Will reverse eminent domain save or damn underwater homeowners?
Mortgage Resolution Partners (MRP) has expanded its reverse eminent domain proposal to include homeowners delinquent or in default on their loans. However, representatives of Wall Street, the mortgage industry, the Federal Housing Finance Agency (FHFA) and financial trade associations continue to protest against the action, suggesting it will have a “chilling effect” on mortgage lending and result in higher lending costs for homebuyers in those regions like San Bernardino, which use the action.
The Lt. Governor of California has called these statements “threats” and attempts to “coerce” counties into not approving reverse eminent domain. He has further asked the antitrust division of the Department of Justice (DOJ) to investigate such statements.
In light of Wall Street’s threats against the citizens of San Bernardino, MRP and the Lt. Governor have warned the FHFA against redlining.
first tuesday Insight
The expansion of the program to include delinquent homeowners is good news for San Bernardino homeowners as well as the entire California real estate market. Although past government intervention for delinquent homeowners has had small success (e.g. the Home Affordable Modification Program (HAMP) and the Home Affordable Refinance Program (HARP and HARP 2.0)), reverse eminent domain is more dramatic and solves the core problem of negative equity by reducing mortgage principal through the state’s police power.
Think of this as a close cousin to the cramdown. This relieves a financial burden from homeowners current on payments and allows those in default (who were previously precluded from participating) to sell their homes at fair market value (FMV). The shackles of negative equity will be loosened and properties freed to be bought or sold again, allowing the local market to regain much-needed balance and these owners much needed mobility.
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However, threats from the FHFA and its buddies on Wall Street that reverse eminent domain will lead to increased lending costs or freeze mortgage lending in affected areas are entirely unjust. The debate over reverse eminent domain is national; if one county uses it, the doors will be opened to every other county in the nation — a potentially profound and powerful precedent. As the power is exercised locally and precedents are set, its legality and feasibility will be broadly established, possibly paving the way for states and municipalities to take the negative equity crisis into their own hands.
There are many ways to tell a tale, but here’s the plain truth of this situation: lenders are threatening to target homebuyers by their geographical location under the guise of protecting themselves against a “credit risk,” when in fact this is nothing more than economic discrimination — dare we say, redlining.
Fact: Homebuyers seeking financing to purchase property in San Bernardino County are no greater risk than those purchasing property in the counties surrounding San Bernardino. Any suggestion on the part of lenders that higher lending costs will meet future San Bernardino homebuyers is an attempt to strong-arm the county into complying with the preferences of lenders, whether or not those preferences are legally or rationally justified.
We will follow this debate all the way to the Supreme Court. Illusions have been lost as a result of the Lesser Depression and more citizens are realizing they needn’t be pinned down under the thumb of the Big Banks.
Wall Street provides the service of financing America’s homes. They screwed up royally five years ago and they are waiting for homebuyers to forget. Well, they haven’t. Reverse eminent domain is a viable option for local citizens to regain control over their shelter and determine the direction of their lives without being beholden to the Big Banks. These threats are the impotent battle cries of a crumbling regime, desperate to hold onto a withering status quo.
Dear Wall Street,
Please attempt to redline San Bernardino County so they can take you to the Supreme Court and make an example of you on the national stage — again.
Related articles:
The Housing Financial Discrimination Act of 1977
Mortgage mods by eminent domain: Be an advocate this time, for a change
Re: “Lt. Gov. Gavin Newsom alleges ‘threats’ against mortgage plan” from the Los Angeles Times
