Crony Capitalism Masquerading As Homeowner Relief
August 8, 2013 Leave a comment
A company run by prominent Democratic supporters is colluding with local governments to enact sweeping home mortgage reforms at the expense of taxpayers and lenders, according to a U.S. congressman.
Rep. John Campbell (R., Calif.) has introduced legislation that aims to prevent municipalities from using eminent domain to seize properties as a means to address mortgage foreclosures crises.
The proposal, he said in an interview, was spurred by schemes in his home state and elsewhere to use the government’s power to seize property to address high foreclosure rates and large numbers of underwater mortgages.
Richmond, Calif., is the latest city to attempt the plan. Officials in the city plan to use eminent domain to seize mortgages, paying lenders 80 percent of the current value of the homes, according to the New York Times.
The city will then allow borrowers to refinance at a slightly higher price and will split the difference with Mortgage Resolution Partners (MRP)—the company that is providing much of the capital for the effort—and other investors in the plan.
“There are many things I despise about this proposal, but one of them is that I don’t think there’s any legitimacy in public policy,” Campbell told the Washington Free Beacon.
“It’s entirely an effort of a private entity [MRP] to say, ‘If we can get local government to go along with us and basically rip off the taxpayers and financial institutions, and we share in the spoils, wouldn’t this be a great deal?’” Campbell said.
Disgusting lawlessness–and, if successful, probably the last nail in the coffin of the Takings Clause of the Fifth Amendment.
Let’s say you owe $300,000 on your home and it is currently valued at $200,000. The city takes the mortgage from your lender and pays it the estimated value, minus about 20 percent. Your lender gets $160,000. The new investors refinance the property based on the non-discounted value of $200,000 — and you, the homeowner, get to stay in the house and make payments on the new, lower principle. These new players, consultants and the city profit from the proceeds, which comes from the difference between the price they pay and the higher price at which they refinance the loan.
Campbell is livid that the deal is financed on the backs of taxpayers given that the loans will be sold back to Fannie Mae, Freddie Mac and FHA. He and many others also are opposed to what they rightly view as a misuse of power.
“One group of investors, MRP, has figured out a way to use the legal powers of municipalities to extract profits from the people who hold Mortgage Backed Securities,” Chris Killian, an executive with the Securities Industry and Financial Markets Association, told me. The plan will add risk and costs to investors, he said, which will reduce the pool of buyers willing to take a chance in the city.
Props to Congressman John Campbell (who unfortunately is due to retire at the end of his current term) for addressing this clearly un-Constitutional scheme (although, after Kelo v. New London, one might well wonder whether the Supreme Court would come up with some cockamamie rationale to justify it).
The bill can be tracked here: H.R. 2733: Defending American Taxpayers From Abusive Government Takings Act of 2013.
Addendum: “Eminent domain proposal for mortgages gains traction in California.” (h/t @lynngg)