Category: Credit, Real Estate, Think Tank

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

15 Responses to “Paying Paul and Robbing No One: An Eminent Domain Solution for Underwater Mortgage Debt”

  1. DeDude says:

    Just change the law so judges can write down principal in bankruptcy. The stupid self-defeating exception that the banksters got into our bankruptcy law is one of the main things blocking the clearance of bad housing debt. Banks gave these irresponsible loans, let them suffer the consequences (anything else is moral hazard). Why should society bail the banks out of their rotten loans?

    • gjobx says:

      Seems to me there would be “moral hazard” if the borrowers got free money, no? So the banksters should go to jail for fraudulent loans and borrowers should not be rewarded for the inability to read documents or perform simple arithmetic.

      • As opposed to the moral hazard of the bankers getting free money . . . ?

      • gjobx says:

        My point is that neither the bankers who committed fraud nor the borrowers who thought they would just flip their way to untold fortunes should be allowed a free pass. The bankers take the loss and the borrowers don’t get a gift. Despite the headlines not every loan that was made was fraudulent (many were), not every borrower was duped (many were).

      • DeDude says:

        The borrower was the “low information” party in these deals. They could be excused for not fully understanding what they got lured into. The banks on the other hand were professionals who had all the knowledge and training to understand what the risk and rewards were. If you take away the punishment of “risk gone bad” from these bankster (who took a calculated risk), then you have a classic case of moral hazard. Next time when they are tempted to take a similar risk they will do so with much less concern because they didn’t take a hit last time.

        If borrowers are allowed to go bankrupt and get the same kind of “clean slate” that we afford to businesses that make mistakes, then there is no moral hazard – just a fair and equal treatment. The borrower will have gone through a serious unpleasant experience and end up with 10 years of lower credit rating as well as a structured payment plan that does not leave them much of any money for all those things most of their peers enjoy. They will be painfully aware that house prices can fall (in spite of what all their paid advisers told them), and they will know that even in the best case scenario it is a long and difficult process to recover from having purchased to much house and not having a buffer against sickness and loss of jobs.

  2. louis says:

    But it lacks public support, maybe the bankers can help!

  3. Bridget says:

    Dedude, what makes you think the banks will suffer the consequences? They offloaded those irresponsible loans very shortly after they made them.

    As to the use of eminent domain by individual states to force bondholders to sell their loans at a discount….I’m not convinced. The article points out numerous instances of non-real estate assets that have been acquired through eminent domain, but I think those examples require further analysis. The ramifications of the use of eminent domain in this situation extend far beyond the borders of the state in which the real estate securing the mortgage is located.

  4. Moopheus says:

    Yeah, the article kinda glosses over the reason we don’t have mortgage cram-down: bank industry lobbying. Legislation to allow it was floated, but the industry came out hard against it. Various forms of this eminent-domain idea have also been floating around for a few years, but basically they boil down to ways for private investors to buy properties for cheap and get cities to do the dirty work for them.

  5. gjobx says:

    The banksters should go to jail. But the irresponsible borrowers just get free money? Doesn’t seem quite right.

  6. kaleberg says:

    It makes more sense to seize the underlying land and structures using eminent domain and setting a value based on the income produced by the current non-performing asset. In other words, any reasonable assessed value should be very low perhaps 10 cents on the dollar. Once title is clear, the property can be resold at a profit, especially if the new owner makes an effort to consolidate properties renovate – perhaps using sweat equity, and marketing the new development, rather than individual distressed properties as this would rebuild the neighborhood and enhance services.

    As for the bankers, they are well paid for the risks they take. If they were all minimum wage clerks, I’d say they are owed something, but they’ve already cashed their fat paychecks. They screwed up. Let them take their lumps. The borrowers were amateurs who relied on fraudulent representations. Yeah, they should have known better, but it’s time we started bailing them out, or we won’t have much of country left when this is over.

  7. capitalistic says:

    Obviously, writing down principal balances makes sense for homeowners. But what about the IO and PO investors? What about the CDS writers/buyers? There isn’t a sound solution.

    The most logical would be to split the principal into market value, and the difference into a zero/deferred interest 2nd mortgage.

    • DeDude says:

      Which would leave those investors (who in their greed reached for additional additional yield without fully investigating the risk), fairly free of harm (at least if the 2nd mortgage is deferred). For the sake of the economy we need all those consumers who are trapped in underwater mortgages to get out of that trap so they again can have the opportunity to consume (and grow the economy). The fact is that most of them are in houses that are to “big” for them, unless we lower the “price” of their house. I know some people are afraid that some of these individuals may have had an idea of what gamble they got themselves into, and that helping them would be allowing them to “get away with it”. However, in my opinion, this primitive desire to ensure punishment of “regular folks” has to yield to the need for getting the economy back on track.

  8. louis says:

    One word for all you pro bankers in this mess, Libor.

    The bankers should not go to jail they should be tarred and feathered along with the regulators that were captured.

  9. BuildingCom says:

    If housing prices were allowed to fall to realistic levels, the market would clear in a hurry.

    What we have right now is the largest price fixing scandal in world history.