The WSJ today reported that:
A handful of local officials in California who say the housing bust is a public blight on their cities may invoke their eminent-domain powers to restructure mortgages as a way to help some borrowers who owe more than their homes are worth. ...
... instead of tearing down property, California's San Bernardino County and two of its largest cities, Ontario and Fontana, want to put eminent domain to a highly unorthodox use to keep people in their homes.
The municipalities, about 45 minutes east of Los Angeles, would acquire underwater mortgages from investors and cut the loan principal to match the current property value. Then, they would resell the reduced mortgages to new investors.
The scheme "is the brainchild of San Francisco-based venture-capital firm Mortgage Resolution Partners, which has hired investment banks Evercore Partners and Westwood Capital to raise funds from private investors." The key plotters are three fellows named Graham Williams and Steven Gluckstern of MRP and Evercore's founder and co-chairman, Roger Altman.
Here's how the troika will make their profits:
For a home with an existing $300,000 mortgage that now has a market value of $150,000, Mortgage Resolution Partners might argue the loan is worth only $120,000. If a judge agreed, the program's private financiers would fund the city's seizure of the loan, paying the current loan investors that reduced amount. Then, they could offer to help the homeowner refinance into a new $145,000 30-year mortgage backed by the Federal Housing Administration, which has a program allowing borrowers to have as little as 2.25% in equity. That would leave $25,000 in profit, minus the origination costs, to be divided between the city, Mortgage Resolution Partners and its investors.
As an unrepentant free market capitalist, I generally have no objection to people making a profit. But I very much object to these people making this profit in this way.
Williams, Gluckstern, and Altman are not going to be making a profit by the sweat of their brow. Instead, they will do so by persuading desperate city governments to grossly abuse their eminent domain powers. As such, it is a classic example of how big government faciltates private rent seeking:
Rent seeking is a way of transferring previously-existing wealth to oneself by something other than voluntary trade. It typically involves a transfer of wealth, not a creation of wealth like that which occurs in a market with voluntary trade driven by utility and profit maximization. I will list a couple of examples of rent-seeking for illustration. Stealing is perhaps the “purest” example of rent-seeking. A thief takes what others earned without earning it. ... A mugger might hit you over the head and take your wallet, but when government takes wealth from one sector and transfers to another, there is the implied force that comes from the government having enforcement agents (police, prosecutors) to ensure that its wishes are carried out.
... Government has the power to pass laws, to write regulations, to collect taxes and to enforce the laws, regulations and taxes. Because members of government have lots of power, they have lots of favors to dole out, and it is the competition for these favors that forms the basis of rent-seeking. Firms are competing with each other, but instead of competing for customers by offering better products or better service at lower prices, they are competing for government favors. Instead of employing salesmen or engineers or factory workers, they are employing lawyers and lobbyists.
It's thus not surprising that the people behind this effort are wealthy Democrats. Back to the WSJ: "Evercore's founder and co-chairman, Roger Altman, served in the Clinton administration and is raising funds for President Barack Obama's re-election effort." Rich Democrats like Altman love big government precisely because they can game the system to transfer wealth to themselves, just as he plans to do here.
What's particularly frustrating about this example of the phenomenon is that it strikes so close to home. There will dountless be costs to California tax payers. There will inevitably be litigation (even though Messrs Williams, Gluckstern, and Altman reportedly are deliberately targeting the weakest banks with the shallowest pockets for legal fights). Banks will be less willing to lend to Californians, which will drive down property values. As such, this is a wealth transfer from people like yours truly who were fiscally prudent, took on only as biug a mortgage as we could afford, and didn't run up huge lines of credit to people who were fiscally imprudent, who took on jumbo mortgages to buy far bigger houses than they needed, who ran up huge lines of credit to finance spending, and stupidly thought the housing bubble would last forever. Now that the music's stopped, they're going to get relief--with a big chunk being siphoned off for Messrs Williams, Gluckstern, and Altman--at our expense.
The whole thing reminds me of Rick Santelli's famous tea party rant:
"This is America!" Santelli declared. "How many of you people want to pay for your neighbor's mortgage that has an extra bathroom and can't pay their bills?"
Granted, the words are not as elegant as those of Thomas Jefferson or John Adams. But the thought is clear. Santelli was arguing that the people who, in Bill Clinton's felicitous phrase, "work hard and play by the rules" shouldn't have to subsidize those who took on debts that they couldn't repay.
This was both an economic and a moral argument. Economic, because subsidies to the improvident are an unproductive investment. We know now that very many of the beneficiaries of the administration's mortgage modification programs ended up in foreclosure anyway. Subsidies just prolonged the agony.
But it's also a moral argument. Taking money away from those who made prudent decisions and giving it to people who made imprudent decisions is casting society's vote for imprudence and self-indulgence.
When one takes into account who else will benefit from this proposal, the moral case against this proposal becomes even stronger. It's time for somebody to throw an old-fashioned tea party Messrs Williams, Gluckstern, and Altman. You know, the kind with tar, feathers, and a rail for them to ride out of town. Or so I think, in my First Amendment-protected humble opinion.
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