A remarkable result of the housing crash has been the revelation that although local governments retain legal authority over real estate — taxes, title, recordation, foreclosure — 100% of them lack the will or the way to protect constituents from a horrific, slow-motion disaster.
If they won't use their powers constructively, then reduce complexity by having Washington centralize all this — such as title registry. That might even save money and thin the fog.
But Washington has done little that has been quantitatively effective in reducing the enormous costs and collateral damage associated with forcing out owners and throwing properties on the market.
Now comes a new idea: San Bernardino County, California, is considering acquisition by private investors via eminent domain of home-secured loans, to protect homeownership while delivering the market value of the old loans to their owners.
Many vested interests, starting with large banks and other investors who don't want to recognize losses, particularly on second lien loans, object vociferously to getting paid off at market. That's odd if their accounting is honest—but they're entitled to pursue their perceived self-interest. The people of our political subdivisions are likewise entitled to exercise their legal rights.
What legal rights? According to some commentators, this program is unconstitutional. First we are told eminent domain doesn't apply because there is no "public purpose." Ridiculous excuse. Protecting and improving neighborhoods, as with eminent domain for urban renewal, is a well-tested public purpose.
Second we're told that the program breaches the "sanctity of contracts." Indeed it does. After prior misreading of the Fifth and Fourteenth Amendments, state legislative enactments have breached the "sanctity of contracts" to serve a public purpose with support from the Supreme Court since 1937 (West Coast Hotel Co. vs. Parrish). Now we again have what that Court referred to as "unparalleled demands for relief."
I do not argue for the specifics of the San Bernardino plan, but rather for flexible use of eminent domain, which fits specific classes of situations such as: The homeowner can't pay on his current mortgage loans, but he's able and willing to pay on a new mortgage loan with value at least as high as the reduced market value of his present loans.
A concrete example: Suppose the customer's payments under a 30-year government-backed fixed-rate mortgage, plus home equity loan — averaging a 6.5% rate — aren't affordable. He's paying only on the home equity. The total market value of the loans is only 50% of the balance.
Maybe he can make the much smaller payments — approximately half as large — under a new mortgage with no reduction in principal, but interest-only payments for 10 years with initial rate of 3.25%. This isn't a modification. It's a single new mortgage which should receive the same government backing, since it's more affordable.
Between the mortgage servicer settlement, legacy Countrywide, investors and various federal interventions, the refinancing of the old mortgages doesn't get done. So, the borrower, even after being magnanimously accorded the highly-touted advantages of "single point of contact" and "no dual tracking," is likely to lose his home.