More On the . . . Glub, Glub . . . “Underwater Mortgage” Eminent Domain Takings

In case you haven’t had enough of this tidal wave of misinformation, The New York Times is making sure your supply doesn’t run out. See Shaila Devan, A Long Shot Against Blight, N.Y. Times, Jan 12, 2014, at p. 1 (Business Section). See

To begin with, this one doesn’t tell us that this idea was honked up by a Cornell law professor named Robert Hockett. Guess he’s had his 15 minutes of fame, so it’s time for another activist to step up to the plate. The Times gives credit to Richmond mayor, Gayle McLaughlin, “[a] longtime advocate of left-wing causes,” for coming up with this idea. It “involves a novel use of the power of eminent domain to bail out [underwater] homeowners by buying up and then forgiving mortgage debt.”

Where will the money for these bailouts come from? After all, if you are going to use eminent domain, the constitution requires that you pay “just compensation” and under California law “just compensation” is fair market value of the taken property, which in turn is statutorily defined as the highest price that the property being taken would bring in the open market with both parties to the transaction being unpressured and fully informed. Besides, compensation is decided by a jury that does not have to accept the government’s valuation figures, and first gets to hear both sides’ qualified appraisers in a civil trial. The annals of California eminent domain law are replete with cases in which condemnors who tried to lowball the condemnee/owners wound up paying just compensation running into multiples of condemnors’ inadequate offers (for a collection of such cases see 40 Loyola L.A. L. Rev. at 1146-1148). The Times article doesn’t really explain how the financial angels of this caper can pay the highest price the subject property (i.e., the “underwater” mortgages) would fetch in a voluntary market transaction, and still make a profit by reselling them. Smells like a something-for-nothing scheme to us.

However to give credit where credit is due, the Times is one of the few (the only?) major news source to acknowledge the existence of another major problem, namely that

“the mortgages had been bundled into pools and resold to thousands of investors all over the world. The rules governing many of the pools forbade the investors’ representative, known as the trustee, from selling off mortgages or modifying them unless they were already in default, even though it might be in the investors’ interest to do so.”

But if you use eminent domain to take mortgages that are secured by those bundled bonds, you will necessarily be lowering the value of the security for the remaining bonds in the bundle, thus inflicting damages on the remaining bondholders. That would require compensation to them as well as the lenders. And win or lose, in California the condemor has t0 pay the condemnees’ ordinary court costs (filing fees, deposition costs, etc.). These costs are usually not very big, but if you are talking about hundreds or thousands of cases, they do add up.

So how will the financial “angels” of this caper, before they can take the subject property, (a) pay the full constitutionally required highest market value to the mortgage holders, (b) pay severance damages to the remaining bondholders, i.e., pay for the reduction in bond values to holders of bonds that are not taken but are the security for those mortgages, and (c) still make a profit? Getting sticky, isn’t it?

Oh, we almost forgot. In California there are no mortgages; we use deeds of trust. To bring that up may sound a bit pedantic, but if a law professor can’t be pedantic, who can? However, it is a little different in the rest of the United States, you still might want to look into a mortgage if you are looking at buying Homes in Charlotte NC or another state.

And let’s not forget that if the would-be takers try to lowball the mortgage/bond holders too much, and make them unreasonably low offers, they will have to pay the condemnees’ litigation expenses, including their attorneys and expert witness fees. Also, if the takings prove too rich for the cities’ blood and have to be abandoned, the same thing happens — the would-be condemnors then have to pay those condemnees’ litigation expenses.

So let’s wait and see how it all turns out. Stay tuned.