A number of special interests publicly oppose keeping American families in their homes through purchasing and refinancing their loans using eminent domain.  They use fictitious arguments in a transparent attempt to intimidate local governments.  Here are their fictions, and the actual facts.

Fiction:  Using eminent domain to acquire and refinance deeply underwater mortgage loans is "appalling" and "an abhorrent misuse of the power of the state."[1]Fact:  It is appalling and abhorrent that our opponents plan to needlessly foreclose on millions of American families and evict them from their homes.  Using eminent domain to help families remain in their homes is appropriate and may be the only way to stop the underwater mortgage crisis from continuing to devastate local communities.  Opponents believe that it is appropriate to use eminent domain to acquire a house to widen a road, moving a couple out of the home in which they raised a family and a neighborhood of lifelong friends, but it is appalling and abhorrent to purchase loans to save that very home and neighborhood from destruction. 

In fact, it is appalling and abhorrent to elevate mere financial assets above the safety and well-being of families, neighbors and communities.  Our opponents simply wish to evict families and cherry pick the best houses to buy at steep foreclosure discounts to rent to others for large profits, leaving communities to deal with the discarded homes that remain.[2]   


Fiction:  Using eminent domain to purchase underwater mortgage loans violates the Contract Clause of the U.S. Constitution.

Fact:  The Contract Clause does not apply when communities purchase underwater mortgage loans by eminent domain.  The communities will purchase loans outright, not impair them.  Once the community owns a loan it is free to restructure the loan as it sees fit. The U.S. Supreme Court has unanimously rejected the Contract Clause argument, stating that it has no merit because no one has ever thought that the Contract Clause protects anyone against the sovereign power of eminent domain.[3]  In fact, the Supreme Court has prescribed the use of eminent domain in our current circumstances.  "If the public interest requires, and permits, the taking of property of individual mortgagees in order to relieve the necessities of individual mortgagors, resort must be had to proceedings by eminent domain . . ."[4]


Fiction:  A law firm has written an opinion concluding that the use of eminent domain to acquire mortgage loans is highly likely to be unconstitutional on several grounds.

Fact:  The proposal is entirely constitutional and will withstand any legal challenge.  The firm has merely written an outline of potential constitutional arguments that might be made, and it does not in fact opine that the program is unconstitutional on any ground.  In addition, the outline acknowledges that any conclusion will differ if the assumed facts are incorrect -- which they are. 


Fiction:  You propose to cherry pick the best loans.

Fact:  The best loans in private securitizations are ones that are current and above water.  They have lower default rates, equity to protect the lender, and above market interest rates that the borrowers have failed to refinance.  Local governments will not pick these cherries.  Instead, they might purchase deeply underwater loans that are highly likely to default and cause further losses to both the securitization trusts and the communities.


Fiction:  There is no reason to believe that deeply underwater loans in private securitizations will default.

Fact:  Fannie Mae projects remaining cumulative default rates of 40-69% on typical loans originated in the peak bubble years for private securitizations. And Amherst Securities, a respected firm that covers the mortgage market, projects a future default rate of 55% even for loans that already have been modified.  The very high expected default rates of deeply underwater securitized mortgage loans are highly publicized and well documented by the mortgage industry.


Fiction:  There is no public purpose to acquire and refinance current, deeply underwater, securitized loans.  Governments should purchase defaulted loans to help those most in need.

Fact:  The purpose of acquiring and resolving underwater loans is to protect neighbors and the broader community from defaults, foreclosures, and the losses that they cause.  The Federal Housing Finance Agency has concluded that the single best best way to reduce losses is to proactively fix loans that are current, deeply underwater, and securitized.  Once a borrower stops paying, the ability to mitigate loss falls dramatically.  Each local government has the power to determine whether to acquire loans, and if so which loans.  It might rightly purchase loans that are current, delinquent or in default.  It chooses the public goals and methods that it wants to pursue -- not private financial interests who want taxpayers to bail them out of their holdings of defaulted loans.


Fiction:  It is impossible to determine the value of deeply underwater mortgage loans; local governments will have to litigate price all the way to the U.S. Supreme Court.

Fact:  Mortgage loans are simple financial assets.  Financial firms of all kinds price these assets every day using consistent, standard methodologies and data from actual market transactions.  In fact, on any given day the market values even more complicated financial assets like long term, underwater European government debt denominated in euros -- even for governments that are likely to abandon that currency.  Anyone who claims that Wall Street cannot price a mortgage loan is misrepresenting the facts.

Moreover, the value of a loan is an issue of fact for a jury to determine.  California appellate courts defer to a jury's factual determination except in the most extraordinary circumstances, and the U.S. Supreme Court does not review such facts.  California law gives eminent domain priority over all other civil matters.  Trial courts will expeditiously hear these cases, and appellate courts will not review a jury's decision on value.


Fiction: It is not economically possible to cover administrative and capital costs unless the local government pays less than fair value for the loans.

Fact: The local government can cover these costs because the public-private partnership will invest additional money, time and effort to refinance the loans into more valuable, fully documented loans with a far lower probability of default.  In fact, the public-private partnership will be more successful at refinancing the loans then a private enterprise would be acting alone, without the credibility and participation of the local government and community. This is precisely the same as when a government purchases a farmer's land and develops it into a toll road or an airport. The project can cover its costs (and more) because the toll road or airport produces far more revenue than the farmland.


Fiction:  Private lenders will shun communities that use eminent domain to prevent defaults.

Fact: Wall Street firms are raising billions of dollars to buy houses cheaply in foreclosure sales to convert into profitable rentals -- they don't care that Hawaii used its power of eminent domain to purchase rental homes from landlords to sell to tenants throughout the state.

These same firms are selling bonds backed by the foreclosed homes to finance themselves -- they don't care that Connecticut used its power of eminent domain to condemn bondholder rights in $4 billion of its own state debt.

Wall Street financiers regularly start new businesses, issue and trade stock in corporations, and go hunting together -- they don't care that American governments have used their powers of eminent domain to purchase business franchises, corporate stock, and hunting rights.

The fact is that private lenders will always seek to earn profits from loans.  They are currently shunning communities precisely because they expect the debt overhang to continue to drive home prices down.  Communities that use eminent domain to clear out a dangerous inventory of underwater mortgages will be more attractive to lenders as a result, not less -- and will get there sooner than communities that do nothing.  Using eminent domain in this crisis will not affect lending in a normal market, in which there will be no public purpose for acquiring mortgage loans. The mortgage lending market is broad, deep and competitive when home prices are stable.


Fiction: MRP is a venture capital firm that will make an enormous profit on buying and refinancing underwater mortgages.

Fact:   MRP is a community advisory firm that will assist communities that choose to use eminent domain to purchase underwater mortgages. MRP will earn a government approved flat fee per mortgage -- the same fee that any major bank earns today if it successfully modifies a loan under the federal government's Home Affordable Modification Program. MRP is not a venture capital firm and will not earn any profit share.


[1] "Cities Consider Seizing Mortgages," Wall Street Journal, July 4, 2012 (quoting Scott Simon of PIMCO describing the proposal as "appalling"), http://online.wsj.com/article/SB10001424052702303933404577505013392791018.html; letter from SIFMA to the Hons. Ben Bernanke, Timothy Geithner, and Shaun Donovan, dated July 21, 2012 (describing the proposal as "an abhorrent misuse of the power of the state.").

[2] "Private equity bets billions on foreclosures," Businessweek, July 26, 2012, quoting Scott Simon of PIMCO, a noted opponent of helping homeowners through eminent domain (http://www.businessweek.com/articles/2012-07-26/private-equity-bets-billions-on-foreclosures); "Ex-Morgan Stanley housing chief launches foreclosed home fund," Reuters, Aug. 1, 2012 (http://www.reuters.com/article/2012/08/01/us-fund-foreclosure-chang-idUSBRE8700QV20120801).

[3] Hawaii Housing Authority v. Midkiff, 467 U.S. 229, 243 n. 6 (1984).

[4] Louisville Joint Stock Land Bank v. Radford, 295 U.S. 555, 602 (1935).