Shining a Light on Shadowy Plan to “Save” Homeowners

A New York Times article this week detailed a small Northern California city’s ambitious plan to prevent homeowners who are upside down on their mortgages from being foreclosed upon. But like any good political scheme, the plan and the action rarely coincide. First, a look at the New York Times article:

A City Invokes Seizure Laws to Save Homes – New York Times

Use eminent domain for good, keep homeowners in their homes, save the free world, right? Wrong.

Richmond, California and cities like it are not seizing the homes, but are attempting to seize the mortgage documents (in California these are called “deeds of trust” or “trust deeds”). Under the Cities’ theory it will force the lenders or their assignees (if they can be located out-of-state or overseas) to sell the trust deeds to the City at a lower value under an eminent domain court order. If the jury agrees on the presumed lower value, the City would then be in a position as a lender to modify the terms of the loans and keep the owners in their homes. In theory.

However, there are shadowy consultant companies who would skim off some value by, in effect, lending to the City the money to go through the complex process of many individual eminent domain lawsuits. The homeowners may lose their homes anyway, and the consultants would profit at everyone’s expense by becoming mega-lenders to the City. The City would have borrowed money to finance a bunch of risky lawsuits.

The seizure of trust deeds may be a violation of federal law. Many trust deeds are insured by Fannie Mae or Freddie Mac. A lower payout on the trust deeds as forced by an eminent domain court order, could trigger the federal agencies’ insurance duty to pay the lender the difference between the original (higher) loan value and the lower value the City forces the lender to accept via its eminent domain court orders. It is likely the lenders will hire expensive lawyers to defend their lender status. Under the terms of the trust deeds and under constitutional case law, if the City loses, it will be required to pay all costs and all attorneys fees to the lenders. That could be huge. When the City of Oakland tried to seize the Oakland Raiders football team in the 1980’s and lost, the awards against it were in the millions.

The shadowy consultants are not guaranteeing success by the City or guaranteeing the fees and costs the City might have to pay to the lenders. Thus, the homeowners could still be foreclosed, losing their homes, and the City taxpayers would be stuck with a huge bill to the shadowy consultants. Only the consultants and the lawyers for all sides would profit during the lawsuits and appeals. Posturing by politicians claiming to “save” homeowners would have made matters worse than if they had done nothing.

Remember Murphy’s Law:
Everything takes longer than you think.
Everything is harder than it looks.
If something can go wrong, it will.

Timothy Sandefur’s a fan

Read the full blog post here Celebrating a victory for property owners in California

Pacific Legal Foundation’s Timothy Sandefur attended the most recent M.O.R.R. (Municipal Official for Redevelopment Reform) Conference. He mentioned us his his blog yesterday. He said, “For me, the highlight was the presentation by Pasadena attorney Chris Sutton, one of the state’s leading experts on eminent domain, who presented us all with copies of a beautiful poster his daughter made announcing the fundamental truth that “Property rights are human rights.” It now proudly hangs on my wall. But, Sutton warned, the abolition of RDAs is only one important step toward restoring the security of property rights in the Golden State.”