Robert Shiller has finally gone off the deep end. He wants to condemn millions of US guaranteed mortgages from the bankster mafia.
My colleague Karl Case and I showed in 1996 that when the value of a home falls below the value of the mortgage debt — when it is underwater — a person is much more likely to default on the mortgage. And it is well known that in foreclosures, lenders lose so much on the legal costs and depressed market values of the homes that it would be in their interest to lower mortgage balances so the homeowners stay in place and don’t default.
If such mortgage principal reductions could be applied on a large scale, there could be large neighbourhood effects, raising a sense of optimism among homeowners and bolstering the value of all homes and, ultimately, the whole economy. But mortgage lenders in all their different forms lack a group strategy.
John Geanakoplos, a Yale economist, and Susan P. Koniak, a Boston University law professor, have proposed legislation that gives community-based, government-appointed trustees a central role. The trustees would have the authority to impose a write-down of mortgage principal that served the interests of mortgage issuers as a group, without having to prove that each and every one would be better off. But Congress has not acted on their idea…
ROBERT C. HOCKETT, a Cornell University law professor, has outlined another approach, which uses the principle of eminent domain, to solve this collective action problem… The principle allows governments to seize property, with fair compensation to owners, when a case can be made that such seizure serves the public interest.
Traditionally, we think of eminent domain law as applying to land and buildings…
But eminent domain law needn’t be restricted to real estate. It could be applied to mortgages as well. Governments could seize underwater mortgages, paying investors fair market value for them. This is common sense too. The true fair market value for these mortgages is arguably far below their face value, given the likelihood of default, with its attendant costs.
This is nuts. Mass condemning mortgages would be an unworkable mess, would take years, and would fail. The lawyers and appraisers would make out like bandits though. And for sure, the taxpayers would get screwed, just like they always do.
Governments could seize underwater mortgages, paying investors fair market value for them.
Simple. Just like that, huh?
As a former commercial real estate appraiser who sometimes worked on condemnation cases (although I tried to avoid them as much as possible) it’s plain to me that Shiller and the guy who proposed this hare brained idea know absolutely nothing about the nuts and bolts of the condemnation process. I’m far from an expert, but I know that you don’t just say “Poof, I take these properties,” and just like that it’s done in a flash.
Let’s say that the City of Cleveland wants to seize all the underwater mortgages there. That would be probably a couple hundred thousand mortgages. Has anyone thought about how many different investors might be involved? Dozens? Hundreds? Did anyone stop to think that these investors are often institutions plenty big enough to afford lawyers to challenge the process? And in some states, the condemning authority must pay the legal fees and reasonable costs of the property owner challenging the condemnation in court.
Mass condemnations take years, they have enormous costs, and are fraught with risk and legal challenges from property owners. I have seen condemnations for large takings last as long as 10-12 years from the initial proposal to completion of the taking. Markets can go through an entire cycle by the time they are complete, and municipalities invariably grossly overpay when they finally are able to acquire all the properties. It is often far, far more than when they first made a public announcement of the idea.
In real estate condemnations, speculators who get wind of the process swoop in and buy up the affected properties on the cheap from the property owners (in this case the institutions who own the mortgages) and then they threaten to sue the municipality if they don’t get their price. Municipalities, fearing having things tied up in court, then cave and overpay for the assets. If a government is forced to overpay for these mortgages, who, pray tell, will then buy the mortgages from the municipalities who condemn them? Once the city overpays, it’s stuck.
Furthermore, what is the “fair value” of the trillions of dollars of mortgages guaranteed by Fannie, Freddie, and the FHA. That’s right. To the investor holding the mortgage, it’s 100 cents on the dollar, not one penny less.
The whole idea is nuts. Aside from all the reasons it’s just dumb, it’s a practical impossibility. This is the problem with these academic conomists. Most of them simply don’t live and act in the real world. They live in a world of theory. In the immortal words of the great existential philosopher Yogi Berra, “In theory, there is no difference between theory and practice. In practice there is.”
Meanwhile, the mortgage servicing bankster mafiosi have figured out that by holding rather than dumping massive numbers of foreclosed properties, and even by slowing down the foreclosure process while allowing a few cramdowns in the form of short sales, the market has begun to rebound on its own. The bankster mafia know that placing massive numbers of properties on the market at once would crash the market and destroy the value of their portfolios, and essentially crash the financial system. So they have made a wise strategic decision not to self immolate. They will not now, not ever, dump on the market all this “shadow inventory” that all the housing bears are crapping their pants over.
While ZIRP Bernankecide destroys all the widows, orphans, Grandmas, Grandpas, and Aunt Millies, it serves its purpose. The bankster mafiosi have the benefit of zero cost of funds allowing them to carry all this worthless crap on their books indefinitely, and they will. By giving them the free money that he siphoned and skimmed from Grandma, Don Bernanke has guaranteed that the bankster mafia will live on to carry out their nefarious skimming and scamming schemes forever. What difference does Grandma make? Steal her home or steal her savings or break her knees. It’s all the same. The rackets must go on. The banksters gotta get theirs. So screw you, Grandma. You don’t matter. You’ll be dead in few years anyway.
The bankster mafiosi now recognises that this housing inventory that it now owns is largely unmarketable anyway because it is located in areas where there never was and never will be enough demand to absorb all of it. Or it becomes unmarketable quickly due to physical deterioration and willful damage. But what the fuck do they care? The Don Obama- Consigliere Geithner Gang guarantees they’ll get their money. The banksters’ attitude is, “Shut the fuck up and pay me already.”
I don’t blame them. They’re rational. The Obama-Geithner gang under the cloak of the US Government made a promise, and the US Government doesn’t rat out on its fellow mobsters.
Meanwhile there are benefits to others under the criminal status quo. What about the benefits to the economy of the countless numbers home occupants who have stopped paying, but stay on for months or years. They build savings or spend that money they save on not making mortgage payments in other ways. They buy twinkies, chips, beer, and soda, and Hyundais, all the things that keep the US economy strong. That’s a net benefit to the society as they screw the banksters, and ultimately the taxpayers who have unwillingly been committed to paying off their mortgages. But, good on them! The Squatter Stimulus Plan, Russ Winter called it.
And for those who stay and pay in their underwater homes because they have the will and the ability to do so–they are the real heroes of this mess, because they are the ones paying the price, and through their sacrifice and devotion to duty, they keeping the system afloat. They are paying for all the rest of us. Were it not for the few, the strong, and the committed, the rest of us would be toast. We should kiss the ground they walk on, because they could walk away too. But they won’t. At least not in any meaningful numbers from here on. They’ve stuck it out this long. Those who would have done it, have done it. Those who stay are suckers who actually believe in the rule of law, and in doing the right thing. There are still a few of us.
So the mortgage foreclosure process has essentially frozen, and reduced REOs on the market have caused supply shortages in desirable markets. While partly accidental, that is now embedded in the market. Worthless unmarketable supply is not supply. It will disappear over time. In the meantime, in most well located markets oversupply has already disappeared, and demand has rebounded enough to put in a price bottom in those areas, enough so that the national median price has been rising on a year to year basis for the past couple of months.
These are facts that few are willing to recognise, but they are facts just the same. If any of these wild eyed crazy academics ever get some dumb arse municipality to actually try their stupid ideas, it will turn into just another boondoggle where Wall Street gets to skim the cream and the taxpayers are left holding the bag yet again. Because that’s the way it is.
And oh yeah. The US Government should stop paying off all these bad loans guaranteed by Fannie and Freddie and FedHo (FHA). As long as that guarantee is in place, the investors who hold these mortgages will never accept condemnation at less than par. Not now. Not ever. Why should they? Our government has guaranteed them that we the taxpayers will pay them 100 cents on the dollar, regardless of the fact that their collateral is worthless.
Stop those guarantees, and you’d see the market clear real fast. But our government knows which side its bread is buttered on, and it’s not ours. Nope, the US Government is just another bankster mafia protection racket. Skim baby skim. Rob those grandmothers blind. The banksters must get paid.
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