Adding Brad Miller (NC-13) To My Act Blue Page

Basically, he has an idea so good, that I don't care that he wrote it in The New Republic.

He notes that obvious, that the various ways that the government has attempted to deal with home foreclosures are inadequate, and what's more, the banks aren't cooperating with the program in any significant way.

His solution is brilliant, use eminent domain to purchase the mortgage backed securities that have locked homeowners into their unsustainable home loans:

The Obama plan, by contrast, has misunderstood the calculus faced by homeowners facing foreclosure. An underwater homeowner has little incentive to save their home from foreclosure, even if the monthly payment is reduced. Mortgage modifications that reduce the principal are far more successful than modifications that reduce the interest rate. A homeowner with equity to protect will find a way to pay the mortgage. In contrast, for underwater homeowners a mortgage payment is just expensive rent.

…………

Also, roughly half of troubled mortgages now have “second liens,” a second mortgage or a home equity line of credit. Second liens are secured by the value of the home in excess of the first mortgage. Home values in many markets have declined by well more than the amount of most second liens. A reduction of principal on the first mortgage would often just be a gift to the second lien holder, still leaving the homeowner with negative equity in their home.

…………

That’s why there’s a need for a much stronger government role in this crisis. Some in the financial industry may be more willing to sell mortgages to the government at a discounted price than they are to modify mortgages themselves. Servicers fear that if they offer affordable mortgage modifications to struggling homeowners, many more homeowners will stop paying and wait for an offer. Selling a mortgage to the government may avoid that problem because the government would modify the mortgage, not the servicer.

But for many of the same reasons that the financial industry has not modified mortgages voluntarily, others in industry would not likely sell many mortgages voluntarily either, at least not at a realistic discount. So how can a new HOLC
[Home Owners’ Loan Corporation, an entity created by Roosevelt to help homeowners by buying and managing mortgages duringthe Great Depression] work if mortgage holders will not voluntarily sell mortgages?

The new HOLC could buy mortgages by eminent domain. Eminent domain powers are most commonly used to purchase land for highways or public buildings, but also to renew “blighted” neighborhoods or clean up contaminated land. And existing law allows the use of eminent domain to purchase property interests other than the outright ownership of land.

Some uses of eminent domain have resulted in public wariness and resentment. The Supreme Court’s 2005 decision in Kelo v. City of New London allowed the condemnation of family homes for an “economic development” project from which private developers profited. A mortgage in a securitized pool is no one’s castle.

The toxic assets backed by mortgages are impossible to value. The concern that taxpayers would get fleeced buying toxic assets from the financial industry was well justified. Whole mortgages are not hard to value at all. There are frequent, well-publicized auctions of mortgages with a sufficient number of informed, sophisticated buyers. The auctions are an almost perfect pricing mechanism. The problem for the financial industry is not the difficulty of valuing troubled mortgages; the problem is that many mortgages are not worth much. There are obviously many considerations in the price, but distressed mortgages generally sell for about 30 to 50 cents on the dollar at auction. And any honest valuation of many second liens would be pennies on the dollar.

Your mouth to Obama's ear.

He is right on the law: In eminent domain, one is obligated only to pay market value, not par.

It won't happen though, because Geithner and Summers would shoot it down, even it is legal, because, of course, it's bad for the banks, and what's bad for the banks is, to them, bad for America.

To be fair though, it should be noted that while Geithner and Summers may be financial Cossacks, it is also true, as Professor Delong is wont to say, "The Cossacks work for the Czar."