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It looks like one county in CA is planning to use Eminent Domain to cram down all Mortgages to FMV : NY times link

Here is the simplified summary of how Eminent Domain could be used:

1. Use Eminent Domain to buy up all homes that are underwater paying Fair Market Value (based on an appraisal) as required by the US constitution. The remaining Mortgage balance will be wiped out since CA is a no-recourse state.
2. Sell the home back to the owner at 100% of Fair Market Value using a combination of conforming 1st Mortgage, 2nd Mortgage and small unsecure loan (if the homeowner can't come up with the 3% downpayment required).

This would only be done for homes where the homeowner agreed to participate due to being underwater on the Mortgage.

Of course the actual plan in the article was proposed by a private investor and involves the investor providing the state with the funds for the purchase in step 1 and then making a profit by charging the Homeowner 110% of Fair Market Value to buy back the house (amount of markup not clearly disclosed in the article). They claim Homeowners that are more than 110% LTV will still come out ahead, especially since they will be eligible for the latest Mortgage rates. They also modified step 1 to involve buying the Mortgage rather than the home so the Mortage holder cannot legally object, and since most Banks carry Mortages that are underwater on their books at the estimated FMV of the home, they assume the FMV estimate of the Mortgage will be the same as that of the Home.

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bump for an interesting thread

SangioveseW (Nov. 18, 2012 @ 8:39a) |

Condemnation is quite a legal process as far as I know. I just wonder who will be authorized to pick the winners in lose... (more)

delzy (Nov. 18, 2012 @ 9:41p) |

Any updates?

neophyte (Feb. 09, 2013 @ 2:04a) |


Of course the actual plan in the article was proposed by a private investor and involves the investor providing the state with the funds for the purchase in step 1 and then making a profit by charging the Homeowner 110% of Fair Market Value to buy back the house (amount of markup not clearly disclosed in the article). They claim Homeowners that are more than 110% LTV will still come out ahead, especially since they will be eligible for the latest Mortgage rates.

I seem to remember a thread from a while back where a company was going to do something similar. The owner was posting here about it.

If you actually read the article, you're statement that they are 'planning to use imminent domain' is incorrect.

A business proposed the idea to San Bernadino County, which is intrigued, but recognizes that there would be serious legal ramifications that would likely have to play out in court. The county government is voting on the idea in December.

I imagine with the terrible finances plaguing this government, it likely can't afford a drawn-out court battle against the big banks and this plan will be DOA. We shall see.

So who would all of the new junk loans?

chocula said:   So who would all of the new junk loans?

The investor who would also protect itself with some ridiculous clauses making it impossible for people to ever default on their debt? This idea spells desperation and it won't fly.

ananthar said:   The remaining Mortgage balance will be wiped out since CA is a no-recourse state.
AFAIK, that's only true for purchase loans. I'd be curious how many of the homeowners have only their original purchase loan, and have never done a refi or added a HEL or HELOC.

ananthar said:   
Here is the simplified summary of how Eminent Domain could be used:

1. Use Eminent Domain to buy up all homes that are underwater paying Fair Market Value (based on an appraisal) as required by the US constitution.


And how do they pull this off? Involking Eminent Domain requires the land be acquired for a public purpose, not for the purpose of immediately selling it back to the same person.

I believe there are already companies using this same concept - the homeowner walks away from their home and mortgage, an investor buys the home in forclosure, investor sells it back to owner at market price. Not sure why the county would even have a roll in the process, aside from giving the scheme a bit of credibility and convince more people (who'd typically dismiss it as a scam) to participate. And of course, to guarantee the money the investors are using to finance the whole thing, and to assume the risks associated with each individual property so the investors can just sit back and collect their return worry-free.

This is a terrible idea. First, whether or not a private company gets involved, the incentives strongly favor the government underpaying you for your property and eminent domain has few enough citizen protections already - no they don't have to get an appraisal, they just make up a number and take your stuff. Secondly, there are serious Constitiutional issues with doing this, as eminent domain is only supposed to be used for the public good and a new, broadly construed intrepretation of that could lead to even more arbitrary seizures and erosion of proper rights than we have now (under RICO, etc, which already have huge abuses). Lastly, note that this proposal allows seizing property from still-current-but-underwater homeowners which would have a chilling effect on the mortgage securitization market, since any mortgage buyer would need to worry about the political risks of asset seizure in addition to the normal repayment risks of holding a mortgage. From the article,

NYT said: “If the government has the ability to abrogate the contract at will and at the expense of the bond holder, the investor is going to do one of two things: require a tremendous premium for the risk they are incurring, or just not invest at all,” Mr. Bentsen said. “It would be a risk factor that would be impossible to underwrite.”

I guess we're already mostly to the point were almost nobody writes mortgages unless they can hand them off the FHA, but this is a bad trend and I can't think that the government running the whole housing market is a good idea. Look at what great stewards of the public good they were back in the 2000s - encouraging lax lending and "home ownership" for Fannie and Freddie that lead to billion dollar losses, the Fed building a huge asset bubble whose crash destroyed threatened the banking system, etc.

http://www.law.cornell.edu/supct/html/04-108.ZS.html Kelo vs New London The US Supreme Court said you're wrong xerty. It is not a new found right. Issue settled in 2005. And your correction of my statement on Madoff on how far back the Madoff trustee can go is not two years as limited by the federal statute but 6 years under the NY fraudulent conveyance statute. The 2nd Circuit issued a memorandum reinstating the bankruptcy court order and for Judge Rakoff to use the previous 2nd circuit decision instead of the two years in his order. Don't think that Wilpon and Katz can prove they are "unsophisticated investors". Golden rule of bankruptcy is the trustee always wins sooner or later.

Big catch for the HELOC and other "recourse loans" is that they must prove that they held at least $1 in equity over and above the mortgage portion of the loan to maintain their right of recourse. Think of the Daitek 125% of value loans. Otherwise eminent domain is force majure just like an earthquake. The lenders didn't lose anything they that they had in real world accounting.

All this would do is remove the likelihood of bankers making stupid loans. They want to make stupid loans and have the public bail them out when they go bad.

nsdp said:   http://www.law.cornell.edu/supct/html/04-108.ZS.html Kelo vs New London The US Supreme Court said you're wrong xerty. It is not a new found right. Issue settled in 2005.
There's a pretty big difference between taking land for a larger project (even if it is a private project), and taking land simply to give it back - as-is - to the same owner...

Not sure what the following Madoff rant has to do with anything, either.

nsdp said:   Big catch for the HELOC and other "recourse loans" is that they must prove that they held at least $1 in equity over and above the mortgage portion of the loan to maintain their right of recourse. Think of the Daitek 125% of value loans. Otherwise eminent domain is force majure just like an earthquake. The lenders didn't lose anything they that they had in real world accounting.
Well, the lender is entitled to the repayment of a loan, and then (with non-recourse loans) they arent. So yes, they've lost something regardless of how you want to characterize the accounting of it.

And their right of recourse has nothing to do with having equity - a lack of equity just means the lender doesnt get any proceeds from a foreclosure sale. The whole concept of being "recourse" is that the lender can still pursue the borrower for any deficiency regardless of any equity remaining in the home. Non-recourse loans are what limit the lender's ability to collect to the equity in the home, and that's typically limited to purchase money mortgages, not post-purchase refinances and HELOCs.

Kelo is living proof that not even the Supreme Court can get things right. IIRC the lot is now used as a landfill or something of the sort.

ETA: Yep, what a joke.
http://en.wikipedia.org/wiki/Kelo_v._City_of_New_London

Ultimately, Pfizer chose to retain the Groton campus on the east side of the Thames River, closing its New London facility in late 2010 with a loss of over 1000 jobs. This coincided with the expiration of tax breaks on the New London site that would have increased Pfizer's property tax bill by almost 400 percent.[17][18]

In the aftermath of 2011's Hurricane Irene, the now-closed New London redevelopment area was turned into a dump for storm debris such as tree branches and other vegetation.[20]

xerty said:   
NYT said: “If the government has the ability to abrogate the contract at will and at the expense of the bond holder, the investor is going to do one of two things: require a tremendous premium for the risk they are incurring, or just not invest at all,” Mr. Bentsen said. “It would be a risk factor that would be impossible to underwrite.”


The real mystery is why mortgage rates in CA (a non-recourse state) are not already higher than in "recourse" states, since the risk factor Mr. Bentsen refers to already exists : anyone in CA with a non-recourse loan can do a strategic default themselves and the Mortgage holder ends up even worse than under the proposal mentioned since they typically have to wait 2 years with no interest or payment to even get a chance at 100% of FMV recovery (and good luck getting 100% of FMV for a forclosure sale in the current economic environment). The only difference with a strategic default is that the homeowner is forced to move and buy a similar home somewhere else, but given 2 years of rent-free living the homeowner still comes out ahead vs the Eminent Domain proposal.

Glitch there is something called the Fair Housing Act of 1968. http://www.fairhousing.com/index.cfm?method=page.display&pageid=... Probably passed before you were born. Applies to purchase, sales, and lending for residential single family and multifamily dwellings among other things. It happens to prohibit suits or collections where a lien holder has no equity to attach to. Originally done to take care of certain abusive lending practices of unsecured lenders who would sue and get a judgment and cloud title on a primary residence. Congress just said no equity no recourse. If you have partial equity then you do have equity subject to limitations of the Fair Housing Act of 1968 even though state law may not impose any limitations. Article IV Clause 2 US Constitution.

Mr. Bentsen's claim is garbage. No mystery why California rates are no different, the market has had since 1968 to adapt.

After Kelo, Glitch's distinction is meaningless from the Supreme Court's point of view as was pointed out in the opinion. “this Court long ago rejected any literal requirement that condemned property be put into use for the … public. 467US244” http://www.law.cornell.edu/supct/html/historics/USSC_CR_0467_022... It pays to read the cases not summaries or Wikipedia before commenting. Midkiff was a unanimous opinion written by Justice O'Connor. Purpose here is community redevelopment. Supreme Court has said it is not the place of the Court to second guess the state legislature on what is a public purpose.

ananthar said:   xerty said:   
NYT said: “If the government has the ability to abrogate the contract at will and at the expense of the bond holder, the investor is going to do one of two things: require a tremendous premium for the risk they are incurring, or just not invest at all,” Mr. Bentsen said. “It would be a risk factor that would be impossible to underwrite.”

Besides non recourse , were also not required to get earthquake insurance . So that's another loss the lender may face on high ltv loans
The real mystery is why mortgage rates in CA (a non-recourse state) are not already higher than in "recourse" states, since the risk factor Mr. Bentsen refers to already exists : anyone in CA with a non-recourse loan can do a strategic default themselves and the Mortgage holder ends up even worse than under the proposal mentioned since they typically have to wait 2 years with no interest or payment to even get a chance at 100% of FMV recovery (and good luck getting 100% of FMV for a forclosure sale in the current economic environment). The only difference with a strategic default is that the homeowner is forced to move and buy a similar home somewhere else, but given 2 years of rent-free living the homeowner still comes out ahead vs the Eminent Domain proposal.

Glitch99 said:   

And how do they pull this off? Involking Eminent Domain requires the land be acquired for a public purpose, not for the purpose of immediately selling it back to the same person.

I believe there are already companies using this same concept - the homeowner walks away from their home and mortgage, an investor buys the home in forclosure, investor sells it back to owner at market price. Not sure why the county would even have a roll in the process, aside from giving the scheme a bit of credibility and convince more people (who'd typically dismiss it as a scam) to participate. And of course, to guarantee the money the investors are using to finance the whole thing, and to assume the risks associated with each individual property so the investors can just sit back and collect their return worry-free.


How governments utilize eminent domain is actually an area of my research for my PhD, so I've done a ton of research on this (and 1 peer reviewed article published on it, yay). Kelo v. New London expressly allowed eminent domain for economic development purposes unless state law otherwise prohibited it (or city law, in the case of home rule states). California local governments have home rule so the city could easily enlarge its eminent domain power for this purpose. Under Kelo economic development seizures where allowed by local law are considered a public purpose because the public indirectly benefits and the government has a established public purpose in promoting economic growth.

This is called the "expanded public benefit" doctrine in academia, which is the idea that governments using eminent domain can do so for just about any reason where they can reasonably claim citizens benefit - even indirectly. This is in contrast to the "strict public use" doctrine, which is what many lower level courts before Kelo held (SCOTUS was not always so clear, as you can see from Hawaii Housing Authority v. Midkiff)- which is that there must be a direct and obvious relationship between the seizure and its actual use by the public. This wouldn't be allowed under strict use, but is under expanded benefit.

Additionally, under blight provisions most governments can seize property, and the definition of blight can be exceedingly large (in North Carolina, for example, its so huge I'm convinced you could use eminent domain any declare anything blighted). Again, because were not dealing with a home rule local government if they don't have a expanded blight provision they could easily pass one. The tricky part on blight provisions is that if you seize property which obviously isn't blighted (using the traditional understanding of the term) because you gave yourself as a government an all-encompassing definition of what blight means, you could end up in court against the former property owners. But since in this case the property owners would LOVE to have their property "seized" they wouldn't take the government to court.

The only kink I see here is that I suspect the mortgage holders will not take this laying down. Eminent domain requires "just compensation" for the seized property, but the case law on that has always clearly ruled that this equates to fair market value. Although the mortgage holders undoubtedly know this it still may not stop them from taking the city to court, or threatening to do so, in order to dissuade them from doing this. Even if the city is guaranteed to win they could drag this out for years and cost the city countless millions.

magika said:   Glitch99 said:   

And how do they pull this off? Involking Eminent Domain requires the land be acquired for a public purpose, not for the purpose of immediately selling it back to the same person.

I believe there are already companies using this same concept - the homeowner walks away from their home and mortgage, an investor buys the home in forclosure, investor sells it back to owner at market price. Not sure why the county would even have a roll in the process, aside from giving the scheme a bit of credibility and convince more people (who'd typically dismiss it as a scam) to participate. And of course, to guarantee the money the investors are using to finance the whole thing, and to assume the risks associated with each individual property so the investors can just sit back and collect their return worry-free.


How governments utilize eminent domain is actually an area of my research for my PhD, so I've done a ton of research on this (and 1 peer reviewed article published on it, yay). Kelo v. New London expressly allowed eminent domain for economic development purposes unless state law otherwise prohibited it (or city law, in the case of home rule states). California local governments have home rule so the city could easily enlarge its eminent domain power for this purpose. Under Kelo economic development seizures where allowed by local law are considered a public purpose because the public indirectly benefits and the government has a established public purpose in promoting economic growth.

This is called the "expanded public benefit" doctrine in academia, which is the idea that governments using eminent domain can do so for just about any reason where they can reasonably claim citizens benefit - even indirectly. This is in contrast to the "strict public use" doctrine, which is what many lower level courts before Kelo held (SCOTUS was not always so clear, as you can see from Hawaii Housing Authority v. Midkiff)- which is that there must be a direct and obvious relationship between the seizure and its actual use by the public. This wouldn't be allowed under strict use, but is under expanded benefit.

Additionally, under blight provisions most governments can seize property, and the definition of blight can be exceedingly large (in North Carolina, for example, its so huge I'm convinced you could use eminent domain any declare anything blighted). Again, because were not dealing with a home rule local government if they don't have a expanded blight provision they could easily pass one. The tricky part on blight provisions is that if you seize property which obviously isn't blighted (using the traditional understanding of the term) because you gave yourself as a government an all-encompassing definition of what blight means, you could end up in court against the former property owners. But since in this case the property owners would LOVE to have their property "seized" they wouldn't take the government to court.

The only kink I see here is that I suspect the mortgage holders will not take this laying down. Eminent domain requires "just compensation" for the seized property, but the case law on that has always clearly ruled that this equates to fair market value. Although the mortgage holders undoubtedly know this it still may not stop them from taking the city to court, or threatening to do so, in order to dissuade them from doing this. Even if the city is guaranteed to win they could drag this out for years and cost the city countless millions.
I'm not disputing the ability to use eminent domain to advance private development, for a clear "public purpose" or otherwise (I've seen prime tourist property seized, just to give to the Indians to build a casino...).

I'm disputing the ability to use it for the sole purpose to give the property back to the same owner in the same condition for the same purpose it was already being used for. These parameters definately do not fit the parameters of the case being cited. I'm pretty sure that merely clearing a lien off an individual's private property - which is the only thing being accomplished - doesnt count as an "economic development purpose" in any sense of the term.

nsdp said:   Glitch there is something called the Fair Housing Act of 1968. http://www.fairhousing.com/index.cfm?method=page.display&pageid=... Probably passed before you were born. Applies to purchase, sales, and lending for residential single family and multifamily dwellings among other things. It happens to prohibit suits or collections where a lien holder has no equity to attach to. Originally done to take care of certain abusive lending practices of unsecured lenders who would sue and get a judgment and cloud title on a primary residence. Congress just said no equity no recourse. If you have partial equity then you do have equity subject to limitations of the Fair Housing Act of 1968 even though state law may not impose any limitations. Then what's the purpose of "recourse" and "non-recourse", if a lender can only collect up to the value of the property regardless? And what's the point of a short sale, if it doesnt matter if the lender decides to accept a lower payoff amount or not?

Why dont you reference the actual place in the Fair Housing Act that states this, instead of a link to a generic overview? Because in reality it prevents arbitrary liens from being attached to a home, not legit lender from collecting the amount they are owed. If the debt balance exceeds what is recouped from the foreclosure sale, the lender has every right to pursue the borrower for the remaining balance due (aside from purchase-money mortgages in a non-recourse state, of course).

Glitch99 said:   I'm not disputing the ability to use eminent domain to advance private development, for a clear "public purpose" or otherwise (I've seen prime tourist property seized, just to give to the Indians to build a casino...).

I'm disputing the ability to use it for the sole purpose to give the property back to the same owner in the same condition for the same purpose it was already being used for. These parameters definately do not fit the parameters of the case being cited. I'm pretty sure that merely clearing a lien off an individual's private property - which is the only thing being accomplished - doesnt count as an "economic development purpose" in any sense of the term.


Under expanded use the permissible purposes for eminent domain, economic development can include just about anything that could help generate growth. They would claim that having so many people under water suppresses local development potential, and that by doing this they create an environment that is more conductive for economic growth. And...at least as far as the courts have previously ruled...they would win.

Eminent domain power is INCREDIBLY broad in home rule states - the local government can just about do what they want. There doesn't need to be a direct link in most cases...as long as - somehow, some way, you could argue the public would benefit economically from the seizure.

Its really kind of scarey when you think about it.

If this went through, what's to stop any moron from massively overpaying for a house because he knows the government will seize his mortgage? I'm sure they'll have to have some very specific rules for this program, because it seems like you could game this over time.

My house is worth $150k, I sell to somebody (associate) at arms length transaction for $250k and three years later he gets the mortgage seized and I split the $100k overpayment with him. Perhaps a shoddy appraiser might be required and this is just an initial thought of gaming this...so there are some holes.

I wonder how this would play on the tax base. IIRC, property taxes in CA are restrained by a limited growth rate from the prior sale. For an underwater property that was caused by the market peak it would seem this may push down the tax base. For an underwater property that was caused by cash out refi's with an old, low value may goose it with the FMV transaction.

Interesting either way.

xerty said:   ... Look at what great stewards of the public good they were back in the 2000s - encouraging lax lending and "home ownership" for Fannie and Freddie that lead to billion dollar losses, the Fed building a huge asset bubble whose crash destroyed threatened the banking system, etc.As to the housing bubble and financial crisis, you left out the most obvious culprit: the private non bank lenders such as Ameriquest and New Century Financials and the Wall Street non agency securitization machine.

Strange.

Magika, my understanding is that several states passed laws after Kelo to prevent governments from having such broad authority to exercise eminent domain. I know in the city I was living, they forced through a project before the state changed the law for this reason. Do you think in these states the idea that anything that can generate growth would still be viable? It looks like California passed proposition 99, (proposition 99) although honestly the language seems so vague I wonder if it really would have much effect.

You are right, it is scary, especially if the only barrier to seizure is "economic benefit"

magika said:   Glitch99 said:   I'm not disputing the ability to use eminent domain to advance private development, for a clear "public purpose" or otherwise (I've seen prime tourist property seized, just to give to the Indians to build a casino...).

I'm disputing the ability to use it for the sole purpose to give the property back to the same owner in the same condition for the same purpose it was already being used for. These parameters definately do not fit the parameters of the case being cited. I'm pretty sure that merely clearing a lien off an individual's private property - which is the only thing being accomplished - doesnt count as an "economic development purpose" in any sense of the term.


Under expanded use the permissible purposes for eminent domain, economic development can include just about anything that could help generate growth. They would claim that having so many people under water suppresses local development potential, and that by doing this they create an environment that is more conductive for economic growth. And...at least as far as the courts have previously ruled...they would win.

Eminent domain power is INCREDIBLY broad in home rule states - the local government can just about do what they want. There doesn't need to be a direct link in most cases...as long as - somehow, some way, you could argue the public would benefit economically from the seizure.

Its really kind of scarey when you think about it.
Obviously you seem to know what you are talking about in this discussion. But I see a lot of differences between Kelo vs New London and this case (like what Glitch is saying). In this case , there is a contract that states the value of the the mortgage. I can't see how the city can argue the fair compensation is different from what the contract states. I am not debating the ability of using Eminent domain to seize the property. I am saying the only way to do it is to pay off the mortgage.

To put it simply, unless there were frauds involved, the contract was signed by two willing and able participants of the commercial transaction. Nobody can make a case that the mortgage amount is not a fair amount.

Besides, for the local governments to actually choose to do it this way it requires passing some pretty big political hurdles.

I am not seeing this thing happening.

magika said:   Glitch99 said:   I'm not disputing the ability to use eminent domain to advance private development, for a clear "public purpose" or otherwise (I've seen prime tourist property seized, just to give to the Indians to build a casino...).

I'm disputing the ability to use it for the sole purpose to give the property back to the same owner in the same condition for the same purpose it was already being used for. These parameters definately do not fit the parameters of the case being cited. I'm pretty sure that merely clearing a lien off an individual's private property - which is the only thing being accomplished - doesnt count as an "economic development purpose" in any sense of the term.


Under expanded use the permissible purposes for eminent domain, economic development can include just about anything that could help generate growth. They would claim that having so many people under water suppresses local development potential, and that by doing this they create an environment that is more conductive for economic growth. And...at least as far as the courts have previously ruled...they would win.

Eminent domain power is INCREDIBLY broad in home rule states - the local government can just about do what they want. There doesn't need to be a direct link in most cases...as long as - somehow, some way, you could argue the public would benefit economically from the seizure.

Its really kind of scarey when you think about it.

I still don't see the idea of condemning a property to take it, then uncondemning it and selling it back to the same person in the same condition would hold up in court.

I still don't see what this program even accomplishes, aside from letting the investor putting up the cash hide behind the county's guarantee, rather than face the risks of dealing with each homeowner directly... Sounds more like a political favor than a solution to underwater mortgages...

ksuwldkat said:   Magika, my understanding is that several states passed laws after Kelo to prevent governments from having such broad authority to exercise eminent domain. I know in the city I was living, they forced through a project before the state changed the law for this reason. Do you think in these states the idea that anything that can generate growth would still be viable? It looks like California passed proposition 99, (proposition 99) although honestly the language seems so vague I wonder if it really would have much effect. Right, this is what I was meant by "political hurdle". Even if the legal option (of e.d. seisure) is there, the political support to take that option may not be there. (Just to be clear I don't think the legal option is valid to begin with)

You are right, it is scary, especially if the only barrier to seizure is "economic benefit"Don't jump to conclusions so fast.

Al3xK said:   If this went through, what's to stop any moron from massively overpaying for a house because he knows the government will seize his mortgage? I'm sure they'll have to have some very specific rules for this program, because it seems like you could game this over time.

My house is worth $150k, I sell to somebody (associate) at arms length transaction for $250k and three years later he gets the mortgage seized and I split the $100k overpayment with him. Perhaps a shoddy appraiser might be required and this is just an initial thought of gaming this...so there are some holes.


No your scheme would get you about 21-27 months in Kansas for official corruption. Ever hear of Plaquemines Parish, La or Huey Long? This game was around 20 years before I was born and that was a looong time ago.

nsdp said:   Al3xK said:   If this went through, what's to stop any moron from massively overpaying for a house because he knows the government will seize his mortgage? I'm sure they'll have to have some very specific rules for this program, because it seems like you could game this over time.

My house is worth $150k, I sell to somebody (associate) at arms length transaction for $250k and three years later he gets the mortgage seized and I split the $100k overpayment with him. Perhaps a shoddy appraiser might be required and this is just an initial thought of gaming this...so there are some holes.


No your scheme would get you about 21-27 months in Kansas for official corruption. Ever hear of Plaquemines Parish, La or Huey Long? This game was around 20 years before I was born and that was a looong time ago.
Corruption? Really? Do explain...

ksuwldkat said:   Magika, my understanding is that several states passed laws after Kelo to prevent governments from having such broad authority to exercise eminent domain. I know in the city I was living, they forced through a project before the state changed the law for this reason. Do you think in these states the idea that anything that can generate growth would still be viable? It looks like California passed proposition 99, (proposition 99) although honestly the language seems so vague I wonder if it really would have much effect.

You are right, it is scary, especially if the only barrier to seizure is "economic benefit"


It is true that several states passed laws to restrict eminent domain for economic development, but an analysis of most of those laws shows that they are largely symbolic gestures. In most cases the passed legislation has broad exceptions under blight like I said in my post earlier. The other thing those new laws like to do is expressly prohibit the government from economic development seizures but allow the government's corporations to do so (so it still happens - its just the economic development corporation making the moves). A good article, although its a bit dated, on this is:

Somin, Ilya. 2009. The limits of the backlash: Assessing the political response to Kelo. Minnesota Law Review 93(6): 2100-2178.

The extent to which local governments can be compelled to follow state law puts them in two categories, called Dillon's Rule and Home Rule. Governments in states under Dillon's rule are legally compelled to follow all state laws and the exceptions to that must be granted by the state government. In Dillon's rule states with eminent domain laws they are compelled to follow the state law unless the state allows them to make their own (none do that I am aware of). Home rule states are just that - (with some exception) they can do what they want and make laws completely opposite to the state if they want. Proposition 99 prohibits local governments from doing this but its also a challenge to California's home rule principle since the state constitution provides: "A county or city may make and enforce within its limits all local, police, sanitary, and other ordinances and regulations not in conflict with general laws."

This is the legal battle I refer to above. I see four ways of them arguing out of Proposition 99: (1) Proposition 99 interferes with established home rule authority in an area that local governments previously had full local control over, (2) I could see them arguing here over the definition of what exactly the "general laws" mean in the context of the state constitution, and (3) I could see local governments arguing that the intention of Proposition 99 was to stop the ultimate conveyance of homes from Family A to B, and the government isn't actually conveying the property to a separate party in the end - the home owner gets it back at fair market value instead of their underwater mortgage, and (4) Depending on how the term "public improvement" is used in other laws in the state, they could claim this plan was a type of public improvement. As I said before, the possibility of the legal battle guarantees this won't go anywhere.

Nycll and Glitch:

SCOTUS has generally held to fair market value, which they have defined in United States v. Cartwright (even though this wasn't an ED case, FMV as defined here is how they use it in other cases) as: "...the price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell and both having reasonable knowledge of relevant facts." So in this case the fair market value is not what the value of the mortgage would be, but what the property would be worth to a buyer intending to use it as it currently is (as a home). They would just pay whatever the tax assessed value is claiming its FMV and tell the mortgage company to pound sand for the rest of it. So, for Home A that lets say is tax assessed to be worth 100k but has a 200k mortgage:

Step 1: Seize Home A citing an economic development purpose, claim Proposition 99 doesn't apply because its a public improvement and your not conveying it to a separate private party other than the original owner.
Step 2: The government as the owner pays banks 100k cites Cartwright, tells mortgage company to get over it, bank eats 100k loss.
Step 3: Government writes mortgage for 100k on Home A, then bundle it with all the others and sell it to get the mortgages off the books.

Of course...again..all of this is rather academic since there is enough legal gray area here to cause immense and costly court battles which ensures they won't bother with all this. I just don't think that gray area comes from their statutory power to do a economic development taking and pay less than the mortgage using FMV calculations.

magika said:   Nycll and Glitch:

SCOTUS has generally held to fair market value, which they have defined in United States v. Cartwright (even though this wasn't an ED case, FMV as defined here is how they use it in other cases) as: "...the price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell and both having reasonable knowledge of relevant facts." So in this case the fair market value is not what the value of the mortgage would be, but what the property would be worth to a buyer intending to use it as it currently is (as a home).

The above definition of fair market value actually helps the mortgage lender's case that the only fair compensation for a condemned property (in this contemplated application of ED) is to pay off the mortgage, as it is the only actual transation the property had gone through.

If the local government wants to use appraisals to justify a lower amount, there is nothing to stop the mortgage lender to put in a bid at the mortgage amount. That's what they will be doing at foreclosure auctions anyways. An actual bid from a willing and able buyer will trump the appraisals or assessments in any courts.

We are mostly a home rule state and this was floated as a possibility by a nearby government. Opinions (among some very seasoned and experienced local-government attorneys) varied as to whether it would be legally achievable. But most everyone was unified in saying - as magika and others have pointed out - that the procedural and political boundaries were just too great to overcome.

Even if there were popular support, which in this tea-infused society I can't imagine there being - eminent domain trials are a Very Big Deal. They are incredibly expensive, requiring a full 12-person jury* and trial for every case, even with willing sellers. And since by law, the government bears all costs in a successful eminent domain trial .... nah, ain't gonna happen.

Some local municipalities are taking a slightly different approach, using existing housing funding to buy foreclosed properties, rehab them and then sell them to qualified low-income buyers. But there's absolutely no taking involved.

*By comparison, you can try someone for any felony outside capital murder with only a six-member jury.

Kelo or not, anyone who tried this would end up defending it in court for a decade before being able to proceed.

nycll said:   
If the local government wants to use appraisals to justify a lower amount, there is nothing to stop the mortgage lender to put in a bid at the mortgage amount. That's what they will be doing at foreclosure auctions anyways. An actual bid from a willing and able buyer will trump the appraisals or assessments in any courts.


But the Mortgage holders bid would not be an arms length bid and hence would not count in estimating FMV. Given that appraisals are done by professionals based on generally accepted sound pricipals (comparables and adjustments) I don't see how a Mortgage holder's bid would have any effect on a professional appraisal.

The real interesting question is how to appraise the FMV of a Mortage in a recourse state : the only reasonable way would be to use the secondary market for Mortage Notes and it is likely that the Mortage notes that are underwater trade at a slight (but not very large) premium over the FMV of the property but well below its face value. Most recourse states make it harder (ie often 6-12 months longer) to get a judgement for the non-recourse portion of the loan and in practice over 75% of Banks don't even try, presumably because the legal costs and subsequent collection costs exceed the expected recovery for the unsecured portion of the loan.

This goes back to the roots of how this country was formed. Queen of 15th century England usurped the land of commoners under the guise of tax. This is no different. While the banks(owners here) are hardly moral, using eminent domain to grab their houses and sell them to private parties is vile and unconstitutional.

ananthar said:   nycll said:   
If the local government wants to use appraisals to justify a lower amount, there is nothing to stop the mortgage lender to put in a bid at the mortgage amount. That's what they will be doing at foreclosure auctions anyways. An actual bid from a willing and able buyer will trump the appraisals or assessments in any courts.


But the Mortgage holders bid would not be an arms length bid and hence would not count in estimating FMV. Given that appraisals are done by professionals based on generally accepted sound pricipals (comparables and adjustments) I don't see how a Mortgage holder's bid would have any effect on a professional appraisal.

The real interesting question is how to appraise the FMV of a Mortage in a recourse state : the only reasonable way would be to use the secondary market for Mortage Notes and it is likely that the Mortage notes that are underwater trade at a slight (but not very large) premium over the FMV of the property but well below its face value. Most recourse states make it harder (ie often 6-12 months longer) to get a judgement for the non-recourse portion of the loan and in practice over 75% of Banks don't even try, presumably because the legal costs and subsequent collection costs exceed the expected recovery for the unsecured portion of the loan.
You may have confused the real bid with a hypothetical bid. The bid will be a real bid, to buy the house with real money. Who needs a stinking appraisal when there is a real bid?

It is really simple: here is the money. You give me the house and I give you the money. (Of course at the closing you have to pay off the mortgage, but that is requires by law).

The lender's attorney can bring a suitcase of money at the inevitable court hearing to show the judge or jury the bid is for real. That will eliminate any doubt that the fair compensation is either at the bid or higher.

You can paint it any way you want, the banks own the playground and don't plan to lose.

BlueEyesAustinTexas said:   Kelo or not, anyone who tried this would end up defending it in court for a decade before being able to proceed.

Not under FRCP Rule11. It would become a question of how long the lawyer keeps his license. A claim that a Supreme court decision is wrong is per se frivolous. You might try to argue Kelo was wrongly decided but I don't know of a legitimate way to get around the court's policy decision to defer to the legislative authority under the FRAP. If you notice no one has been back to court on this point. [I don't think you could convince the ACLU to take this one on. You obviously haven't tried something frivolous in front of the Hon.Sam Sparks or the HOn.Lee Yeakel recently.

Glitch99 said:   nsdp said:   Al3xK said:   If this went through, what's to stop any moron from massively overpaying for a house because he knows the government will seize his mortgage? I'm sure they'll have to have some very specific rules for this program, because it seems like you could game this over time.

My house is worth $150k, I sell to somebody (associate) at arms length transaction for $250k and three years later he gets the mortgage seized and I split the $100k overpayment with him. Perhaps a shoddy appraiser might be required and this is just an initial thought of gaming this...so there are some holes.


No your scheme would get you about 21-27 months in Kansas for official corruption. Ever hear of Plaquemines Parish, La or Huey Long? This game was around 20 years before I was born and that was a looong time ago.
Corruption? Really? Do explain...


Glitch since you think you are a lawyer and want to play lawyer, I will teach you how to do it just like every other lawyer learns to do when they prepare for court. First read the literature on corruption in Plaquemines Parish . You will be amazed at what a people a lot smarter than you have tried and been convicted of . Think Edwin Edwards. You learn by reading the statutes and text books

I sent you to the statute at large because you are too lazy to look to see if what you post has any probative value before posting. The Fair Housing Act is actually a good maze and a wonderful example of why anosognosics should avoid trying to interpret federal statutes. On my first appointment for a defendant it took me two weeks to get comfortable with the statute and its links back to Title VIII of the Civil Rights Act of 1964 and the Civil Rights Act of 1866.

It is a bit like trying to explain to a board certified real estate attorney that his subdivision HOA loses the right to collect maintenance fees post bankruptcy when every other type of HOA (condo, townhouse, coop and timeshare) are given limited protection under 11 USC 523(a) (16) if the BK filed before October 2005. The 9th Circuit decided to fix congress drafting problem themselves. Individual lots are not membership associations as defined by the 1994 statute if the Bk occurred before October 2005. Then the guy comes in a few weeks later and has a condo with a BK before 1995. Then he is out of luck completely:

"Since the Rostecks' debt for future assessments, based on their pre-petition agreement to pay those assessments, existed when they filed their bankruptcy petition, that debt was discharged by the bankruptcy court in its discharge order.4 This result is consistent with the Bankruptcy Code's goal of providing debtors a fresh start. As the bankruptcy court noted, by bringing even contingent and unliquidated claims into the bankruptcy case, " 'Congress has insured that the debtor will receive the complete discharge of his debts, without the threat of lingering claims "riding through" the bankruptcy.' " 85 B.R. at 75 (quoting In re Baldwin-United Corp., 55 B.R. 885, 898 (Bankr.S.D.Ohio 1985))." 899 F2nd 694. This is no longer the law after 2005 for all BK's and for condos townhouses and timeshares after 1994.

Now virtually every real estate lawyer I ever talked to didn't know Rostek vs Old Willow existed. I have even had some try to argue that the 2005 amendments apply retroactively even though Article I Section 9 of the Constitution says you can't pass ex post facto laws.

Until you have a better understanding of the Fair Housing Laws or the US Criminal Code any attempt on my part will be doomed to hopeless failure as have previous attempts in other threads such as issues involving the "Ostrich Instruction" in criminal cases. The Chius specifically. Sent you and MrC. to the DOJ manual. Which you proceeded to argue with and say is wrong.

In this present thread, you seem to not be able to understand that the Supreme Court has decided economic development is what ever the state legislature says not what Glitch99 thinks. You don't get to second guess the Supreme Court. The legislature passes the law, the Supreme Court decides if it is constitutional and you get to obey the law.

For those wondering about the Chius sentencing, it has been reset to 8/14/2012.

BitemeIamtoxic said:   You can paint it any way you want, the banks own the playground and don't plan to lose.

Banks always lose under 11 USC522(f) if the loan is a HELOC and did not pay off the purchase money mortgage. Federal Home stead exemption preempts state law protections. Banks lose under the NY State's Martin Act since the NY Attorney General only has to prove they did the fraud not that there was any intent.

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