It's more than 18 months since Mortgage Resolution Partners (MRP) first came to general public attention, and since I wrote three substantial posts explaining exactly why, as the headline of the first post says, "using eminent domain for liens is a bad idea." The idea is still a bad one, but it lives on - and now Shaila Dewan has delivered a 2,500-word piece in the NYT about its status in Richmond, California - the town where it is closest to being enacted.
Like most of the discussion of this issue in the press, Dewan's article fails to make what, to me, is the key distinction here - between seizing mortgages and seizing houses. Seizing houses where the owners are underwater on their mortgages is, at least in principle, a good idea. You buy the house in a short sale at a fair market value. All of the proceeds go to the mortgage lender. You then sell (or rent) the house back to its current owner, for a little more than you paid for it but a lot less than the mortgage was for. The homeowner now has equity again, and a much reduced mortgage, and the risk of foreclosure has gone down substantially. If municipal powers of eminent domain can help you do this, then by all means use them.
Disappointingly, that's not what's being proposed. Instead, the idea being shopped around various cities, including Richmond, is that MRP, along with the municipalities, will seize the mortgage under eminent domain. They will then issue a new mortgage to replace the old one, which gives the homeowner back some equity. There are lots of problems with this idea; they haven't changed at all since 18 months ago. The main ones are, firstly, that the plan does nothing to address the problem of second liens; and, secondly, that the whole scheme is based on a huge lie. The plan only works if the mortgage can be seized for a price which is substantially less than the value of the property. But in fact, nearly all of these mortgages are worth substantially more than the value of the property; indeed, many of them are worth more than the face value of the mortgage. And so the eminent domain plan is not a plan to acquire property at fair market value; in fact, it's a plan to gift mortgages to a private company, Mortgage Resolution Partners, at prices well below what those mortgages are actually worth.
Why doesn't Dewan explain the issue this way? That's easy: it's because she's a reporter, she's reporting what she sees, and that's simply not the way that the contours of the debate are drawn in the real world. If you travel to a town like Richmond, you don't find a debate about the distinction between seizing mortgages and seizing houses; you don't even find a debate about what the fair market value of a mortgage is, if the house in question is underwater. Instead, you find a simple face-off, between poor and angry locals, on the one hand, and well-funded corporate interests, on the other. In that situation, it's hard not to sympathize - as Dewan clearly does - with the humans, especially when the corporations are churning out misinformation in the form of robocalls about the way the plan would give MRP the ability to "take houses on the cheap," and bus in fraternity brothers from neighboring towns to demonstrate against a City Council vote.
The difference between the two sides is especially stark in Richmond, where the mayor, Gayle McLaughlin, is a member of the Green Party and an anti-Chevron activist who refused corporate campaign donations and is a veteran of tough fights against faceless corporate interests. And while MRP's plan is self-serving and unlikely to make a huge amount of difference in any case, it's easy to see why McLaughlin believes that something is better than nothing:
Homes in the city lost 66 percent of their value, on average, and are still worth less than half what they were at their peak, in January 2006. Some 16 percent of homeowners lost their homes in foreclosure, leaving so many scars on neighborhoods that the city began fining banks $1,000 a day if they failed to maintain their property; the city has collected $1.5 million so far.
This explains why the MRP scheme is still alive, despite the astonishing level of opposition it has managed to elicit. Indeed, it might be more accurate to say that the MRP scheme has managed to stay alive precisely because of the astonishing level of opposition it has managed to elicit. The banks and investors and realtors and financial-services industry groups who oppose MRP's plan are exactly the people most to blame for the real-estate crisis which devastated towns like Richmond - which can itself seem to be a good prima facie reason to adopt any plan they're complaining about.
MRP, here, is tapping into a deep vein of resentment and mistrust, and the financial services industry, with its heavy-handed opposition, is in many ways playing straight into MRP's hand. The problem, for the industry, is that it really doesn't have any constructive solutions to Richmond's problems - and as a result, all it can offer is sticks without carrots. (When Richmond attempted a bond offering, to refinance old economic development bonds, it was met with no takers.) MRP itself, of course, is very much part of the financial-services industry, and would love to make an enormous amount of money from its scheme. But it's not hard for MRP to persuade the likes of McLaughlin that it's on her side - all it needs to do is point to the squeals of pain coming from banks, investors, and the like. If the plan is bad for them, it must be good for Richmond, right?
In that sense, what we're seeing here is the current spate of bank prosecutions effectively being played out at the micro-local scale. (In Richmond, for instance, which has a population of more than 100,000 people, a mere 624 homes would be included in the scheme.) For prosecutors, attacking financiers is a move with all upside and no downside: whether you're slapping JPMorgan (JPM) with billions of dollars in fine or merely settling a silly case with Blackrock (BLK) for $400,000, if you're causing money to flow back to taxpayers from Wall Street then you're generally perceived as doing god's work. And the same phenomenon has opened up an opportunity for MRP - which is being supported by the likes of Evercore Partners and Westwood Capital - to paint itself as being on the side of the angels. Municipalities, however, should beware financiers spouting anti-Wall Street rhetoric. The MRP plan might be the only chance that a city like Richmond has to try to address its foreclosure crisis head-on. But that doesn't make it a good idea.