Commentary: Eminent Digression

Commentary: Eminent Digression

06/14/2013 BY: MARK LIEBERMAN, FIVE STAR INSTITUTE ECONOMIST

In a newly published paper posted on the New York Federal Reserve website, Robert Hockett, a Cornell University professor of financial and monetary law, proposes using government’s eminent domain authority as a solution to underwater mortgage debt.

Hockett suggested governments could buy and restructure underwater mortgages and reduce the principal lowering the amount owed by borrowers, reducing the default risk. The new mortgages would be packaged and sold into the secondary market.

In reviewing Hockett’s suggestion, the Wall Street Journal concentrated not on the idea itself, but noted Hockett’s proposal was quite similar to one offered by Mortgage Resolution Partners (MRP), a San Francisco-based investment firm which, the Journal said, “could be a big winner in such a scheme as the repackager of the seized mortgages into new securities in return for a fee.”

Hockett, according to the Journal, “turns out to have been on the payroll of none other than Mortgage Resolution Partners.” Being “on the payroll,” to use the Journal’s own phrasing, “turns out” to have been a “one-time honorarium,” the Journal said quoting MRP Chairman Steven Gluckstern.

Nonetheless, the Journal uses Hockett’s past affiliation with MRP to discredit the suggestion without undertaking anything close to an objective, critical review.

[The New York Fed didn’t distinguish itself in this dust-up by failing, initially, to disclose Hockett’s MRP affiliation when it first published the paper. Hockett’s brief bio at the end of the paper was modified after the Journal inquired, noting, “In 2012, he received a fee from the firm Mortgage Resolution Partners to provide legal analysis of questions raised by his eminent domain proposal in the state of California. All of his current work on the foreclosure crisis and eminent domain plan, for public and private entities alike, is done gratis.” The name of the company does not otherwise appear in the paper.]

Hockett’s paper describes in detail how his plan would work, though it is fairly straightforward. Federal plans to address and resolve underwater mortgages, he wrote, have not worked.

State and local governments, he then suggests are “the collective agents best able to address the structural problems that arise with the pooling and servicing agreements,” which are seen as impediments to working out troubled loans.

State and local governments, he said in his paper, “face the brunt of mass foreclosure and its consequences more directly than the federal government” and “have constitutional authority to address” them through eminent domain. The eminent domain powers, he argued, exist precisely to deal with urgent circumstances which have otherwise defied traditional solution.

Generally we think of eminent domain as the power of a government to take and pay for privately owned property for a public purpose. “Preventing more foreclosures, blighted properties, revenue base losses, and city service cutbacks is recognized by courts as the most compelling of public purposes justifying use of the eminent domain authority,” Hockett wrote. Investors in the mortgages secured by those properties would be paid fair value—that is, what the properties are worth.

And, as he proposes it, taxpayer dollars would not be involved. The seized properties would go back to current owners with mortgages reflecting their current value. Local governments, he suggested, could “finance the purchases with monies lent by federal agencies in the manner of the Treasury’s Troubled Asset Relief and Public-Private Investment Programs, and the Federal Reserve Bank of New York’s MBS stabilization programs, all of which ultimately have turned profits.” [Note to the Journal, Hockett was described in the paper’s end note as a “former visiting scholar at the Federal Reserve Bank of New York.”]

Alternatively, he said the money could be raised from private investors through any number of transactions. Those investors could include the original bondholders.

Hockett provided a legal argument for his plan and said it is not uncommon to use eminent domain “for more than compulsory land purchases for roads and bridges.”

Governmental authorities, he wrote, “compulsorily purchase,” translation: eminent domain, “property at fair value for public use all the time…and they do so with all manner of property-tangible and intangible, contractual and realty-related alike.” Governments, he said have used eminent domain to purchase, among other things, “insurance policies, corporate equities, other contract rights, businesses as going concerns, and even sports franchises.”

In any transaction, there are winners and losers. There may be a lot of good reasons to discard Hockett’s suggestion, but his past relationships are not among them. His idea deserves a fair hearing, not a digression.

Hear Mark Lieberman on P.O.T.U.S. (Sirius-XM 124) Friday at 6:20 am eastern time.

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