Tuesday, November 13, 2012
Robert Hockett (Cornell) has posted Paying Paul and Robbing No One: An Eminent Domain Solution for Underwater Mortgage Debt that Can Benefit Literally Everyone on SSRN. Here's the abstract:
essay provides updated argumentation for and abbreviated specification
of the municipal eminent domain plan for underwater mortgage loans that
the author lays out in his earlier piece titled It Takes a Village. The
nation's ungoing foreclosure crisis and economy-stifling mortgage debt
deflation will not be arrested and reversed, the paper argues, until
mortgage debt principal is written-down to post-bust home equity levels.
Once that is done, however, literally everyone can benefit - from
homeowners and bondholders to neighbors, communities, and local and
Unfortunately, a host of classic collective action problems presently stand in the way of the 'win-win' solution here. Such problems require collective agents for their resolution, which is what private label securitization (PLS) trustees and even loan servicers are. But the pooling and servicing agreements (PSAs) pursuant to which many PLS trusts are formed, hurriedly drafted as they were during the bubble years when many pushed product and few apparently anticipated system-wide housing price crash, prohibit or effectively prevent even value-raising modifications or sales of sufficient numbers of underwater mortgage loans. This means that government alone - the sole entity able to sidestep dysfunctional contract rigidities, by use of the eminent domain authority - can serve as the requisite collective agent.
In theory, the essay continues, our federal government, through any number of instrumentalities, could play the appointed role. But political paralysis in Congress shows that it now faces collective action hurdles of its own. All that is left, then, is state and local government. But the latter, it happens, is happily best situated in any event to exercise the eminent domain authority to take underwater loans at fair value and modify them to benefit homeowners, bondholders, and third parties alike. For the nation's underwater mortgage loan problem is heavily localized in character, and municipalities in any event face the brunt of foreclosure-induced homelessness, tax base decline, and consequent blight wrought by ongoing defaults wrought by negative home equity - the makings of 'public use,' per our constitutional limits on eminent domain use, par excellence.