10 ms·

The blog Naked Capitalism--hardly a friend of big finance--points out that this is a scam here: http://www.nakedcapitalism.com/2013/08/beware-of-private-equity-

The blog Naked Capitalism--hardly a friend of big finance--points out that this is a scam here: http://www.nakedcapitalism.com/2013/08/beware-of-private-equity-guys-bearing-gifts-eminent-domain-mortgage-scam-hit-with-well-deserved-lawsuit.html http://www.nakedcapitalism.com/2013/08/beware-of-private-equ... Some key points: * The profits are being split among Richmond and a private investment firm named "Mortgage Resolution Partners, LLC". * Seizing a mortgage for less than its fair market value is blatantly unconstitutional. The argument that the value of an underwater mortgage in repayment is worth less than the house is so obviously wrong, I have a hard time believing Richmond officials honestly buy it. A mortgage that is on track to be repaid is undoubtedly worth close to the future value of repayment, even if the house is worth $0. * Big banks do not actually own most mortgages in general. So this is not a scheme to rob big banks, although Mortgage Resolution Partners, LLC certainly wants to spin it that way. * Almost all housing mortgages are merely serviced by banks but owned predominantly by entites such as "state and local governments, hospitals, Fannie, Freddie, and to a lesser degree, foundations and endowments". The banks have a legal obligation to protect these mortgages, of course. * Many of these loans are current--they're not distressed mortgages at all! They also plan to steer clear of houses with liens. Naked Capitalism comments that the plan only works financially if they go after the mortgages of those that need help the least. In short, this is a transfer of wealth from a diverse array of investors to the city of Richmond and a bunch of investment banker types--theft under the cover of populist outrage. It would also severely damage the market for future homeowners in Richmond, anyone who wants to sell their home, anyone who wants to refinance... Oh, it's also a threat to fundemental notions of private property, rule of law, and market capitalism, but distressingly few people still care about that. The bit I want to emphasize is that it's Prince John pretending to be Robin Hood.

cinquemb 13y ago
So basically for everyday people it's: Heads (banks keep mortgages): You Lose, because the market value of your home is artificially high, and when the bottom goes out on the market again (unless you happen to be drinking the kool aid and equate a life time of mortgage payments as owning a home), you'll either find yourself on foreclosure or trying to refinance again. Tails (City and PE get mortgages): You Still Lose, but now you have to pay a PE firm those monthly mortgage payments while the above still applies. Am I missing something?
- mbreese 13y ago
  I think that the benefit of the Tails option is that your monthly mortgage payments are more in line with what your home is actually worth, as opposed to the inflated market value of the original mortgage.
  - cinquemb 13y ago
    Oh, so the homes get refinanced in the process? Does that happen every time the market cycle goes into a down turn, or just an one and done in the kick the can down the road kind of way?
    - fnordfnordfnord 13y ago
      >Oh, so the homes get refinanced in the process? That's what they're selling. Whether it really happens...? It wouldn't be the first time a gov't entity promised a plan that would 'help' homeowners and that plan failed to actually do so.
      - cinquemb 13y ago
        Ok, so basically the fundamentals aren't really being addressed to why this is even a problem in the first place, and the game can go on for another day. Fun to watch… As an aside, I wonder if it would just be better sign yourself onto a mansion, get your neighbor to burn "your" house down (using pgp to communicate this with temporal keys), collect insurance, cover neighbors bail and skip to the some emerging market (with no extradition treaty with the US or its allies) together with your "ill" gotten earnings in ones under luggage. </joke>
        fnordfnordfnord 13y ago
        May there be a throng of distraught weeping bankers and insurers at your funeral, sir.
    - mbreese 13y ago
      Yes. (from the article) The city buys the original mortgage and then sells you a new mortgage for a more appropriate valuation. This would hopefully be a one and done deal, but it does kind open a pandora's box in the process.
mbreese 13y ago
> argument that the value of an underwater mortgage in repayment is worth less than the house is so obviously wrong I'm not so sure that it is so obviously wrong... For the individual home, yes, it is a stretch to think that the value of an inflated mortgage is less than the value of the house. But, they are thinking in terms of the population of all underwater homes. There is an increased rate of default on underwater mortgages. So, you could argue (and they are), that the lost value when spread out among all underwater mortgages, makes the pool of them less valuable than the value of the homes themselves. To know the answer, you'd have to know the normal rate of default, the rate of default for underwater mortgages, and the average amount the bank looses when a mortgage defaults (as well as the average value of the homes and the inflated mortgage valuations). It is very possible that when all of the numbers are calculated that offering below the appraised value of the home for the mortgage is approximates fair market value over the whole population of underwater homes. A loan wouldn't necessarily have to be distressed to fall into that statistical population. If you think in terms of one house, this plan doesn't make sense. But, when you think in terms of an entire city, it starts to make more sense (if the numbers and rates line up). It's probably short sighted for other down-stream effects, like lack of future investment and loans, but for the short term, it might work.
- twoodfin 13y ago
  There's an "easy" way for the city to help prevent defaults: Give homeowners money or tax breaks to make their mortgage payments. If this scheme can be reasonably shown to be a good investment for ensuring future tax revenue, go ahead and get a loan to do it.
- bradleyjg 13y ago
  I think you are missing the point. If a government wants to seize a property using it's eminent domain powers it has to pay "just compensation" for that property. The Supreme Court has interpreted that to mean fair market value. If there was a CDO pool that included only mortgages based on houses in that particular town, perhaps the whole pool could be seized at once, based on the fair market value of all tranches of the CDO (although there might be tricky jurisdictional issues). However, that's not the case. The mortgages are spread across many many different such pools. So rather than one big eminent domain case, there needs to be a condemnation of each and every mortgage separately. That being the case, the city must pay the fair market value of each mortgage -- not the the FMV of an abstract average house. The single biggest problem with the city's proposal is not that it is underpaying (though it likely is in most cases) but rather that it is trying to claim that every mortgage can be fairly valued using the same simple formula: 80% assessed value of the underlying asset. Simply put, that's nuts. The second biggest problem is that Freddie and Frannie have already said that they won't refinance the written down mortgages. So the city would have to hold the mortgages to maturity. They don't seem to have anywhere near enough capital to do that, and I don't think the muni market would be terribly interested in financing such a scheme (or the litigation!). Especially not with Detroit making everyone nervous to begin with.
fernly 13y ago
So what is the "fair market value" of a mortgage? Consider that immediately on sale, the mortgage contract was bundled by the bank and sold as part of a bundle of similar mortgages, and the bundle has perhaps been split, recombined, and resold multiple times since, its relationship to the actual real property has become somewhat tenuous -- or rather, even more tenuous than it was when it was created in an inflated market. So what's the "fair market value" of that piece of paper? You assume it "is on track to be repaid" but that is a highly optimistic evaluation. The note represents a net future value of payments multiplied by a probability P that it _will_ be repaid. P is considerably less than 1.0 for a note whose face value is more than the present value of the property, and it shrinks every time another house in the same neighborhood is foreclosed or abandoned. At best the value of the note is the sale value of the foreclosed home (less the not inconsiderable costs of performing a foreclosure and prepping the property for resale) -- and the sale value of an abandoned foreclosed house in a city full foreclosed houses is a fraction of the original purchase price. Frankly if Wells Fargo can get $150K for a $200K mortgage in Richmond, they ought to take the money and run.

cinquemb 13y ago

So basically for everyday people it's: Heads (banks keep mortgages): You Lose, because the market value of your home is artificially high, and when the bottom goes out on the market again (unless you happen to be drinking the kool aid and equate a life time of mortgage payments as owning a home), you'll either find yourself on foreclosure or trying to refinance again. Tails (City and PE get mortgages): You Still Lose, but now you have to pay a PE firm those monthly mortgage payments while the above still applies. Am I missing something?

mbreese 13y ago
I think that the benefit of the Tails option is that your monthly mortgage payments are more in line with what your home is actually worth, as opposed to the inflated market value of the original mortgage.
- cinquemb 13y ago
  Oh, so the homes get refinanced in the process? Does that happen every time the market cycle goes into a down turn, or just an one and done in the kick the can down the road kind of way?
  - fnordfnordfnord 13y ago
    >Oh, so the homes get refinanced in the process? That's what they're selling. Whether it really happens...? It wouldn't be the first time a gov't entity promised a plan that would 'help' homeowners and that plan failed to actually do so.
    - cinquemb 13y ago
      Ok, so basically the fundamentals aren't really being addressed to why this is even a problem in the first place, and the game can go on for another day. Fun to watch… As an aside, I wonder if it would just be better sign yourself onto a mansion, get your neighbor to burn "your" house down (using pgp to communicate this with temporal keys), collect insurance, cover neighbors bail and skip to the some emerging market (with no extradition treaty with the US or its allies) together with your "ill" gotten earnings in ones under luggage. </joke>
      - fnordfnordfnord 13y ago
        May there be a throng of distraught weeping bankers and insurers at your funeral, sir.
  - mbreese 13y ago
    Yes. (from the article) The city buys the original mortgage and then sells you a new mortgage for a more appropriate valuation. This would hopefully be a one and done deal, but it does kind open a pandora's box in the process.

mbreese 13y ago

> argument that the value of an underwater mortgage in repayment is worth less than the house is so obviously wrong I'm not so sure that it is so obviously wrong... For the individual home, yes, it is a stretch to think that the value of an inflated mortgage is less than the value of the house. But, they are thinking in terms of the population of all underwater homes. There is an increased rate of default on underwater mortgages. So, you could argue (and they are), that the lost value when spread out among all underwater mortgages, makes the pool of them less valuable than the value of the homes themselves. To know the answer, you'd have to know the normal rate of default, the rate of default for underwater mortgages, and the average amount the bank looses when a mortgage defaults (as well as the average value of the homes and the inflated mortgage valuations). It is very possible that when all of the numbers are calculated that offering below the appraised value of the home for the mortgage is approximates fair market value over the whole population of underwater homes. A loan wouldn't necessarily have to be distressed to fall into that statistical population. If you think in terms of one house, this plan doesn't make sense. But, when you think in terms of an entire city, it starts to make more sense (if the numbers and rates line up). It's probably short sighted for other down-stream effects, like lack of future investment and loans, but for the short term, it might work.

twoodfin 13y ago
There's an "easy" way for the city to help prevent defaults: Give homeowners money or tax breaks to make their mortgage payments. If this scheme can be reasonably shown to be a good investment for ensuring future tax revenue, go ahead and get a loan to do it.
bradleyjg 13y ago
I think you are missing the point. If a government wants to seize a property using it's eminent domain powers it has to pay "just compensation" for that property. The Supreme Court has interpreted that to mean fair market value. If there was a CDO pool that included only mortgages based on houses in that particular town, perhaps the whole pool could be seized at once, based on the fair market value of all tranches of the CDO (although there might be tricky jurisdictional issues). However, that's not the case. The mortgages are spread across many many different such pools. So rather than one big eminent domain case, there needs to be a condemnation of each and every mortgage separately. That being the case, the city must pay the fair market value of each mortgage -- not the the FMV of an abstract average house. The single biggest problem with the city's proposal is not that it is underpaying (though it likely is in most cases) but rather that it is trying to claim that every mortgage can be fairly valued using the same simple formula: 80% assessed value of the underlying asset. Simply put, that's nuts. The second biggest problem is that Freddie and Frannie have already said that they won't refinance the written down mortgages. So the city would have to hold the mortgages to maturity. They don't seem to have anywhere near enough capital to do that, and I don't think the muni market would be terribly interested in financing such a scheme (or the litigation!). Especially not with Detroit making everyone nervous to begin with.

fernly 13y ago

So what is the "fair market value" of a mortgage? Consider that immediately on sale, the mortgage contract was bundled by the bank and sold as part of a bundle of similar mortgages, and the bundle has perhaps been split, recombined, and resold multiple times since, its relationship to the actual real property has become somewhat tenuous -- or rather, even more tenuous than it was when it was created in an inflated market. So what's the "fair market value" of that piece of paper? You assume it "is on track to be repaid" but that is a highly optimistic evaluation. The note represents a net future value of payments multiplied by a probability P that it _will_ be repaid. P is considerably less than 1.0 for a note whose face value is more than the present value of the property, and it shrinks every time another house in the same neighborhood is foreclosed or abandoned. At best the value of the note is the sale value of the foreclosed home (less the not inconsiderable costs of performing a foreclosure and prepping the property for resale) -- and the sale value of an abandoned foreclosed house in a city full foreclosed houses is a fraction of the original purchase price. Frankly if Wells Fargo can get $150K for a $200K mortgage in Richmond, they ought to take the money and run.