3 ms·

> 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 wro

by 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.
- mbreese 13y ago
  No, I'm not missing the point. I'm trying to figure out their logic here. Which, I believe would be that they are trying to pay "just compensation" for a mortgage, based on the actual value of the house, and a built-in discount. The question is: is this a fair estimate of "just compensation". And it just might be, if you look at the mortgages in aggregate. It is harder to argue with an individual home, but when the entirety of all homes underwater is taken into account, that has a known risk associated with it. Each mortgage is different at the individual level, and so the risk would be harder to include in a discounted price. But when you lump them all together, you can start to look at how the risk affects the entire group, so you could start to apply the risk discount across the board. Some will be more risky, and others less. At least, that would be an arguable theory...
  - bradleyjg 13y ago
    If you want to know what they are thinking, check out Robert Hockett on SSRN. He's the intellectual force behind the whole idea.

by mbreese 13y ago

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.

mbreese 13y ago
No, I'm not missing the point. I'm trying to figure out their logic here. Which, I believe would be that they are trying to pay "just compensation" for a mortgage, based on the actual value of the house, and a built-in discount. The question is: is this a fair estimate of "just compensation". And it just might be, if you look at the mortgages in aggregate. It is harder to argue with an individual home, but when the entirety of all homes underwater is taken into account, that has a known risk associated with it. Each mortgage is different at the individual level, and so the risk would be harder to include in a discounted price. But when you lump them all together, you can start to look at how the risk affects the entire group, so you could start to apply the risk discount across the board. Some will be more risky, and others less. At least, that would be an arguable theory...
- bradleyjg 13y ago
  If you want to know what they are thinking, check out Robert Hockett on SSRN. He's the intellectual force behind the whole idea.