In San Bernardino County, California, county officials believe they have figured out a way to solve their housing woes. The idea is simple and straight forward: to take people’s houses away. The mechanism these officials are utilizing is through a liberal understanding of an old legal concept called “eminent domain” which typically is used to acquire privately held properties to enhance the surrounding public at large. However, instead of seizing the actual property itself, the officials are seizing the mortgages.
Then, the firm behind this complex plan, Mortgage Resolution Partners, would pay the holders of the mortgages “fair market value” (reflecting the depressed post housing bubble prices), and write new loans to the homeowners. The homeowners would then continue to live in their homes while paying lower and more manageable mortgage payments to the new mortgage holders. Sounds great! This would also prevent foreclosures or short sales, and thus presumably help the housing market bounce back. Seems like a true win-win answer to our housing problems, no?
Well, not really.
It’s obvious that the original mortgage holders would be adversely affected by this scheme, as they lent the money at the height of the market, and are getting paid back according to the new depressed “fair market value.” It’s also true, as Professor emeritus at Loyola Law School Gideon Kanner points out, that homeowners will have less of an incentive to pay their mortgages, as they can hope to “refinance” their mortgage under this scheme.
But I think that Steven Greenhut of Bloomberg really hit the nail on its head, when he underscored how small investors, who have been waiting for an opportunity to enter the real estate game, are now being denied the golden opportunity that comes with any economic downfall. By preventing the natural progression that should follow any housing bubble, namely an abundance of foreclosures and short sales, this scheme is shutting that window that should be opened for real estate investors.
Taking this idea one step further, and putting the Keynesian economic theory aside, it’s so ironic how venture capitalists firms quickly team up with county officials to create a scheme when its serves them financially well, so contrary to the Capitalist ideal of truly free markets.