Mortgages. How do they work?

[luzribeiro.livejournal.com]

A curious story here. See, in the SoCal desert, one of those southern counties is trying to implement the "eminent domain" clause to rescue some of its towns. The whole idea is that the local authorities would be allowed to take a home that's sunken underwater, pay the bank the market price (more likely: less than the market price), and then re-finance it for the current resident. The purpose would be to avoid many areas mainly consisting of foreclosed (and now empty) homes turning entire areas into ghost-towns.

Article: http://www.bloomberg.com/news/2012-06-28/eminent-domain-is-bad-ploy-for-underwater-mortgages.html

Question is, is this step an abuse of government power? Or if we get further, could it be interpreted as government theft? It'll certainly affect lien holders negatively, but will those who caused the housing crash be duly punished, or they'd never get affected?

Tbh, I'm not entirely sure that I understand how this strategy would work. So the local authorities seize the property and pay less than the outstanding lien value to the lien holder - fine. This should reduce the amount owed against that lien, but I fail to see anything there that would compel the lien holder to forgive the balance of the debt when all of this happens. So the resident borrower would still end up paying roughly what they doe pay at the moment. Or am I missing something?

Sure, I tried to research some more on the subject, and found this: http://www.sfgate.com/business/networth/article/Eminent-domain-home-loan-plan-creates-ruckus-3690485.php

The way I see it, the general idea is that the authorities would be allowed to seize property at market prices for public use. A SCOTUS ruling on a New London case was that authorities could use the "eminent domain" clause to transfer property from local residents to businesses - so there's the precedent. And precedents matter, at least at the wrong side of the Pond. The way it looks from here, much of the properties in the US are somehow tied up in financing, so first you have to untangle these before you could seize the property.

So, if a town authority sees fit to condemn property for some reason (the presumed reason here being that high vacancy in some areas of town could pose a danger for the community, by eroding the town's vitality and ultimately turning it into a ghost town), said town could take the risk to lose some money, but the lien holders would lose as well, being stuck with worthless deeds. Thus, the lender would get something back, while the town gets a chance for survival.

On the other hand, let's note that the latter article mentions that the scope of this initiative is pretty limited, less than 10% of homes qualifying into that category.

Ps. Btw, could any of our Icelandic denizens confirm if this is veritable? -->
http://www.morningliberty.com/2012/04/24/iceland-gets-it-mortgage-debt-forgiveness-for-all/
Seems like the dire situation in Iceland has led the Icelandic government to implement a nationwide mortgage forgiveness for everybody (um, poor wording in the article, it would seem) national re-financing of all notes, while the trials against former bankers and politicians on charges of corruption continue across the country. In your opinion, is this good or bad?

Comments

[a-new-machine.livejournal.com]

Well, one big part that you've misunderstood: they're not taking the home, they're buying the mortgage note. That's perfectly normal, and happens all the time - your mortgage is rarely owned by the people who issued it to you, but is often sold to investors, often as part of the "mortgage-backed securities" that were all the rage in '06 or so.

The suggestion here is that they force the note-holders to sell for current market value of the home (rather than the face value of the note) and then take a 5% hit in value when refinancing to the homeowner, so that the owner has 5% equity in the home. As for whether it's good or bad for lienholders, I heard an interesting argument on that front. California is a non-recourse state, which means that CA residents can walk away from underwater homes and leave banks holding the bag anyway - in fact, that's happened in a large number of cases already. So this plan isn't worse for them than what's happening already. Further, most of the current lienholders bought the notes at substantially reduced prices because everyone recognizes that the note is worth less than what the face value would suggest, due to the very high risk involved.

[soliloquy76.livejournal.com]

You're welcome.

[luvdovz.livejournal.com]

Correct correction on your part. As it's worded in that news report, the story about Iceland is complete bollocks. It's not mortgage forgiveness as they say.

[eracerhead.livejournal.com]

Sounds like a government bail-out of mortgage holders.

[rick-day.livejournal.com]

You say that as if this were a bad thing.

[gunslnger.livejournal.com]

Question is, is this step an abuse of government power?

Yes.

[foolsguinea.livejournal.com]

Really? Why?

Other things that are government power, and therefore "abuses of government power" to a minarchist:
workman's compensation
the USDA
the Centers for Disease Control and Prevention
income tax
speed limits
child support
anti-stalking laws
affirmative action
health codes

Face it, the TEA Party ruined that whole approach. Once you start complaining that government should be constitutionally limited just because, you just look like another TEA Party loon.

[mahnmut.livejournal.com]

You say it like it's a bad thing for some.

[gunslnger.livejournal.com]

Eminent domain is allowing government to confiscate private property. At best, it's for a public use, which is what people generally expect and are minimally ok with. Taking it to give to some other private party is what this is and is what is an abuse of gov't power.

I'm ignoring your rant.

[mikeyxw.livejournal.com]

Terrible idea.

Eminent domain is there to allow governments to acquire property for public uses. This is a bit problematic but it's the least problematic of solutions. Cities and states need new stuff from time to time and without this, those projects would be impossible. In this case, the state is really forcing the mortgage holders to sell to a different group of investors at a reduced rate. They aren't acquiring the property for some project; they're acquiring the mortgage so another group can buy it at a low rate and make a bunch of money. If this is allowed, favored investors could pick any asset and resell it to a favored group of investors at a lower price. I would expect that this would be good for political contributions and well-connected investors but bad for anyone who wants to get a mortgage in the future.

Something like this is not needed right now. Home prices are starting to recover in most areas. If the government sees it in their best interests to bail out places where there are still problems, they should use their own money, not that of the people who bought the bonds and mortgages and should certainly not pick a group of investors who would buy the mortgages at a discounted price.

If there is to be a reset, even if eminent domain is used, the current bond holders should just get a haircut in some systematic way, like what the federal government is imposing. This is something that bond holders do from time to time. Forcing them to sell to someone else at a huge discount (probably somewhere around 50%) is a good way to ensure that the price of mortgages in the future will be much higher than now... which would send mortgage rates up and probably erase the recent gains in housing. This really looks like a group of investors have found a way to use unsophistocated city governments and eminent domain to enrich themselves.

[anfalicious.livejournal.com]

Theft? Abuse of powers? No it's what the government should have done in the first place rather than bailing out the banks. What other organisation has the power and desire to enact a nationwide programme for the good of the people? The fact that the government decided to enact a programme for the good of the 1% is a problem with American Capitalism, not government. The Icelandics have realised that their errors lay in US Capitalism and are now returning to the sanity of social democracy to fix the destruction left in the wake of the banksters.

[luzribeiro.livejournal.com]

I seem to be receiving mutually contradictory responses from people here (pst! read above!)

Partisan politics is confusing.