The housing proposal that won’t die
One of the biggest economic stories this year has been the recovery in U.S. home prices. But for the more than 11 million homeowners stuck with a mortgage that’s worth more than the value of their home, it has felt more like being Bill Murray in the movie Groundhog Day.
The housing crisis may be over for Blackstone, Colony, American Homes 4 Rent and other deep-pocketed investment firms snapping up foreclosed homes with cheap money courtesy of the Federal Reserve, but for many Americans they are still living with it some five years later.
So maybe that’s why a controversial idea of using the government’s power of condemnation to seize and restructure distressed mortgages in order to provide debt relief to struggling homeowners just won’t go away, even though many think it’s unconstitutional and bond investors have rallied to savage the proposal.
On Wednesday, the city of North Las Vegas, a community with one of the highest percentage of underwater mortgages in the U.S., became the latest community to move a step closer to using eminent domain to condemn troubled mortgages that are packaged into mortgage-backed bonds issued by Wall Street firms before the financial crisis. By a 4-1 vote, the City Council agreed to enter into an advisory agreement with Mortgage Resolution Partners, the San Francisco-based investment firm that has been peddling the eminent domain for more than a year and stands to make money off of each home loan that gets seized and restructured.
North Las Vegas, a community of 219,020, located less than 10 miles from the glitz and glamour of the Vegas strip, is one of those places that was particularly hard hit by the financial crisis and the housing bust. In some neighborhoods in North Las Vegas, 70 percent of homeowners not in foreclosure were under water on their mortgages, according to RealtyTrac.
Last June, Reuters first reported on MRP’s unusual proposal, which involves raising private funds to pay for the condemnation process, which would result in investors in mortgage-backed securities incurring a loss on every loan that got seized and restructured into a new mortgage with lower overall dollar value. MRP tried to sell officials in San Bernardino County, Calif. on the idea, but in January public officials there walked away from the idea in light of protests from bond investors and the Securities Industry and Financial Markets Association.
But MRP didn’t go away. Since losing in San Bernardino, it has now signed advisory deals with half dozen towns and cities, including North Las Vegas. And while none of those towns has yet agreed to go forward with the condemnation process, things are inching in that direction.
Clearly SIFMA thinks so: After the North Las Vegas vote it put out a statement on Thursday saying that “today’s step brings the city closer to embracing an unconstitutional scheme to seize mortgages.”
Even the New York Fed gave a nod to eminent domain when it published a paper in support of the idea by Robert Hockett, a Cornell University law professor who at one time was advising MRP and does consulting work for the NY Fed and is a visiting scholar with the Global Interdependence Center, a think tank headed up by former PIMCO deep thinker Paul McCulley.
So why this continuing interest in an idea that everyone knows will likely result in a lawsuit being filed the minute a municipality actually engages MRP to go out and seize distress mortgages?
Maybe it’s strong indication of just how much despair remains across the U.S and that is hard to see from the canyons of Wall Street or the beachfront homes in the Hamptons or Malibu, for that matter.
Former Wall Street analyst Jason Ader of Ader Investment Management put it succinctly when he told us late last year that Wall Street, not Main Street, is propping up the housing market. “The positive numbers that are coming out of housing are probably related to institutional purchases of foreclosures,” Ader said.
Ader is in a good position to know as he and partner were in early on the foreclosed home trade and got out because he saw the window to make good money for renting the properties might be a short one.
And that window to buy homes to rent them out might close even faster if the Fed moves to shut the easy money spigot faster than anyone thinks. All of which might mean that what looks like a housing recovery now will slip away, leaving underwater borrowers with even less reason to see an end to their misery.