that they cannot do this with NPLs; have to be performing, cannot do rent-to-own converts –> there are PE/Hedge Funds doing that strategy, just not MRP

    1. Yves Smith Post author

      With all due respect, you are incorrect on #4. Condemnation is MOST suited to non-performing mortgages. You have a legitimate public purpose. And contra your assertion, 184 of the mortgages they are attempting to condemn in Richmond are NPLs.

      You are also wrong re 1. It is not difficult to refi a securitized loan if you are current. There have been tons of refis done in the last few years. All of the pre-crisis mortgage trusts have had large volumes of refis, that was one of the big sources of paydown in the the trusts. You’ll see this in any trust if you look at the investor reports. Chain of title is a borrower defense in foreclosure. No one cares in a refi. The banks and the government agencies are of the official view that that is not an issue. The “difficulty” is in getting servicers to do mortgage modifications, which is a completely different issue. That has nothing to do with refis.

      I believe MRP’s fees are $4500 per mortgage. They had thought they’d be able to do 10,000 in San Bernardino until they were advised of the various issues you mention. $45 million in one town. For what value added, might I ask? As I said, if you ran an auction with hedge funds, you’d get better prices, modifications for distressed investors, and you would not need MRP.

      The post discussed the issue with Fannie and Freddie guaranteed mortgages; MPR is concerned they will be subject to Federal pre-emption.

      But the plan was to condemn only non-performing mortgages, it’s not certain Fannie and Freddie would object (MPR would be at risk that they might, but it would really depend on whether MRP was paying what they thought was a fair price). The second lien holders might think about it but they’d lose the PR and legal battle.

      1. Motor Ryder

        Just to be a bit more clear, amongst the loans the City of Richmond listed and set proposed prices on you will find some non-performing loans. That is a far cry from actually having written a check to acquire the loans in question. If the borrower was 4 months delinquent as of two months ago, do you think they are going to be able to sell the loan in the secondary market? For a delinquent borrower, they would have to underwrite an application BEFORE acquiring the loan to know whether they could even afford the new, reduced payment. With performing loans, they would be pretty certain of payment ability at a lower loan amount.

  4. McWatt

    Eminent Domain was never meant to be used this way and shouldn’t. Eminent
    Domain was previously abused starting in the early 1990′s by local governments using Eminent Domain to take private land and turn it over to private developers at public expense. They hid these illegal land transfers behind calling the property in question “blighted” so that it’s removal was in the “public good”. Eminent Domain should only ever be used for the creation of schools, parks and highways/public transportation. And infrastructure projects that were created by Eminent Domain were to be in perpetuity. In other words if you took someone’s land under this statute it had to be used forever for a public purpose.

    It is a fundamental right of property ownership in America that your land can not be taken away by the government for the enrichment of some one else.

    Here in Chicago with the closing of 54 public schools there are a few of us who are very anxious to see what happens to these school properties most of whom were partially or entirely created with the use of Eminent Domain.

    1. Bridget

      “If a judge agreed, the program’s private financiers would fund the city’s seizure of the loan…”

      That’s pretty much of a dead giveaway right there that this scheme lacks the necessarily element of public use, or even any public benefit to speak of.

      In light of abuses, many states have passed legislation tightening up requirements for local governments to demonstrate public use and for appraising and valuing property. This dog won’t hunt in Texas.

    2. Bag Lady

      “It is a fundamental right of property ownership in America that your land can not be taken away by the government for the enrichment of some one else.”

      Just make up a good reason, or pass a law or two, and hand out an unpayable loan, always focus on the ability of the property owner to “do something”, once failure is guranteed then voila, take it.

      The entire country is still reeling with displacement of all kinds, lower unemployment, poor employment and abuses of all kinds, yet here’s our matriarch with her own line that can’t be crossed:
      “provided the borrower still has a reasonable income”

  5. Frank Burns

    Money is much more important than housing people. Glad we cleared that up. How’s that mental illness thing going?

    1. John

      Banks get freebees all the time, and they are the ones launching this “well deserved” law suit. That freebee charge, incidentally, has been around our lifetimes comparitively since at least the 70s. Vicious and stupid.

  6. allcoppedout

    I can’t comment directly on knowledge grounds. What interests me is the depressing similarity between this and various company restructuring/liquidation schemes everywhere. As we know there are always fat fees for professionals, total disregard for what should matter (as Frank says) and the ‘strange’ matter that the vultures always end up with any equity that matters. Asset stripping is written all through, though of course, never mentioned.

    My overall guess is that vile overseas practices of our banks are returning home with a vengeance. We once looked for ‘fat firms’ to break up at a greater sum than their market cap – the situation now seems to be the break up of a ‘financial sector’ worth maybe a third of its mark-to-golden-fleece, that value itself supported by tax-payer/FED/BoE/ECB pre-intervention.

    It looks as though people’s homes are now as valuable as the Rover Group pre-Phoenix (£10). There was no UK value-added (the opposite) and four men took £42 million in pay and pensions as the new firm was failing. £16 million went on a report that told us nothing and with no TBTF concerns there were no criminal prosecutions.

    It’s very difficult to see, as it was in Rover, where new revenue lines can come from to support mortgage reconstructions, as these must come from new, better-paid jobs – such new revenue was always supposed to be the point in reconstructions (often by triple-decimating pay and on-costs). It would be interesting to see what the business plan has to say about abilities to pay.

  7. anon y'mouse

    as a total aside, Richmond being characterized as a place where the recovery has not happened is incorrect.

    the boom years, whenever they really occurred, never happened in most of Richmond.

    by other Bay AReans, that town is considered the city-version of East Oakland. not that it lacks ‘normal’ sections, but most of it is considered a wasteland of the poor, minority sort. these aren’t folks who were riding high during the boom years, if that’s the image of Californians with $400k homes that one is playing on.

  8. susan the other

    Just wondering who the slimeballs are who are MRP. Probably the usual suspects like Bain. It occurred to me that it could be the most ironic of all lawsuits if it goes from an unsatisfactory federal ruling against the trusts and they do go back into state court. There they can use the chain of title defense themselves because they would effectively be being foreclosed upon. The trusts could even then sue the banksters who “securitized” their bogus investments and kill two birds with one stone. Actually 3 birds because it would establish once and for all that the chain of title is fatally flawed in almost every mortgage.

    1. william occam

      What could possibly go wrong? After all we all know that bankers have the best interest of home owners and local governments at heart.

      The prime mover behind the use of eminent domain is a group called Mortgage Resolution Partners (MRP) run by Steven Gluckstern who has personally donated more than $160,000 to Democratic candidates and committees since 2000, including $7,300 to President Obama. Gluckstern also bundled between $200,000 and $500,000 in donations for the president in 2008.

      http://bluecravat.blogspot.com/2012/07/beware-of-banker-friends-of-obama.html

  9. william occam

    One issue not emntioned is the tax bill homeowner would get under current law if their loan were discounted. They would have to pay taxes on the “gain”

  10. down2long

    Thanks Yves for this analysis. This really never ends, does it?

    As someone who lost a property on which I was current to Slimin’ Dimon, when he got the WaMu loan for free from the FDIC/taxpayer, I know that when you these sleazy money people involved with government, the investors and the homeowners are going to lose. It is, as you say Yves, not a buy but a feature.

  11. Todd NYC

    Can we look at it from the perspective of the borrower?

    Imagine you’re one of the borrowers who is current on a $300k mortgage, whereas your house is today valued at $150k. Aren’t you stuck? You can’t refinance. You can’t sell. You are stuck, without defaulting and killing your credit. Best case is you won’t have the liquidity to invest in new economic growth. Worst case it sucks your assets down to zero until you eventually have to default – the lender still loses, but now you are a ward of the state. Why is that a preferred outcome?

    This writ large is the debt overhang that drags on the economy.

    We know mortgages underwritten into the credit crisis were based almost entirely on rising collateral values alone, contrary to Yves’ assertion. (A bit of heads I win, tails you lose, isn’t it?) So where have been the write-downs? Isn’t that what cleans the slate so the economy can grow again?

    This may not be the specific manner in which these debts will be written down to economically sustainable levels, but ultimately they will be – either explicitly or indirectly.

    But don’t pretend that the lawsuits are anything other than lenders trying to push the cost of adjustment onto current-pay borrowers. There is no reason in equity or economics that only the current-pay mortgage holders should suffer from the poor economic decisions of a decade ago.

    1. Yves Smith Post author

      Todd,

      If this scheme goes forward, investors will demand massive premiums in terms of interest rate to make mortgage loans if they can be written down just because the house value went down but the borrower can still pay. Or they might refuse to lend entirely in these communities.

      You want to make sure no one will ever be able to sell (to anyone other than an all cash buyer) or refi, this is the way to guarantee that result. I would never take this risk as an investor.

      In fact, what you will assure is that homes in these communities will be sold largely to rental investors at distressed prices. You’ll greatly accelerate the movement of housing stock into private equity hands as rentals. Is this what you want? Be careful what you wish for.

      1. Todd NYC

        Yves I think you have turned the dial to 11. Or maybe past 11.

        You really think eminent domain would become a routine way of forcing write-downs on underwater mortgages?

        I don’t think anyone believes that. I see this as a one-time adjustment to force some of the unrealized losses in the system back onto the lenders.

        You really think we will see such massive systemic disconnects between par and market value in real estate again in our lifetimes?

        Not likely. So the impetus for this sort of extreme reaction won’t be there, and your worries about poisoning the mortgage market are overblown.

        Its in everyone’s interests that underwater loans be written down and losses be realized. Japan is the cliché counter-example, but they still haven’t written down their loan losses and still can’t get their economy to move.

        This scheme may not be the best way to achieve this outcome, but I don’t see anyone else standing up with any other one.

        1. Steven St Croix

          It is decidedely not in everyone’s interest to write ‘em down. They’ve made this clear to the point of destroying peoples lives and the communities they live in. Constant attempts to rewrite history do prevail,as a sizable body politic still believe Banks were forced to lend to unworthy black people. More sophisticated intellectual bilge claims people were unsmart, or ran with the herd.

          Just make it up. Hell, they do it daily:

          http://www.reuters.com/article/2013/08/06/us-mental-disorder-idUSBRE97511E20130806

        2. Yves Smith Post author

          Todd,

          Please don’t try insinuating I’m overdramatizing this situation. I’ve been in contact with the investors. They are so furious they can’t see straight. If you think what I wrote is 11, they are at 100.

          We’ve had six years of investors having their oxen gored thanks to predatory servicing (which has hurt borrowers hugely too) yet the investors were unable to get their act together to orchestrate an effective response (admittedly, a big contributor to investor ineffectiveness was “tranche warfare” issues, that the investors in one tranche would benefit from the servicer abuses and would fight the other investors). The fact that they have come together and are going after this hard should give you an idea of how upset they are and their determination to stop this before it goes anywhere.

          Go read MPR’s sales talk. They are presenting this as helping borrowers. In fact, this is helping MRP and the local pols and the few who might qualify.

          This is not going to force any sort of market clearing, and separately, the direction of policy has been to encourage appreciation and defer the recognition of losses in the fond hope the economy will pick up enough to solve the problem. And as much as I don’t like how they’ve gone about it, this approach actually has produced the current recovery. I would have preferred mods as the way to deal with the situation, but that’s not where we are now.

          What it will do is force losses on investor on mortgages where people are paying on time. They are clearly committed to keeping the houses. You are seriously telling me a narrow subset of mortgage borrowers (non Fannie Freddie AND no second liens) are particularly deserving of help? Seriously? And that giving a group of middle class borrowers a special bennie is somehow desirable?

          You refuse to hear that all it will do is get those communities denied mortgage credit and force even greater eventual losses on everyone. If homeowners who are buying homes as primary residences face greatly more stringent terms in communities (as in much higher down payments and much higher interest rates, assuming they can even get a mortgage) where they’ve tried this stunt, what do you think it is going to do to the local housing market? This will drive prices lower, a LOT lower.

          I’m all for helping distressed borrowers. Thats’ a win-win. I’m not a fan of hurting investors and taxpayers to enrich middle class borrowers who are clearly willing and able to pay their mortgages.

          And most of all, I’m not a fan of theft, which is what this plan amounts to.

          Those current mortgages all day are worth more than the value of the house. What you are saying is that for a local government to take property at somewhere between half and 3/4 of its market price if it helps the market “clear”. Establish that precedent and tell me where it ends.

          We already don’t have functioning private label mortgage market because the sell side fought sensible reforms for the buy side that the FDIC was pumping for. You try a stunt like this and mortgage finance will be on Federal life support permanently. And what happens when the Republicans get in office and try to redesign housing finance so as to provide more subsidies to the rich at the expense of the poor? Having the government so deeply involved in housing finance is a terrible way to implement housing policy, and this scheme would just make this underlying problem worse. And the Republican revenge scenario isn’t paranoid. This scheme is being pushed by well heeled, well connected Democrats at the state level (who I believe are in many cases also investors): Byron Georgiou in Nevada, Gray Davis and Phil Angelides in Ca, for instance. The Republicans can’t stand the degree to which housing policy is used by the Dems to buy votes. If they can see a way to exact their revenge, they will.

          1. Todd NYC

            Yves, I wasn’t trying to be flip and didn’t mean for my post to be inflammatory.

            I still don’t see how this move becomes a precedent, instead of a one-off. Eminent domain is not going to become a routine tool, and the magnitude of underwater-ness is not going to be repeated in our generation.

            I agree that the direction of policy has been to encourage appreciation and defer recognition of losses. I point again to the experience of Japan. Didn’t work well there, and hasn’t been working well here.

            If the servicer are the bad guys here, then its in the interests of lenders and borrowers to modify and come to somewhere in the middle. This scheme is a ham-handed, one-sided approach to modification, but again I don’t see anyone else stepping up with better proposals, or in fact any proposals.

            Lastly, just because a borrower is current doesn’t mean that they are not extremely stressed. In the tradition model, mortgage default is the last step a household takes before falling off the cliff. With interest rates so low, we should have seen every single property refinance in the past six years – but that hasn’t happened and we still have a huge consumer debt overhang. My position is that but for their mortgages being underwater, these middle class borrowers would have refinanced years ago, and freed up capital to redeploy into economic growth. This is why the economy is growing so slowly. We should be focused laser-like on modifying all borrowers, even the current borrowers, because everyone will benefit from that.

            This scheme may not be the best approach, or even a good approach, but these pissed-off investors are not the only valid voice in these circumstances.

      2. Anon

        Thanks for the response to Todd above, Yves, as well as the underlying article. I was thinking along similar lines, and it’s helpful to see the consequences of this scheme explicated. It’s still a difficult point, because this seems like one of the only credible, if ill-conceived schemes by which underwater borrowers who kept up with the mortgage might actually be rewarded for responsible behavior. Particularly when they seem like the ideal profile for strategic defaults, but it can’t really helped.
        Does anyone know about other efforts toward wide-scale, significant principal reduction that are getting anywhere? Most of what I’ve seen has tended toward feel-good pieces which appear to have negligible legal and political prospects.

        1. Yves Smith Post author

          The problem is, as you can see from the more than 2/3 going to current borrowers, is that to make the math of the MRP scheme work, the condemnations have to go overwhelmingly to current mortgages. So there’s really very little relief to the people who are in serious distress.

  12. allcoppedout

    Rent to buy in the UK is run by sharks. An offer is made and then they pull out and offer 15% – 40% less – some are so poorly funded the poor sods who sell to them end up losing the tenancy because the buying firm goes bust.

    I’m wondering what our salaries/wages would really support on the old 3 times to mortgage ratio as total housing value – potentially this is what the housing stock is worth.

    Good to see a US example of the vultures in the housing market. Osbourne is probably collecting a group of moustachioed sexual predators as I type!

  13. Yves Smith Post author

    Dear readers:

    There were quite a few screechy comments on this post. When I went backstage to look at the history of the writers, it turned out one person (same IP address) had used seven different identities to leave comments on this post. And this on a post that had only about 30 comments That’s against site policy. I’ve trimmed that individual back to one identity.

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