Flawed Eminent Domain Proposal Still Being Pushed

January 09, 2013

By Jason Hughey

Yesterday, the Center for American Progress hosted a panel on the topic of “Eminent Domain as a Means to Reduce Principal.”  Back in September, AFP’s sister organization submitted a comment on this same proposal to the Federal Housing Finance Agency (FHFA).  In the comment, several questionable aspects of the proposal were identified, including violation of the Constitution’s eminent domain provision, the potential cost to the taxpayer, the likelihood of increased instability in lending markets, and the encouragement of cronyism.

As a recap, the proposal was put forward by Mortgage Resolution Partners (MRP), a private investment firm.  MRP wants to help cities and counties develop plans to condemn underwater mortgages so that the local government can seize the mortgages from the mortgage servicers under the power of eminent domain. The principal would be written down and then MRP would then refinance the loan (at a profit for its investors).

After yesterday’s panel in which MRP’s chairman, Steven Gluckstern, attempted to defend the proposal, it remains clear that there are numerous problems with the proposal.  Gluckstern did clarify, counter to the concerns in the comment that only privately serviced loans would be targeted by this proposal (not Fannie Mae or Freddie Mac loans).  Despite this clarification, Tom Deutsch, executive director for the American Securitization Forum still expressed concern as to what the cost would be to the taxpayer if this proposal were extended to federal loans.

The other concerns remain completely intact.  The use of eminent domain in MRP’s plan would constitute a severe abuse of government power at the expense of individual property rights.  Significantly, Mr. Deutsch brought up very explicitly the same concerns that AFPF’s comment expressed in September, namely MRP’s plan would introduce instability in an already fledgling lending system and that it seemed to serve the interests of MRP to assist local governments with carrying this plan out.  Mr. Deutsch specifically questioned MRP’s guarantee of a 20-30% return according to the MRP’s own investment literature.

All in all, this plan represents a partnership between government and business interests that advances an agenda.  As a result, local governments and MRP stand to benefit while potential borrowers and private servicers stand to lose with no means of recourse.

Although free market capitalism is a benefit to society, MRP’s brand of cronyism, which causes instability in the market and violates the property rights of private servicers, is not a solution to the underwater mortgage problem.

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