Tag Archives: eminent domain

GSE Nationalization and Necessity

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Nestor Davidson has posted Nationalization and Necessity: Takings and a Doctrine of Economic Emergency to SSRN. This essay will be of interest to those following the Fannie/Freddie shareholder litigation. The abstract reads,

Serious economic crises have recurred with regularity throughout our history. So too have government takeovers of failing private companies in response, and the downturn of the last decade was no exception. At the height of the crisis, the federal government nationalized several of the country’s largest private enterprises. Recently, shareholders in these firms have sued the federal government, arguing that the takeovers constituted a taking of their property without just compensation in violation of the Fifth Amendment. This Essay argues that for the owners of companies whose failure would raise acute economic spillovers, nationalization without the obligation to pay just compensation should be recognized as a natural extension of the doctrine of emergency in takings. Public officials must be able to respond quickly to serious economic threats, no less than when facing the kinds of imminent physical or public health crises — such as wildfires and contagion — that have been a staple of traditional takings jurisprudence. Far from an affront to the rule of law, this reflection of necessity through an extension of emergency doctrine would reaffirm the flexibility inherent in property law in times of crisis.

Davidson looks at the various companies that were nationalized during the financial crisis, including Fannie and Freddie, and concludes,

It does no violence to norms of ownership—or the rule of law—to acknowledge that overriding necessity in times of crisis can be as relevant to economic emergency as it has always been to more prosaic threats. The doctrine of economic emergency that this Essay has proposed accords with the deepest traditions of our system of property, and rightly should be so recognized. (215)

 

Davidson reaches a very different conclusion than does Richard Epstein, who argues that just compensation is warranted for shareholders in the two companies. I have no doubt that the judges deciding these cases will have to struggle with very same issues that Davidson sets forth in this article, so it is worth a read for those who are closely following these cases.

The Cost of Doing Nothing

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Yesterday, I wrote about the Securities Industry and Financial Markets Association (SIFMA)’s FHFA comment letter. Today I write about SIFMA’s comment letter in response to Treasury’s request for input relating to the future of the private-label securities market. Like the FHFA comment letter, this one is written with the concerns of SIFMA’s members in mind, no others, but it identifies many of the structural problems that exist in the housing finance system today.

If I were to identify a theme of the comments, it would be that the federal government has not moved with sufficient speed to establish a well delineated infrastructure for the housing finance market. Some commentators identify benefits of a slow approach — time to get consensus, time to get rules right, time to for trial and error before committing for the long term. Few identify the costs of regulatory uncertainty — failure to get buy-in for capital-intensive ventures, atrophy of existing resources, limited investor interest.

Now, SIFMA’s members want a vibrant private-label MBS market to make money. But a vibrant private-label MBS market is also good for the overall health of the mortgage market as it spreads risk to private MBS investors and reduces the footprints of the gargantuan GSEs and the government’s own FHA. After all, most of us want the private sector taking a lot of the risk, not the taxpayer.

Notwithstanding the strengths of SIFMA’s comment letter to Treasury in critiquing the status quo, I will highlight a few passages from it that hit a false note. The first relates to the role that private-label securities (PLS) have played

in funding mortgage credit where loan size or other terms may differ from those available in the Agency markets, or where economics dictate that PLS execution is superior. The PLS market may also be more innovative and flexible than the Agency markets in adapting to economic conditions or consumer preferences, or to changing capital markets appetite. (3)

This innovation has obviously cut both ways in terms of introducing new products that can help expand access to credit as well as expand access to credit on abusive terms. The latter way seems to have predominated during the most recent boom in PLS MBS.

The second one relates to assignee liability. SIFMA states that

Investors are concerned with the prospect of assignee liability stemming from violations of the ability-to-repay rules contained in Title XIV of Dodd-Frank and embodied in the CFPB’s implementing regulations. SIFMA has raised concerns with assignee liability in many forms over the years based on the fact that mortgage investors are not at the closing table with the lender and borrower, and should not be held liable for defects of which they have no knowledge or ability to prevent. While efforts were made by policymakers to provide some level of certainty through the inclusion of safe-harbor provisions, no safe harbor is entirely safe, and it is important to note that none of these provisions have been tested in court. It will be in litigation where the market learns the exact boundaries of the protections provided by any safe harbor. This potential liability for investors is likely to reduce the availability of higher-priced QM loans and non-QM loans, all else equal, due to higher required yields to compensate for the increased risk. (5-6)

This focus on assignee liability seems to be a red herring, one that SIFMA has floated for years. The risk from assignee liability provisions is not limitless and it can be modeled. Moreover, the notion that investors should face no liability because they are not at the closing table is laughable — without them, there would be no closing table at all. They paid for it, even if they are not in the room when the closing takes place.

The last one relates to the threatened use of eminent domain by some local governments to take underwater mortgages and refinance them to reflect current property valuations:

Investors have significant concerns with, and continuing distrust of the policy environment because of a sense that rules have been and continue to be changed ex-post. The threat by certain municipalities to use eminent domain to seize performing mortgage loans has been a focus of MBS investors for the last two years and would introduce a significant new risk into investing in PLS. These municipalities propose to cherry-pick loans from PLS trusts and compensate holders at levels far below the actual value of the loans. SIFMA’s investor members view such activity as an illegal taking of trust assets, and successful implementation of these plans would severely damage investor confidence in investing in PLS. (6)

This is another red herring as far as I am concerned.  The use of eminent domain is not an ex post legal maneuver. Rather, it is an inherent power of government that precedes the founding of this country. I understand that MBS investors don’t like it, but it is not some kind of newfangled violation of the rule of law as many investor advocates have claimed.

Notwithstanding its flaws, I recommend this letter as a trenchant critique of the housing system we have today.

Urban Reviewer: NYC’s Neighborhood Plans

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NYC land use geeks will want to check out the Urban Reviewer. From its website,

The City of New York has adopted over 150 master plans for our neighborhoods. You can see which areas have been affected and what those grand plans were here.

Neighborhood master plans – often called “urban renewal plans” – were adopted to get federal funding for acquiring land, relocating the people living there, demolishing the structures and making way for new public and private development. Plan adoptions started in 1949 and many plans remain active today. Development in the plan areas sometimes happened, like Lincoln Center, and sometimes didn’t, like many still-vacant lots in East New York and Bushwick. Areas were selected for renewal because they were considered blighted or obsolete. The “blight” designation always came from outside the communities that got that label – from inspectors working for the mayor’s Committee on Slum Clearance in the early period and Housing Preservation and Development (HPD) employees in the later period.

This is one of those resources that seem pretty obviously useful once someone has gone to the trouble (and great trouble I am sure it was) to construct it. One can imagine urban historians and planners making good use of it as well as community activists. It also provides a great model for other communities to follow.

Kudos to 596 Acres, Partner & Partners and SmartSign for building this resource.

Reiss on History of Eminent Domain

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The Orlando Sentinel quoted me in History also Parts City, Church in Stadium Dispute  (sign in required). It reads in part,

It’s been said that you can’t fight City Hall. Still, tiny Faith Deliverance Temple is gonna try. The city of Orlando covets its property — now the final piece of the two square blocks upon which will bloom a $110 million soccer savanna for the Orlando City Lions to roam. Church officials balked. So city officials filed suit to seize the land. Goliath shoved. Now, David’s grabbed a sling.

The church has enlisted a Jacksonville property rights law firm to fight for its right to stay put. Any way you slice it, the church’s hopes rest with a judge who, in two previous eminent domain cases involving the soccer stadium, deemed that it fits the definition of a public use.

City Hall considers the stadium manna from Major League Soccer: It’ll nourish the greater community with economic development, jobs and tourism. Pastor Kinsey Shack, meanwhile, simply says her largely black flock “does not want and has not wanted to sell its property.”

It would be easy to reduce the dispute to simplistic terms: Seeing the writing on the wall, the church has fallen prey to the sin of avarice. Orlando offered $1.5 million for property worth less than half that, and most recently upped the ante to $4 million. Church leaders countered with $35 million (but later lowered it to $15 million).

To church officials, it’s simply a matter of fairness. In 2007, Orlando plunked $35 million in cash and other sweeteners into First United Methodist Church’s collection plate. It needed the land for the Dr. Phillips Center for the Performing Arts, and paid a small fortune to the largely white downtown church. In any case, church officials aren’t sweating the optics. Maybe that’s because money isn’t necessarily the root of its revolt.

An alternative motive seems rooted in history, personal and collective. In the late ’70s, Robert Lee Williams moved his wife Catherine, their four kids, and the church he’d incorporated in 1969 to West Church Street in Orlando’s mostly black Parramore neighborhood.

The teeny flock grew as he saved and collected souls through revivals. In the early ’80s, they moved to a West Church Street warehouse. With member donations, Williams bought the property, and largely through the sweat of local day laborers, they moved into a new church home in 1996. Williams died in 1997, but his wife carried on, before passing the mantle to Shack six years ago. For the Williams family, divesting the property divorces them from their community, their history.

Yet, through government strong-arming that very thing is — for blacks in particular — a sordid history as old as America. That’s according to Mindy Fullilove, a Columbia University clinical psychiatry professor in a recent report on the devastation eminent domain wreaks on black communities. “Eminent domain has become what the founding fathers sought to prevent: a tool that takes from the poor and the politically weak to give to the rich and politically powerful.”

David Reiss, a Brooklyn Law School professor, noted in an email that since early last century “local governments have a long history of using eminent domain in black communities, from so-called ‘slum clearance’ to ‘urban renewal’ to ‘blight removal.'”

Eminent Distraction?

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The Urban Institute posted Eminent Domain:  The Debate Distracts from Pressing Problems. The issue brief concludes

The negative indicators shared by municipalities that have considered the eminent domain solution (e.g., high unemployment, low incomes, high proportions of underwater homeowners, slower HPI recovery, etc.) indicate that their shared problems extend beyond housing. These cities have traditionally suffered from lack of investment, high crime rates, concentrated poverty, and other general barriers to opportunity. These factors contributed to their poor performance during and after the housing crash, and the relief efforts to date, both from lenders and policymakers, have been modest relative to the scale of the problem.

Yet it is unclear that seizing loans through eminent domain will produce the desired outcomes: preventing foreclosures and, thus, ensuring that the community fabric and the municipality’s economy remain intact. For example, Richmond is targeting performing loans in PLS, and while the eminent domain plan is designed to help underwater mortgage holders, investors assert that nearly a third of target loans are above water. In contrast, a much wider universe of nonperforming, underwater loans is in private-label and agency securities that are, arguably, at more immediate risk of default. Additionally, implementing eminent domain will likely have repercussions in the housing finance markets that will lead to higher interest rates and down payments.(14)

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The conclusion then outlines “some less disruptive alternatives.” (14) I am not sure that I agree with all of the conclusions of the report.  For instance, I doubt that there would be higher interest rates and down payments as a result of the use of eminent domain by municipalities.  Lenders have notoriously short memories (for a survey of short lender memories, see This Time Is Different.) But this issue brief is important because it is not looking at the legality of the use of eminent domain — others have done that — but at the practicality of this approach. And it raises serious concerns that will need to be addressed by its proponents.

Underwater Mortgages Eminent Domain Battle Gears up

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I was quoted in a recent story in www.thestreet.com, Eminent Domain Mortgage Battle Is a Lose-Lose Situation.  It reads in part,

The move by Richmond, Calif., to seize “underwater mortgages” from private investors using its powers of eminent domain has drawn controversy and consternation within the mortgage industry.

The law has mostly been used to seize property for public purposes such as building roads, highways or schools and other critical infrastructure.

Richmond is now testing whether the rule can be applied to seizing underwater mortgages.

Home prices in Richmond, a city with a population of a little more than 100,000 and a significant Hispanic and African-American presence, are still far below peak levels. More than half of its homeowners are underwater — they owe more than their homes are worth.

Richmond Mayor Gayle Mclaughlin said eminent domain is the only way to help borrowers and repair the local economy, as investors of private-label mortgages have been either reluctant or too slow to provide relief to borrowers.

The city, partnering with San Francisco-based Mortgage Resolution Partners (MRP), began sending letters to owners and servicers of 624 underwater mortgages this week.

If the investors do not agree to sell at the negotiated price, the city will seize the property through eminent domain.

The mortgage industry is, predictably, threatening a legal battle.

* * *

“The constitutional challenges for this proposal are weak,” according to David Reiss, law professor at the Brooklyn Law School.

* * *

The bigger source of legal conflict, according to Reiss and other experts, would be on determining what is fair compensation for a mortgage, especially one that is still current.

* * *

“Courts tend to overcompensate properties taken under eminent domain as a general rule,” said Reiss. “The proponents of this rule may be underestimating how these mortgages will be valued.”

* * *

Eminent domain is “theoretically a great idea,” said Reiss. “States certainly have the legal authority to try this experiment. But it is not clear whether the outcome of all this is beneficial.”

Underwater Domain

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The securitization industry is still fighting tooth and nail against the proposal to use the power of eminent domain to acquire underwater mortgages from private-label mortgage-backed security trusts.  Four California towns are considering working with Mortgage Resolution Partners LLP to take mortgages in their communities by eminent domain and then refinance them at current rates and with valuations that reflect today’s prices.

The heavy hitters in the industry — including the ABA, MBA and SIFMA — have written to the four communities  (San Joaquin letter here) warning of the consequences of proceeding.  Some of the warned of consequences appear to be thinly veiled threats such as, we are going to sue your pants off.  Some are constitutional challenges, although I think that they are overstating their case in that regard.

The letter does, however, raise some important legal, business and practical concerns that will need to be addressed if the proposal is actually acted upon.  Will the municipalities have jurisdiction over the mortgage notes if they are located out of California and is that necessary to proceed?  Will lenders punish communities that employ eminent domain in this way by making less credit available in the future?  Will the proposal be financially workable if fair market value for the mortgages is actually paid?  To what extent will “widows and orphans” be hurt by this proposal because pension funds are big holders of MBS?  These are important questions without obvious answers. Given what is at stake, it seems worth sketching out the answers a bit more before rejecting this innovative proposal out of hand.