Main Street vs Wall Street

[U-Ute]

Richmond, California may have struck upon a plan that allows them to step in and force banks to give up homes that are underwater in their mortgages, and allow the homeowners to refinance at a price that reflects the new market.

http://sfist.com/2013/09/11/richmond_california_just_gave_wall.php

As I understand it, it allows the city to use Eminent Domain to buy houses at the current, underwater, prices, then they have investors lined up to re-sell the houses back to the homeowners at the same price.

[LA Ute]

Richmond, California may have struck upon a plan that allows them to step in and force banks to give up homes that are underwater in their mortgages, and allow the homeowners to refinance at a price that reflects the new market.

http://sfist.com/2013/09/11/richmond_california_just_gave_wall.php

As I understand it, it allows the city to use Eminent Domain to buy houses at the current, underwater, prices, then they have investors lined up to re-sell the houses back to the homeowners at the same price.

853

[chrisrenrut]

Richmond, California may have struck upon a plan that allows them to step in and force banks to give up homes that are underwater in their mortgages, and allow the homeowners to refinance at a price that reflects the new market.

http://sfist.com/2013/09/11/richmond_california_just_gave_wall.php

As I understand it, it allows the city to use Eminent Domain to buy houses at the current, underwater, prices, then they have investors lined up to re-sell the houses back to the homeowners at the same price.

As a result, banks will do everything in their power to not make home loans in Richmond, due to the risk involved.

[U-Ute]

As a result, banks will do everything in their power to not make home loans in Richmond, due to the risk involved.

But they already have investors lined up. Maybe this is a rebirth of community banks then?

[chrisrenrut]

As a result, banks will do everything in their power to not make home loans in Richmond, due to the risk involved.

I like how the article says ". . .the inflated value assigned by the banks." Uh, didn't the market assign the inflated value at the time the house was purchased? The buyer was not forced at gun point by the bank to fill out the application and complete the process of purchasing the house during the real estate boom.

I have a lot of sympathy for the consumers that are in these unfavorable positions regarding their house. There are a lot of options available to them. I don't think the city government should be trying to step in. As we see every day, governments best intentions always come with unforseen consequences that could do more harm in the long run.

Hmm, the head of the business partner the city is partnering with is from Lehman Brothers.

[chrisrenrut]

But they already have investors lined up. Maybe this is a rebirth of community banks then?

The banks are going to be reluctant to finance any new loans on other properties not involved in this scheme, knowing that they are very risky in the future with this resolution in place.

[Scratch]

But they already have investors lined up. Maybe this is a rebirth of community banks then?

And how long will these investors be willing to bail them out? What happens to these investors if the homes in Richmond drop by an additional 10% in the next year (which is a decent possibility, particularly given the likely increased difficulty in obtaining a loan for home purchases)? There is certainly some appeal to this story, but it feels like in the long run it will do more harm than good. Additionally, I haven't done much (any) research into the state of eminent domain law since law school, so I'm not sure whether or not such a use would be constitutional, but in any event it feels like an abuse of the power.

[U-Ute]

I like how the article says ". . .the inflated value assigned by the banks." Uh, didn't the market assign the inflated value at the time the house was purchased? The buyer was not forced at gun point by the bank to fill out the application and complete the process of purchasing the house during the real estate boom.

True, but we also forget that nobody was holding a gun to the banks to force them to make loans to people they knew couldn't afford it either. In a market driven system, what is supposed to happen if a bank underwrites too many bad loans?


I have a lot of sympathy for the consumers that are in these unfavorable positions regarding their house. There are a lot of options available to them.

I'd be interested in hearing about them. I'm not too familiar with this.


I don't think the city government should be trying to step in. As we see every day, governments best intentions always come with unforseen consequences that could do more harm in the long run.

I agree, but that horse left the barn when we bailed out the banks. We did it because letting our entire banking industry crash would've had irreparable results. The problem, however, is that that local economies are also dependent on people and families being able to have jobs and homes. They can't let national interests crush their local economies.


Hmm, the head of the business partner the city is partnering with is from Lehman Brothers.

Which is why I think this may have legs. The guy probably knows his business.

[U-Ute]

And how long will these investors be willing to bail them out? What happens to these investors if the homes in Richmond drop by an additional 10% in the next year (which is a decent possibility, particularly given the likely increased difficulty in obtaining a loan for home purchases)? There is certainly some appeal to this story, but it feels like in the long run it will do more harm than good. Additionally, I haven't done much (any) research into the state of eminent domain law since law school, so I'm not sure whether or not such a use would be constitutional, but in any event it feels like an abuse of the power.

I didn't say it was a good idea. Using Eminent Domain in this regard seems like a slippery slope. But this solution is intriguing to me for some reason. I guess it is the whole underdog story of local governments vs national banks.

[Applejack]

And how long will these investors be willing to bail them out? What happens to these investors if the homes in Richmond drop by an additional 10% in the next year (which is a decent possibility, particularly given the likely increased difficulty in obtaining a loan for home purchases)? There is certainly some appeal to this story, but it feels like in the long run it will do more harm than good. Additionally, I haven't done much (any) research into the state of eminent domain law since law school, so I'm not sure whether or not such a use would be constitutional, but in any event it feels like an abuse of the power.

You could make a pretty good argument that this is a proper use of eminent domain law. After Kelo, I think you could very credibly argue that assisting the community in recovering their homes qualifies as a "public use" under the 5th Amendment.

[chrisrenrut]

True, but we also forget that nobody was holding a gun to the banks to force them to make loans to people they knew couldn't afford it either. In a market driven system, what is supposed to happen if a bank underwrites too many bad loans?

The most simple answer is that the banks lose money on default loans. But are we really talking about bad loans? My understanding is this is to help existing home owners who are current on their loan, but upside down in their house.


I'd be interested in hearing about them. I'm not too familiar with this.

Here area couple of starting points:
http://www.makinghomeaffordable.gov/programs/lower-payments/Pages/hamp.aspx.
http://www.google.com/url?sa=t&rct=j&q=&esrc=s&frm=1&source=web&cd=5&cad=rja&ved=0CHgQFjAE&url=http%3A%2F%2Fkeepyourhomecalifornia.org%2Fprog rams%2Fprp.pdf&ei=fclNUvXwJ8qwygGljoGgDA&usg=AFQjCNGW9LR3-yk1SG3axryc1CY8UQfmBw&sig2=wBkLPXxHnhESChB8k5Gfvw
They are government solutions, but they work with banks, instead of against them.


I agree, but that horse left the barn when we bailed out the banks. We did it because letting our entire banking industry crash would've had irreparable results. The problem, however, is that that local economies are also dependent on people and families being able to have jobs and homes. They can't let national interests crush their local economies.

Agreed, but they should also understand that when taking extreme measures, there are consequences, such as possibly stunting future growth due to FI's being less willing to make new loans in that city.


Which is why I think this may have legs. The guy probably knows his business.

Not sure if you are being sarcastic or not. I state that because Lehman Brothers at the forefront of the crash. They were accused of really shady practices. The movie Margin Call is supposedly based on Lehman Brothers the days before the crash.

Disclosure- I am not an expert in this area. I work for a large bank, but am not in lending areas. However, I'm honest enough with myself to know that the corporate communications I see may bias my opinion somewhat.

[Scratch]

You could make a pretty good argument that this is a proper use of eminent domain law. After Kelo, I think you could very credibly argue that assisting the community in recovering their homes qualifies as a "public use" under the 5th Amendment.

Like I said, I am not current on eminent domain law, nor do I remember it very well, but even if the test is "public use" I'm not sure this would qualify. This would be a very targeted measure that only a small percentage of "the public" could even choose to use. It's different from parks or roads that many members of the public don't use because in those instances they would still have the opportunity to use the public benefit. Here, not so much.

[U-Ute]

The most simple answer is that the banks lose money on default loans. But are we really talking about bad loans? My understanding is this is to help existing home owners who are current on their loan, but upside down in their house.

But I also believe that this is for people who are in danger of losing their homes. Maybe I'm wrong on that.



Here area couple of starting points:

They are government solutions, but they work with banks, instead of against them.


Thanks for the links. I think I've heard reference to some of these but wasn't quite sure how they worked.


Not sure if you are being sarcastic or not. I state that because Lehman Brothers at the forefront of the crash. They were accused of really shady practices. The movie Margin Call is supposedly based on Lehman Brothers the days before the crash.

Disclosure- I am not an expert in this area. I work for a large bank, but am not in lending areas. However, I'm honest enough with myself to know that the corporate communications I see may bias my opinion somewhat.

I'm being quite serious. I am familiar with the history of Lehman Bros. My point is that just because he was in an environment where a lot of bad decisions were made makes him guilty of making those bad decisions. There were a lot of honest people working there that were ruined by a handful of greedy bastards. I would think that these investors have done their due diligence and figured out who he is and what his history is.

[chrisrenrut]

I'm being quite serious. I am familiar with the history of Lehman Bros. My point is that just because he was in an environment where a lot of bad decisions were made makes him guilty of making those bad decisions. There were a lot of honest people working there that were ruined by a handful of greedy bastards. I would think that these investors have done their due diligence and figured out who he is and what his history is.

I just thought it was interesting that the article would point that out. I don't think pointing out that he was an investment banker at a discraced, defunct broker is a ringing endorsement. You can't work at a skunk farm without some stink sticking to you.

[U-Ute]

Apparently the idea is still kicking around (http://www.economist.com/news/finance-and-economics/21592644-radical-plan-help-underwater-homeowners-makes-comeback-not-waving?fsrc=scn/rd_ec/not_waving_but_drowning) in other cities.