Mortgage investors' inevitable constitutional challenge to eminent domain


Alison Frankel: Mortgage investors’ inevitable constitutional challenge to eminent domain

Alison Frankel: Mortgage investors’ inevitable constitutional challenge to eminent domain


On Tuesday, the small California city of Richmond announced that it has sent notices to 624 homeowners whose houses are worth less than they owe on their mortgages. Richmond said it intended to buy their mortgages for 80 percent of the fair value of their houses and to help them refinance with new, more affordable mortgages. In the event homeowners don’t want to participate in the program, Richmond said it would use its power of eminent domain to seize the mortgage loans.

Yes, the much-discussed eminent domain mortgage seizure idea is finally being realized, despite vehement opposition from just about the entire financial industry. It’s been more than a year since a San Francisco outfit called Mortgage Resolution Partners first floated the concept of partnering with troubled cities to reduce foreclosures by using the city’s eminent domain power to seize mortgages of underwater homeowners in the name of the public good. (MRP’s role is to provide cities with capital for the eminent domain purchases, issue modified mortgages to homeowners and then bundle and resell the new loans as mortgage-backed securities.) Proponents have pitched the plan as a public boon, a way to keep homeowners in their houses and preserve neighborhoods that would otherwise be blighted with foreclosures. The concept was alluring enough that over the last year, officials in several California cities, as well as North Las Vegas and even Chicago, have toyed with using eminent domain to stave off foreclosures.

Before Richmond, however, all of the cities that considered the scheme have been dissuaded, in part by concerted financial industry opposition. Investors in mortgage-backed securities hate the eminent domain idea. No mystery there: The vast majority of the mortgage loans that cities want to seize belong to MBS trusts. When cities talk about buying mortgages for 80 percent of the current value of a house, they’re not accounting for the value of the seized loan to the MBS trust that actually owns the mortgage, especially because these eminent domain proposals call for the takeover of performing loans, not mortgages on which homeowners have already defaulted. (More than 440 of the homeowners that received notices from the city of Richmond are up-to-date on their mortgage payments.) So as Timothy Cameron, the head of the Asset Management Group of the Securities Industry and Financial Markets Association, explained to me on Thursday, MBS investors believe that they’re twice injured by mortgage seizures under eminent domain plans. First, they’re shortchanged on the value of the revenue stream from a performing loan; and second, they’re damages by the decline in the value of their mortgage-backed securities, which are worth less when performing loans are terminated.


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2 Responses to “Alison Frankel: Mortgage investors’ inevitable constitutional challenge to eminent domain”

  1. Sarah says:

    Well, we know how Susan Webber feels about this. It’s true, however, that the Constitution doesn’t specifically mention the human right to housing, nor does it mention the right for “investors” to make money at the expense of those human rights.

  2. Carl Collicott says:

    what foreclosure?
    The City of Richmond does not need to pay anything!
    By not judicially Foreclosing on the real property the Bank has lost the lien! See BANK OF AMERICA V. DAILY 152 Cal. App 3rd. 767 1984
    The people of California have been defrauded in the largest way imaginable, in California there is only ONE form of foreclosure on real property. It has to be in a court of law. Code of Civil Procedure section 726, pertinent part reproduced below, states the fact. Furthermore, any deed of trust that contains a waiver of this right is void and unenforceable see Civil Code section 2953. 2953, or C.C.P. 726 can be raised at any time. All deeds of trusts in California are void ! ( the deeds state, you have granted the right to sell the property, via non- judicial foreclosure).
    Source: Find California Code (online)
    Code of Civil Procedure § 726. Form of action; procedure unenforceable
    Form of action; judgment.
    There can be but one form of action for the recovery of any debt, or
    the enforcement of any right secured by mortgage upon real property,
    which action must be in accordance with the provisions of this
    chapter. In such action the court may, by its judgment, direct the
    sale of the encumbered property (or so much thereof as may be
    necessary), and the application of the proceeds of the sale to the
    payment of the costs of court,
    The banks circumvent this requirement by using a different definition of mortgage, found in Civil Code section 2924, adopted in 1872, the so called non-judicial foreclosure. What has the Supreme Court of California stated about section 2924? The code section pertains to a mortgage of personal property.
    [No. 19385. In Bank.—January 5, 1895.]
    105 CAL. 467
    Under section 2924 of •the Civil Code a mortgage may be made by a transfer of an interest in any personal property, other than in trust, made only as security for the performance of another act, and the power to mortgage personal property, without a transfer of pos¬session, is not confined or limited to the articles enumerated in sec-. 2955 of the Civil Code.


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