Since our last update on this topic, several events have taken place, so it’s time for another update! Last month, the Federal Reserve Bank of New York posted on its website a paper written by Robert Hockett, a professor of financial and monetary law at Cornell Law School, and a recent visiting scholar at the New York Fed. Professor Hockett’s article, “Paying Paul and Robbing No One: An Eminent Domain Solution for Underwater Mortgage Debt.” Professor Hockett, who has advised Mortgage Resolution Partners, the company offering to work with local governments to use their powers of eminent domain to acquire underwater mortgages, introduced this concept with an earlier article. You may remember I discussed MRP’s eminent domain plan last month.
The thesis in Professor Hockett’s most recent paper is that state and municipal governments should “use their eminent domain powers to buy up and restructure underwater mortgages, thereby sidestepping the need to coordinate action across large numbers of security holders.”
In his most recent paper, Professor Hockett describes the structure of his eminent domain plan, including “the legal proceedings necessary to exercise eminent domain authority.” Professor Hockett’s plan, however, makes some assumptions that may not prove to be accurate. He notes that, after an underwater mortgage is acquired, “Subsequent litigation, if any, concerns only whether more should be paid, not whether the taking can proceed.” So far, so good. But he then says:
In most cases, governments have accurately assessed the value of the loan, often with assistance from private valuation experts, and paid adequately.”
Under Professor Hockett’s scenario, there is a single number that represents the market value of a loan involuntarily acquired by local government. In an eminent domain proceeding (at least in Florida), there may typically be a range of value reflecting the divergence between the opinions of the owner’s appraiser and the condemnor’s appraiser as to what number represents the market value of a particular property interest on a designated date of value. It seems likely that, in an eminent domain litigation involving underwater mortgages, the appraiser for the owner of the mortgage and the appraiser for the local government seizing the mortgage through condemnation may have different opinions on the market value of the mortgage on a designated date of value. Thus, “accurately assessed” and “paid adequately” are, like beauty, in the eyes of the beholder.
Also last month, the North Las Vegas (Nevada) City Council voted 4 – 1 to enter into an agreement with Mortgage Resolution Partners, as did the City Council of Richmond (California) in a 6 – 1 vote. According to the Las Vegas Review-Journal, the nature of the North Las Vegas/MRP agreement does not authorize eminent domain proceedings to acquire underwater mortgages, but simply authorizes the City Council “to keep studying the idea and reconsider it” at the August 2013 council meeting.
Since the North Las Vegas City Council vote, a North Las Vegas resident has filed a federal lawsuit against the City, challenging the constitutionality of its actions. According to another article from the Las Vegas Review-Journal, the lawsuit alleges the eminent domain plan violates due process and equal protection guarantees in the United States Constitution and violates restrictions on the use of eminent domain in the Nevada Constitution.
As mentioned in the July 14, 2013 Las Vegas Review-Journal article, draft legislation in opposition to the condemnation of underwater mortgages has been proposed in Congress by Representative Jeb Hensarling (R-Texas). In addition, HousingWire reports that Representative John Campbell (R-California) has re-introduced “The Defending American Taxpayers From Abusive Government Takings Act.” I mentioned Representative Campbell’s first legislative proposal on this issue in a December 10, 2012 guest post on the ABA’s Condemnation, Zoning & Land Use website.
This could be interesting …. As events develop, we will keep you posted!