The Stone that Brings Down Goliath? Richmond and Eminent Domain

[eridani]

http://www.nationofchange.org/stone-brings-down-goliath-richmond-and-eminent-domain-1394034390

Investors can afford high-powered attorneys to bring investor class actions, but underwater and defaulting homeowners usually cannot; and that is where local government comes in. Eminent domain is a way to bring banks and investors to the bargaining table.


Professor Robert Hockett of Cornell University Law School is the author of the plan to use eminent domain to take underwater loans and write them down for homeowners. He writes on NewYorkFed.org:

[In] the case of privately securitized mortgages, [principal] write-downs are almost impossible to carry out, since loan modifications on the scale necessitated by the housing market crash would require collective action by a multitude of geographically dispersed security holders. The solution . . . Is for state and municipal governments to use their eminent domain powers to buy up and restructure underwater mortgages, thereby sidestepping the need to coordinate action across large numbers of security holders.

The problem is blowback from the banks, but it can be blocked by requiring them to prove title to the properties. Securities are governed by federal law, but real estate law is the domain of the states. Counties have a mandate to maintain clean title records; and legally, clean title requires a chain of “wet” signatures, from A to B to C to D. If the chain is broken, title is clouded. Properties for which title cannot be established escheat (or revert) to the state by law, allowing the government to start fresh with clean title.

<snip>

Before the rise of mortgage securitization, any transfer of a note and deed needed to be recorded as a public record, to give notice of ownership and establish a “priority of liens.” With securitization, a private database called MERS (Mortgage Electronic Registration Systems) circumvented this procedure by keeping the deeds as “nominee for the beneficiary,” obscuring the property’s legal owner and avoiding the expense of recording the transfer (usually about $30 each). Estimates are that untraceable property assignments concealed behind MERS may have cost counties nationwide billions of dollars in recording fees. (See my earlier article here.)

Counties thus have not only a fiduciary but a financial interest in establishing clean title to the properties in their jurisdictions. If no one can establish title, the properties escheat and can be claimed free and clear. Eminent domain can be a powerful tool for negotiating loan modifications on underwater mortgages; and if the banks cannot prove title, they have no standing to complain.

[WillyT]

1. HUGE K & R !!! - THANK YOU !!!

[roody]

2. Knr

[Stargazer09]

3. Sounds good to me

As long as people are not kicked out of their homes in the process.

[calimary]

4. Mighty good to know. I wonder if they consulted with Elizabeth Warren's office.

Hopefully!

THIS is what we have to do. An example of what we have to do. The enemy has kept us almost too busy, attacking and finagling and chipping away at every column we've tried to build, making the most of loopholes and backdoors and fine print. WHY CAN'T WE DO LIKEWISE??? Start keeping them busy. Drilling holes in their structures and underpinnings. So that, everywhere they turn, they find termites in their foundations.

[pscot]

5. Genius!

[JimDandy]

6. So, not even the private MERS database

has records of the chain of title?

[littlewolf]

7. ok here is a question.

many states have laws preventing gov't from using Eminent domain
from taking property unless it is for a specific public good reason, ie
roads, fire stations, police stations, schools .... etc
how would this idea work IRT those laws?

[Stonepounder]

8. It seems to me that they are conflating two things.

Eminent Domain - The power to take private property for public use by a state, municipality, or private person or corporation authorized to exercise functions of public character, following the payment of just compensation to the owner of that property.

Escheat - The power of a state to acquire title to property for which there is no owner.

To seize properties under Eminent Domain requires that they show 'public good'. To escheat property back to the state simply requires that there be no clear owner, or that the owner has abandoned the property.

The OP seems to use the terms interchangeably, but they are two different concepts. Suppose that I have a savings account with a small balance. I move and forget about the account. After a period of time with no activity on the account and statements being returned the bank can't just keep the money. It has to turn it over to the state. Same with real property. An abandoned property with no clear owner, or the location of the owner is unknown, can be escheated to the state. The state does not have to show 'public good'.

IANAL, but it seems to me that escheating underwater properties and 'selling' them back to the owners after a writedown to current value would benefit the state, the homeowner, and let the banks know what the state thinks about MERS.

[magical thyme]

10. I'm thinking they may be using eminent domain to rope the banks in to discussions

and then, when the banks are unable to prove clear title due to their fraudulent practices, they can escheat the properties. Saves the town money because if they take by eminent domain they have to compensate the owners at fmv, whereas if the property is escheated there is no owner to compensate and the banks have to eat their fraud.

The public good for eminent domain is easy: houses sitting empty lower all neighboring property values and invite criminals to move in, so are a public nuisance.

[Stonepounder]

11. OK, that makes sense. n/t

[littlewolf]

12. I am not certain that the public good portion of your post would pass

a court challenge.
but I am not a lawyer nor have a played one on TV.

[Stonepounder]

15. Ahhh, but who would have standing to challenge it?

Since the home owner would know that the municipality was acting in the owner's best interest, they wouldn't sue. And the whole point is that there is no legal owner, so uless a bank or some other entity could prove legal ownership, they wouldn't have standing to challenge. (IANAL either).

[eridani]

14. Thanks for this explanation n/t

[Martin Eden]

9. Oh Please, Please -- Make It So! ... K&R n/t

[progressoid]

13. Wow. Brilliant.