Unstructured Finance

Mr. Geithner and the politics of condemnation

June 12, 2012

Matthew Goldstein and Jennifer Ablan

The idea of using eminent domain to help out homeowners who are underwater on their mortgages isn’t necessarily a new one.

Two years ago, a group of congressional leaders led by Rep. Brad Miller of North Carolina wrote to Treasury Secretary Tim Geithner recommending that the federal government consider buying underwater mortgages to stem the flood of home foreclosures. The Democratic congressman got two dozen of his colleagues to sign onto the proposal, which Geithner gave a pretty cool response to.

In a May 7, 2010 letter to the U.S. lawmakers, Geithner said the proposal had too many hurdles to be seriously considered. The Treasury secretary said eminent domain is a “complex and lengthy” proceeding. And he worried about the difficulty of  buying “mortgages out of the trusts and other securitization vehicles that own and control a substantial share of mortgage debt.”

But the biggest obstacle raised by Geithner was determining what would be fair value for taxpayers to pay for an underwater mortgage.

“If Treasury were to pay a a price higher than fair market value, taxpayers would be exposed to a high risk of loss and banks and investors would receive a windfall.”

Rep. Miller recently recalled the letter from Geithner when he read in Reuters about a plan by Mortgage Resolution Partners to use private dollars to work with local governments to condemn underwater mortgages through eminent domain. Miller said he is intrigued by the idea but would prefer it to be the government in charge rather than a group of financiers.

It’s not clear whether the plan by San Francisco-based Mortgage Resolution Partners will get any more traction than the earlier proposal backed by the congressman.

But what intrigues us is Geithner’s comment about the difficulty in valuing the underwater mortgages.

For instance, there would seem to be plenty of valuation companies capable of making the appropriate loan-to-value adjustments. 

Plus, we don’t recall too many people at Treasury in 2009 saying valuation was an obstacle to working with the private sector to create public-private entities to buy ailing mortgage-backed securities from U.S. banks.

Then again, when was the last time you heard anyone talk favorably about the PIPP experiment?

Here is the full Geithner Letter.

 

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