Unstructured Finance

The nine lives of the eminent domain for mortgages debate

By Matthew Goldstein and Jennifer Ablan

Law professor Bob Hockett, widely credited with popularizing the idea of using eminent domain to restructure underwater mortgages, says he continues to be approached by yield-hungry angel investors looking for a way to help out struggling homeowners and make money at the same time.

He said an increasing number of wealthy investors on “both coasts” regularly reach out to him to get more information about how eminent domain would work and get a better read on “the prospects of municipalities adopting one or another variance of the plan.”

Hockett also is continuing to advise local officials in a variety of cities including some in New Jersey and New York (Irvington, N.J. and Yonkers, N.Y. for instance) on how they might use eminent domain to condemn, seize and restructure deeply underwater mortgages for homeowners determined to keep-up with their high monthly mortgage payments.

Local officials continue to consider the idea of eminent domain even after it ultimately was rejected in San Bernardino County, Calif., North Las Vegas and banks and bond investors sued Richmond, Calif., the municipality that is furthest along the path to condemning underwater mortgages. The lawsuit against Richmond was dismissed by a federal judge as being premature because the California city merely has said it is considering eminent domain but has yet to actually condemn any home loans.

The lawsuits, however, were something of a warning shot to local officials in Richmond and elsewhere that Wall Street will fight like tooth and nail against the plan that would effectively give municipalities the powers to rewrite mortgages and in the process reduce the value of the bonds the loans were packaged into it.

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.

Cash is king in housing

By Matthew Goldstein

It’s no secret that housing in the U.S. has become an investors market, especially if it’s an investor with cash to burn.

For more than a year now, we and just about everyone else in the financial media have been writing about how Wall Street-backed firms are looking to buy-up the wreckage of the housing bust on the cheap and rent out those homes until the time is right to sell them for a sweet profit. And it should come as no surprise that much of that buying is being done with cash because it’s the easiest way for an investor get a deal done quick.

Recent stats from the National Association of Realtors shows that 32 percent of all single family homes in the U.S. are being bought with that cash. But that’s not just foreclosures; it also includes homes listed by brokers. It’s a testament to how much money institutional investors like Blackstone and American Homes 4 Rent have been able to raise from high-net worth investors and others. all of whom are chasing yield in this low-yield world.

The amazing shrinking pile of non-agency mortgage debt

By Matthew Goldstein

Many cash-strapped, unemployed or underemployed people are still struggling with too much consumer and household debt. But there is one kind of debt that is getting smaller and smaller–mortgage bonds issued during the U.S. housing bubble by Wall Street banks and finance firms that isn’t guaranteed by either Fannie Mae of Freddie Mac.

The outstanding dollar value of  so-called private label residential mortgage bonds, or non-agency mortgage debt, is $909 million, according to stats compiled by CoreLogic and mutual fund firm Doubleline Capital. At its peak in July 2007, the total of private label mortgage debt was $2.2 trillion.

In July 2007, the financial crisis began in earnest as ever-so-late-to-game rating agencies began downgrading en massse a whole range of private label mortgage debt, much of which was backed by mortgages taken out by borrowers with either iffy credit histories or who put almost no money down for a home. As we all know the market for private mortgage debt shut-down and only now is beginning to show the first signs of coming to life–or green shoots as some might say.

UF Weekend Reads

So it appears Uncle Ben a/k/a Fed Reserve Chairman Ben Bernanke finally gets it:  to fix the U.S. economy, you need to fix housing. The trouble is the Fed’s remedy of buying $40 billion worth of mortgage backed securities each month may  not do the trick.

Bernanke argues that buying MBS will push mortgage rates even lower–something that will spur loan refinancings and make it easier for people to buy a home. He believes a rush of new home buying will spur home construction and create job, jobs, jobs.

It sounds good. But the problem is the housing market is not suffering from high interest rates. With the 30-year mortgage rate already down to around 3.65 %, it’s not interest rates that’s keeping the housing market from taking off. Two years after the recession officially ended, far too many homeowners are still weighed down by debt–especially mortgage debt.

When (and where) the 1% talk about 99%

By Jennifer Ablan and Matthew Goldstein

The last place you’d think a group of Wall Street financiers and ex-politicians would convene to come up with a master plan for fixing the housing crisis is a luxury lodge overlooking the Golden Gate Bridge. But in November, during the height of the Occupy Wall Street protests, that’s where 30 rich and powerful people assembled to “do a good thing” for America.

The meeting at Cavallo Point in Sausalito, Calif., aimed to “hammer out a business plan and chart a course through 2012″ for an investment vehicle that intends to buy up troubled mortgages and help out the homeowners all the while making a 20 percent annual return. You can read the details here

The group is led by Phil Angelides, the California politician, land developer and most recently, the chairman of a federal commission who led investigations into why the financial markets collapsed. The Federal Crisis Inquiry Commission was criticized for failing to come up with any real proposals preventing another crisis. Yet it seems to have inspired Angelides (his tenure at the FCIC ended last February) and others to come up with a market-based solution to the housing debacle.

John Paulson’s lost advantage

By Matthew Goldstein

Hedge fund titan John Paulson has a shrinkage problem.

The billionaire manager’s flagship Paulson Advantage funds are quickly losing altitude after peaking with $19.1 billion in assets under management in March. As of the other day, the combined AUM of the Paulson Advantage and Advantage Plus funds had fallen to $15.7 billion, according to investor sources.

The Advantage funds account for roughly 44 percent of the $35. 2 billon in assets under management at Paulson. The two so-called event driven funds  long have been the manager’s largest.

And the July performance numbers for the Advantage funds should be ugly. A source tells us the Advantage Plus fund, which is a leveraged version of the plain vanilla flagship fund, was down 4.63 percent in July. With that decline, the Advantage Plus fund is down a little over 21.6 percent for the year. The plain vanilla Advantage fund is believed to be down around 15 percent for the year.

Jobs and housing

By Matthew Goldstein

The jobs picture in the U.S. just got markedly worse based on the May unemployment report. And as long as job growth remains sluggish, anemic, pathetic–insert your own adjective–the housing market will remain in the dumps as well.

The only glimmer of good news is the nation isn’t shedding jobs–at least for now. But with the economy adding just 54,000 new jobs in May, that’s not nearly enough to work for all those recent college graduates hitting the labor market and the long-term unemployed who were early casualties of the financial crisis.

And the ugly truth is that until the jobs picture seriously improves the foreclosure crisis will show no signs of easing and may very well get worse.

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