Category Archives: Eminent Domain

We’re Still Wrong

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by James Stefanile, ABR, GRI, SRES, QSC, gCertified, REALTOR/Salesperson, Berkshire Hathaway Home Services New Jersey Properties, Montclair Office

You may recall my posts of August and October 2013 (you can re-read them – check the sidebar) where I dealt with the issue of local governments using the power of Eminent Domain to buy distressed loans on behalf of citizen homeowners.  I, unlike the National Association of Realtors, think it’s an idea worth exploring.

In the August 2o14 issue of the Realtor Party News, the successes of the Realtor organizations in Maryland and Louisiana were reported in opposition to this idea.  Maryland, bowing to pressure from Realtors,  has now passed a law mandating a 2 year moratorium on the Eminent Domain practice of buying distressed loans and Louisiana has banned it outright   I’m confused as to how you legislate away part of a basic right of  local governments.  Does this mean that all other uses of Eminent Domain are banned in these states – of course not.  Only this selective slice of the municipality’s constitutional power.  Look for court and constitutional challenges.

Realtor PartySo, what is the Realtor Party?  It’s the political action arm of the National Association of Realtors and its state organizations.  We are one of those dreaded special interest groups and our lobbying protects our narrow interests.  The Realtor lobby is very aggressive and successful on the state and national level and its main purpose is to make the real estate industry lucrative and to protect the vested interest of Realtors everywhere.  It’s stated purpose is “to protect home ownership and property rights” and, in my view, this is a mask for its real purpose – to protect the status quo.  No one from the Realtor Party rises up when a city uses eminent domain to flatten a neighborhood to install railroad infrastructure (an event that occurred in the township I live in about a dozen years ago resulting in the loss of 29 residential properties).  Where is the protection for homeowners and the defense of their property rights in that case?  I didn’t see Realtors picketing that decision or lobbying against it.  On the contrary, the Realtor community was quite excited about this transportation upgrade since it would make the community more attractive to buyers – and the 29 homeowners be damned.  Also, by the way, no Realtor mourned for the lenders holding the mortgages on those 29 properties.  So, in that case, if a lender got shorted it was ok.

You can’t have it both ways.  I have no problem with a city using Eminent Domain when, in the view of the local government, it will improve the quality of life for its citizens.  When a city uses its powers to cajole (ok – force) a recalcitrant lender into selling a mortgage to the city, it’s stated goal is to help that underwater homeowner find a responsible way out and to provide an alternative to the blight of abandoned, foreclosed homes which will impact the quality of life of all its citizens.  Realtors are opposed to this because it lessens the instances of short sale commissions and commissions earned working for the banks who seize homes.  This part of Eminent Domain is wrong in the view of the Realtor Party while other uses of Eminent Domain are ok.  A very selective point of view.

Critics of  this form of Eminent Domain say the original investor will be shorted as the municipality seizes the mortgage at 80% of the home’s current value and re-sells it back to the homeowner at a higher value.  If a foreclosed mortgage goes to auction the investor(s) will get only 40-50 cents on the dollar.  Is that a better deal for the investor?   They say cities are not qualified to judge a home’s value.  An appraiser hired by the city would do that nicely.  Further criticism of this method states that the seizures target mortgages that may be underwater but current.  That’s simply not true in all cases and it doesn’t matter whether the loan is current or delinquent – an underwater mortgage, more often than not, leads to delinquency and default.  Critics point out that mortgages have value to their investors over time with the interest paid on the loan.  It’s very nice for an investor to be making money on an asset that’s lost a major percentage of its value, where a homeowner is still paying on an obsolete, inflated value and paying an interest rate 3 or 4 percentage points above today’s standard.  If Realtors are on board with this thinking they’re working for the banks, not the public.  It’s the public – the homeowner – whose benefit is not being discussed when Realtors point out the negative impact on lenders.  We’re much more focused on selling these distressed assets rather than enabling homeowners to stay in their homes.  So much for us as champions of home ownership.

Further, it’s naïve to think lenders will continue to collect mortgage payments on underwater loans for the life of those loans.  Something like 85% of these loans default.  You would think the lenders and their investors would be looking for any way out of this dilemma but, apparently, they’d rather just hold their breath till they turn blue and we Realtors are ready to hold their hand while they do.

The fear based arguments used in opposition to the Eminent Domain idea include the possibility of a lender boycott of the city in question (illegal), the unchecked authority of government, lawsuits, disapproval by HUD and FHFA, tax liability and the flight of qualified buyers – all unproven.  Fear based arguments pander to our basest, most selfish and paranoid fears and demean the purveyors of such corrosive and unproductive tactics.  I believe this process will play out in the courts over time and the opponents of this form of Eminent Domain have already lost once in Federal Court.  The good news is that special interests (like the Realtor Party) have far less sway over the courts than legislatures.

While the Realtor Party has done some legitimately good work in the past, we are still, and more than ever, on the wrong side of this Eminent Domain vs. underwater loans issue.  And, as time has passed, the Realtor lobby has been able to crank up its institutional muscle to pressure lawmakers to its way of thinking.  Don’t forget we also contribute to the campaigns of many of our pandering public servants and this is yet another blunt instrument used to get results.

The Eminent Domain idea has not been fully studied with regard to distressed mortgages.  If, after thorough review it becomes apparent it’s a bad idea or it’s proven to have negative consequences for homeowners, that’s one thing.  Working for its abolition in the knee-jerk manner of the Realtor Party is quite another.  The impact of this issue would be very small in terms of the overall real estate industry, even if the practice was widespread.  It would not be the Armageddon the lobbyists paint.  To kill this practice in the cradle, as the lobbyists are trying to do, is a blatant attempt to annihilate a new idea.   Our Realtor lobby opines that less and less homeowners are underwater because of rising home prices – nonsense.  It will take years from now for an underwater homeowner to regain a full equity position and the lender is not going to cut that homeowner a break on the inflated interest being paid in the meantime on an inflated value and that homeowner is not going to make payments on an inflated value forever.

I believe the Realtor Party is afraid that the Eminent Domain  practice will be successful in leading to the end of the foreclosure crisis and, as a result, will obliterate some percentage of Realtors’ incomes.  This is a narrow, callous and mean-spirited point of view and an attitude unworthy of our  profession.

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Eminent Domain Update

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by James Stefanile, ABR, GRI, SRES, QSC, gCertified, REALTOR/Salesperson Prudential NJ Properties, Montclair Office

The PBS Newshour broadcast this excellent report on September 19th about the eminent domain strategy being considered in Richmond, California to address its foreclosure and mortgage crisis.  Click the play button to see The Newshour report:

This report makes a number of new points about Richmond’s strategy.  For those of you who don’t follow this blog religiously (What!!!), the August 2013 post deals with this issue in detail.  In summary, the city of Richmond, CA wants to help some underwater homeowners by offering to buy their mortgages from the lenders at approximately 80 per cent of fair market value and then sell the amended, modified loans back to the homeowner.  The borrower would then have a loan that reflects the current value of their home and may even have some equity back.  If the lender refuses to sell the loan, the city would invoke eminent domain, seize the loan, pay the lender and proceed.  Richmond has been particularly hard hit by declining home values and foreclosures and the municipal government is attempting to stem the deleterious effects of crime, blight and eroding neighborhood home values resulting from this crisis.

The thing that got my attention in this broadcast piece is the furious blowback from Wall Street, mortgage lenders and REALTORS.  The Newshour report features California REALTOR Jeffrey Wright (who is part of a campaign by the California Association of REALTORS) using very florid language to put the blame squarely on borrowers.  He says, in effect, no one forced them to accept their loans.  OK, but how about when the home is worth half of what the loan is.  Is that the borrower’s fault as well?  And what if the lender won’t modify the loan or provide principal reduction to reflect the current value of a property?  And what if the loan is securitized and it’s very hard to tell who the lender is?  I suppose the distressed homeowner is at fault there as well.

This REALTOR made me cringe as he just sounded like a man whose potential short sale commissions are in jeopardy.  It’s shameful.  This is why the American people regard us REALTORS as nothing more than used car salesmen in better suits.  He says the lenders have no legal obligation to re-negotiate the loans.  The California Association of REALTORS says there are other ways for distressed property owners to deal with the issue.  What ways?  The Federal Government programs which the National Association of REALTORS trumpet as a viable alternative for homeowners has only helped the tiniest fraction of Americans in mortgage distress.  What other alternatives do homeowners have?  Short sales – that’s it, barring an unlikely loan modification with principal reduction.  Guess who profits financially from short sales?  Shame on us.

It’s time to move forward and away from these old chestnuts which make us REALTORS toadies of the banks.  We need to be on the side of what is best for consumers, the economy and the towns we live and work in.  We need to be on the side of solving this problem of underwater, distressed properties which one of the interviewees in the Newshour report calls “a hair ball stuck in America’s economy and it’s got to get hacked up”.  If we REALTORS are supposed to be the “protectors” of home ownership, Mr. Wright takes a curiously adversarial position toward home owners.  It appears he’s more in favor of a large migration from his town and vacant, blighted properties because of short sales and foreclosures.

As a REALTOR I don’t advocate helping irresponsible borrowers.  I have never seen myself as a social worker.  Richmond is targeting responsible, qualified borrowers who are in trouble, mainly through no fault of their own.  I believe that the hugely corrosive effects of the mortgage crisis on the country demand a shifting paradigm among all concerned with real estate.

The report also notes that Richmond and the group of investors it’s working with are targeting 624 underwater Richmond borrowers who have what’s known as private label securitized mortgages where loans are bundled away from the original lenders, trusts are formed and then an interest in them is sold to investors in the form of bonds.  It’s  almost impossible for a homeowner with this type of loan to know who to negotiate with to modify the loan and it was pointed out that half of these loans nationwide are underwater and in danger of default.  The trustees for the bond holders are – guess who? – some of the biggest banks in the country.  So we can rely on their blind capitalism to do nothing but try to squash any initiative which may, in their minds, threaten their position.

A bond manager in the report calls the eminent domain strategy “stealing”.  He says the everyday American who invests in these bonds will be cheated.  I suppose he thinks it’s a better deal for these investors to lose a huge portion of their money through foreclosure and auction, rather than being paid 80 per cent of fair market value.  When a foreclosed property goes to auction the lender doesn’t take a haircut on the old, obsolete, larger value of the property.  The investor gets shorted, most times by half, on the new, smaller value.

The report also shows a contentious Richmond city council meeting where angry and fearful citizens (who are not in mortgage distress) worry about no credit being extended to Richmond and about lawsuits by the financial industry.  Richmond Mayor Gayle McLaughlin, who is spearheading the eminent domain strategy, makes the very legitimate point that lenders boycotting a town would be illegal.  It’s the same as real estate brokers breaking the law if they boycott another broker’s listings.  The criticisms of the eminent domain strategy are all fear based and don’t hold up to close scrutiny.  Some Richmond citizens at the council meeting blamed the distressed homeowners and called this another bailout.  It’s not, it’s a solution which protects the property value of every homeowner in town.  Those citizens think they are being cheated when the town extends a helping hand to their distressed fellow citizens.  I won’t even get into how selfish this attitude is.  This smacks of Tea Party reactionary nonsense.  It’s an incredibly short sighted, misguided and fear based position.  What hurts some citizens hurts all.

Other criticisms from the financial and real estate industries sound equally flimsy as they seem to be desperately protecting a paycheck with no regard for the bigger picture.  A municipality has the right to protect its economic value, citizens and quality of life and has a responsibility to advocate for its citizens.  The Federal Government doesn’t seem to be stepping up and the banks are hovering.  Who’s left to represent home ownership?  Doesn’t seem to be REALTORS, even though our advertising positions us as such.

Richmond has been unable to sell its highly rated municipal bonds on the open market.  This demonstrates obvious, shameful collusion on the part of the financial industry.  But a coalition of investor bondholders who sued Richmond recently lost their suit in Federal Court.  The city will have to keep its resolve in the face of these spurious assaults on its authority.

Inertia serves no one.  Richmond says it wants to use eminent domain only as a last resort but would rather work out a deal with the lenders, bondholders and trustees.  The financial industry’s reaction has been to try to stonewall Richmond and any other municipality with the temerity to attempt this strategy.  The bondholders’ actions represent an attempt to ensure the status quo which  does no one any good. The banks and Wall Street offer no solutions other than short sales or foreclosing and selling the properties at auction.  All the financial pundits, for years, have been saying the market has to solve the mortgage crisis in this country through foreclosures “cleansing” the market.  We’ve all seen how honest and straightforward financial markets have been when left to their own devices.  No one benefits.  The foreclosure solution pays, maybe, 40-50 cents on the dollar to investors.  Richmond is offering to buy the loans at an appraised, fair market value of 80 cents on the dollar.  It’s time to fill the inert void in the foreclosure issue with new thinking and it’s time for the National Association of REALTORS and REALTORS around the country to find their conscience outside of their pocketbooks.

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New Idea, Old Objections

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by James Stefanile, ABR, GRI, SRES, QSC, gCertified, Salesperson/REALTOR, Prudential NJ Properties, Montclair, NJ

The Federal Government’s programs to assist financially distressed homeowners have not performed up to expectations and have helped only a limited few.  Congress would not authorize bankruptcy judges to modify distressed mortgages by court order in order to assist homeowners in bankruptcy to fairly re-structure outdated or predatory mortgage loans.

The banking industry has pretty much had its way with regard to dealing with underwater and distressed mortgages.  This is despite its robo-signing, its redlining practices, betting against its own toxic securities, its part in the greatest domestic and world-wide financial collapse since the Great Depression, its rescue at every taxpayer’s expense and isolated incidents of out-and-out fraud.

Now, a few municipalities have hatched a new plan to help distressed homeowners within their borders since it’s clear the Feds aren’t going to help and the banks are a united front against these owners while large swaths of some towns disintegrate.

The plan is for the municipality to offer to buy distressed properties’ loans, pay the lender a fair market value and then sell the property back to the homeowner, after the town takes a write-down, with a modified, refinanced mortgage, most likely through a government program.  The investors who put up the money to buy the original loan and the town would benefit from the way the town writes down the loan and the homeowner may go from being underwater to actually having some equity in the property.  If the lender declines the offer the municipality would use its right of eminent domain to condemn the properties and buy the loans with the permission of a court.

The aim of this plan is to prevent neighborhoods from falling into disrepair with the presence of foreclosed or abandoned properties and to assist the town’s citizens who have suffered from outdated or predatory lending practices.

As you can imagine, the banking industry is strongly opposed and is threatening any town with the nerve to hatch this plan with the prospect of a lending embargo and lawsuits.  What’s puzzling to me, however, is the opposition of the National Association of REALTORS.

The banks are opposed because they give up domain over their customers only at the point of a gun.  They complain the eminent domain strategy is government interference in private enterprise but they were more than willing to accept the government’s interference in the form of billions of dollars in bailouts.  The REALTORS (NAR) claim this eminent domain idea (they call it a “scheme”) strikes at the heart of private home ownership and property rights.  The banks and NAR have called this “unprecedented and unconstitutional”.  In other words, they are using the old chestnuts of  “property rights” and a threat to private enterprise as opposition to this strategy which they feel will compromise their industry position.   I have come to regard this and many of NAR’s positions as knee-jerk, calcified opinions justified by their claim to be the protector of home ownership.  This is only a cover story for the real reason for NAR’s opposition – it may disrupt the flow of dollars in the real estate industry.  If NAR is the protector of home ownership it’s odd that they aren’t in favor of protecting the home ownership of the Americans affected by the financial crisis.

Sure, there are risks for abuse by homeowners under the eminent domain plan as NAR warns ominously.  But there is a court ordered step in the process which can be a protection against abuse.  Opponents of this strategy use the public’s existing fear of eminent domain to paint this very specific strategy as an example of Big Brother seizing properties.  They argue that undeserving, irresponsible homeowners will also be rescued.  This is a blanket indictment ignoring the millions of Americans who have either fallen on hard times through no fault of their own or have watched their property’s equity disappear.   As far as property rights are concerned,  I wonder if any of these distressed homeowners feel their rights are being abused.  As to the rights of their financially secure neighbors, anything that will prevent neighborhood  homes from falling into vacancy will protect their property’s values and the quality of their neighborhoods, promoting the public good and preventing the blight, crime and vandalism associated with abandoned properties.  Municipal governments have the right and the obligation to maintain a high quality of life for the constituents they represent.

Banks are terrified that eminent domain strategies could, among other things, engulf the secondary liens and equity lines of credit they hold.  They posture opposition based on morality and fairness, but, in fact, their concerns are dollar based, as always.  As far as the banks’ investors are concerned, eminent domain strategies just may be a way, possibly imperfect, but at least a valid attempt, to fix a mess that has defied solution for many years.

The National Association of REALTORS, as the largest trade organization in the country, has been very successful politically and in protecting its turf.  There are already rumblings in Congress of legislation and regulations to prevent eminent domain in these situations .  I’m sure NAR’s lobby has been busy with our leaders – elected representatives who should be concerned with their constituents and not the welfare of the National Association of REALTORS and the national banking trade organizations..

It may seem strange that I, a REALTOR, should have a favorable opinion of eminent domain as an instrument to deal with distressed mortgages.  My position is that it’s worth a look and not worthy of being murdered in its cradle because of the entrenched interests of entities with large influence.  I understand, and benefit from, the importance of the bottom line in banking and real estate.  I have also seen, in my career, the flip side of capitalism in all its gruesome glory – situations where money was the only motivator at the expense of fairness, professionalism and common sense.  I also understand that the unfettered and unregulated pursuit of profit is what almost sent the world economy off the cliff.  It’s time for new initiatives that take into account more than just the bottom line and it’s time for the trade organization that, supposedly, represents me to think beyond the dollar sign at the end of its nose.

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