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Richmond’s rules: Why one California town is keeping Wall Street up at night

110 points by MaysonL 13y ago

ars 13y ago
Good luck to anyone ever getting a mortgage in that town ever again.
- nl 13y ago
  Or maybe lending standards will increase (ie, you won't be able to get a loan unless you can prove you are going to be able to pay it off), and valuations will be more conservative. Neither are exactly a bad thing.
  - zero_intp 13y ago
    I think big banks will actually avoid the municipality like a plague for several years. But a community bank will rise and the locals will laugh.
- toomuchtodo 13y ago
  If you were foreclosed on over a year ago, and were able to prove it was due to economic hardship, you can get an FHA loan. Disclaimer: Both my parents work in the mortgage underwriting business, one of them forcing BoA/Chase/Wells to take back th loans they made during the boom times. EDIT: I'm a sport, here's a citation: http://www.calculatedriskblog.com/2013/09/wsj-fha-cuts-waiting-period-to-1-year.html http://www.calculatedriskblog.com/2013/09/wsj-fha-cuts-waiti... http://online.wsj.com/article/SB10001424127887323980604579031053653261572.html http://online.wsj.com/article/SB1000142412788732398060457903...
- hansgru 13y ago
  They said the same thing about Iceland too :).
  - zero_intp 13y ago
    I think this is the real and telling part. Yes, they had to give up a 34mm bond sale because the top level bond market was refusing to buy. This is a short term problem caused by butt hurt bankers, not actual investor class bond buyers. The city is not actually defaulting on any real bonds, the bond investor class is not being hurt. Yes it will cost more for 10 years until they can re-finance; but when the city offers a margin over market, actual people bond buyers will jump for the chance to make a % over market.
- dmk23 13y ago
  Moreover, the property values there will go even lower because of dried up financing. This could become a textbook case of government power abuse backfiring at the people the politicians claim to be "helping" There is a better description of what this city did: Theft
  - dasil003 13y ago
    That's one way to look at it. Another way is that they're fully bursting the real estate bubble that the entire nation's financial systems have furiously been forcing compressed air into for the last 5 years in the name of "preserving home values" even though normal people can't actually afford a home anymore.
  - zero_intp 13y ago
    While I agree with railing about bad decisions, it is almost willfully ignorant to continue to argue against settled law. This is as much theft as it was in Connecticut. As much as I hate it, "Wickard vs Fillburn", and "Citizens United v. Federal Election Commission", "Gonzales v. Raich", and lastly "Kelo v. City of New London" ARE the laws of the land. If the investment classes are going to be leveraging laws against homeowner to take property at 'current market prices'; how is it wrong for cities to force investor classes to do the same? Change the laws, but don't decry the victims of fraud and systemic false market inflation turning the current laws against those who perpetuated the pump and dump scheme on them in the first place. I think it will cost some financing issues/property costs, but then it will lead to the rise of a Community Trust bank or Credit Union. These are things that truly change communities.
- Arnt 13y ago
  Maybe. But keep in mind that the world's best-regarded borrower is the German federal government, which has defaulted twice in the past century. Past returns do not predict future performance, as the prospectuses say.
- wintersFright 13y ago
  If no one can get a mortgage there then house prices go to their cash only value, so one wouldn't need a mortgage to buy. So the good luck should go to anyone wishing to sell a house there
- acdha 13y ago
  You want to bet there isn't a credit union in the entire city? That entire category had much fewer problems because they didn't write bad-to-fraudulent loans during the derivative party era and the recurring theme throughout this story is that Richmond has been unable to otherwise motivate the big banks to do their jobs – something which would not be true for a local/regional bank which wasn't grossly irresponsible.
millstone 13y ago
If a mortgage is underwater and the debtor cannot (or will not) pay, then it hardly matters to the investors whether the owner is foreclosed on, or the city forces principal reduction. Either way, the investor takes a loss. But seizing current underwater mortgages would be terribly shortsighted. What intrigued me is the idea that investors would be willing to accept a principal reduction, but cannot because the logistics are too difficult. FTA: Although it was in the banks' interest to write down the principal on loans to avoid an outright default... ...so many different investors would have to sign off on the change. Because of that, these "private label securitized" loans are much more likely to default than the banks' portfolio loans. So maybe a deal could be crafted that is in the interests of both investors and homeowners. Home buyers might get the short end, with fewer foreclosed homes coming on the market, but I've heard that banks tend to sit on foreclosed properties for a long time anyways, so it may not affect the market supply much.
- JumpCrisscross 13y ago
  "If a mortgage is underwater and the debtor cannot (or will not) pay, then it hardly matters to the investors whether the owner is foreclosed on, or the city forces principal reduction. Either way, the investor takes a loss." Mortgage markets are not terribly liquid. The "market value" the City of Richmond picks may not be favorable to the investor. The extra-contractual origin of this market-value-by-fiat makes it doubly uncomfortable. Further, collateral can improve in value. The housing market is presently appreciating. A defaulting debtor's prospects are less certain.
josephagoss 13y ago
They say using Eminent domain as if thats the solution, take the banks property away. I am thinking the fallout from this move will be disastrous. These are the ideas that fundamentally change the fabric of a society. Now the Government will use Eminent domain whenever a private entity is acting against the social interests of the citizens, whilst many will applaud such a move I fear it gives the Government and elected officials far too much power. Also why bother obtaining property and wealth when the Government positions itself as the taker of all things whenever it suits them best?
- nl 13y ago
  Now the Government will use Eminent domain whenever a private entity is acting against the social interests of the citizens, whilst many will applaud such a move I fear it gives the Government and elected officials far too much power. Isn't the purpose of government to protect its citizens when a more powerful entity acts against them? Also why bother obtaining property and wealth when the Government positions itself as the taker of all things whenever it suits them best? I agree. That's clearly not what is happening here, though. For one thing, the people who have taken the mortgage out own at least some of the property, and secondly the banks that hold the mortgages are profiting form fraud (ie, the deliberate strategy of selling sub-prime mortgages to people who couldn't afford them). Finally, this isn't what suits [the government] best. It would suit the local government if the problem could be ignored, which is what other jurisdictions (including at the Federal level) are doing.
  - JumpCrisscross 13y ago
    "the people who have taken the mortgage out own at least some of the property" By definition of being underwater they own no equity of value. When a company goes bankrupt, i.e. when a company's equity value hits zero, i.e. when a company's assets are worth less than its liabilities, shareholders are wiped out. At that point they have no residual claim to the assets.
    - nl 13y ago
      Yeah, but that's an outcome of the way US mortgage system works (ie, the mortgage holder is preferred over other equity holders). It doesn't have to be this way; for example in the event of a liquidation all parties with an equity interest could have money distributed to them in proportion to the interest the hold.
JumpCrisscross 13y ago
Richmond has decided to tear up a private contract to one side's advantage based on no pre-existing law. This is, generally, contrary to the principles of rule of law. The upside will be a short-term bump in Richmond's residents' balance sheets. Courts are likely to strike this down. This will trash Richmond's public balance sheet. If courts allow this one would eventually expect private sector credit availability, to anyone in a low income neighbourhood, to dramatically re-price or freeze. It could also trigger a national housing credit, and price, pull-back. Ironically either outcome will further impair Richmond property values, pushing more borrowers underwater and the city's tax income lower.
- toomuchtodo 13y ago
  You're right. You know what would be easier? For all of Richmond to default on their mortgages. Sidetrack: I put $50K into a townhouse in 2007 (my mistake!). I lost it all when the real estate market flopped. I walked away from the property because I wasn't willing to work for several years just to pay the principle down. End result: No matter what, the real estate lost value. Either write it down now, or enjoy the pain as you write it off later (ie "extend and pretend": http://www.americanbanker.com/bankthink/megabanks-extend-and-pretend-they-will-never-pay-for-foreclosure-fouls-1052937-1.html http://www.americanbanker.com/bankthink/megabanks-extend-and...). What's that? Default judgement? Oh no. Bankruptcy. I still get to keep $1MM plus in retirement accounts, and I just can't buy another house for ~7 years. How horrible.
  - JumpCrisscross 13y ago
    Couldn't agree more - default is the proper way to do this. Others include Richmond (a) buying underwater mortgages off investors and tearing them up or (b) making mortgage payments for its residents (an ersatz bail-out to investors).
    - toomuchtodo 13y ago
      Agree. But! You're going to need to find a way to untangle which investor owns which mortgage (these are derivatives after all). I'd say you get 90 days as an investor to respond; after that, the city gets to take unilateral action.
tomohawk 13y ago
The US constitution says: "No State shall enter into any Treaty, Alliance, or Confederation; grant Letters of Marque and Reprisal; coin Money; emit Bills of Credit; make any Thing but gold and silver Coin a Tender in Payment of Debts; pass any Bill of Attainder, ex post facto Law, or Law impairing the Obligation of Contracts, or grant any Title of Nobility."
- venomsnake 13y ago
  And since when Richmond is a state? You can read the constitution by spirit or by the letter. You cannot have both.
  - tanzam75 13y ago
    > And since when Richmond is a state? You can read the constitution by spirit or by the letter. You cannot have both. There is no local sovereignty in the United States, except for whatever a state chooses to delegate to its municipalities. (This is why you hear about states that take over failing cities' schools and finances. The city possesses no sovereignty.) All of Richmond's powers derive from the State of California. If California is prohibited from doing something, then so is Richmond.
  - mikeash 13y ago
    Don't local governments simply operate as agents of the state they're in? I could be wrong about this, but I thought that they were simply organizational conveniences with no true independence, as contrasted with the states and the feds, here the states are independent entities bound by certain rules.
- Maxious 13y ago
  Wikipedia says: > The Framers of the Constitution added this [no Law impairing the Obligation of Contracts] clause in response to the fear that states would continue a practice that had been widespread under the Articles of Confederation—that of granting "private relief." Legislatures would pass bills relieving particular persons (predictably, influential persons) of their obligation to pay their debts. However it seems that in the Great Depression the Supreme Court held it to be okay for States to modify morgages under the "emergency exception doctrine" http://en.wikipedia.org/wiki/Home_Building_%26_Loan_Association_v._Blaisdell http://en.wikipedia.org/wiki/Home_Building_%26_Loan_Associat...
enko 13y ago
While I am pretty sympathetic to the anti-TPP cause, the video is awful. It started off with ridiculous scaremongering about "frankenfoods", ie GMO foods, which have the potential for incredible benefits for mankind. It even specifically calls out food grown in a lab - do these people not realise the environmental damage we could prevent if we could grow meat? The nutritional benefits? The cruelty averted? And that's the very first thing they said! I couldn't tell you the second thing, because I closed the video. What is it about these activist organisations that compel them to so consistently throw the baby out with the bathwater?
- justincormack 13y ago
  Thats a different story!
ig1 13y ago
They're making the fundamental mistake of fixing a problem now in a way that will cause huge problems in the future. Mortgage lenders will put huge premiums on mortgages in the town in the future because of "default by eminent domain" risk, if the government pulls freddie/fannie mae it'll be even more expensive. Basically they're robbing future mortgage owners in order to pay current ones. Worse yet, other towns with similar profiles might have their risk profile increased too, so they'll get extra premiums because of Richmond's behaviour without getting any of the benefits. So while it might seem like they're just taking the money from pension funds and other investors, in the longer term they'll be taking far more from future mortgage owners.
- tmorton 13y ago
  If this system becomes routine, mortgage rates will go up, though I'm not sure about "huge premiums." Is that a bad thing? The investment becomes risker and more expensive, so less money is available, so fewer mortgages are made. More people rent instead of buy their own homes. I would submit that fewer owner-occupied homes would be a positive thing for the national economy.
  - different-opini 13y ago
    Fewer mortgages = lower property prices. No mortgages = 10x lower property prices.
    - ams6110 13y ago
      No mortgages = Detroit. The end result of this idea is not pretty.
      - tanzam75 13y ago
        > No mortgages = Detroit. The end result of this idea is not pretty. The lack of mortgages did not cause the collapse of Detroit. The causation runs the other way. The collapse of the auto industry led to the collapse of housing prices in Detroit, which in turn led to the collapse of the mortgage market. Who wants to issue mortgages for houses that are dropping in value?
negamax 13y ago
It's the money of other citizens. People don't realize it but money doesn't always gets invested from wealthy individuals. It could very well be from pension funds, mutual funds etc. So it's not that banks are getting hurt but other normal citizens. Also, stop painting banks as evil.
- nl 13y ago
  It's the money of other citizens. People don't realize it but money doesn't always gets invested from wealthy individuals. It could very well be from pension funds, mutual funds etc. Pension & mutual funds are big enough to force banks to act differently, and haven't. They should bear the risks associated with that behaviour. stop painting banks as evil Why? Their behaviour in the lead up to the 2008 financial crisis was unethical (to say the least), and their behaviour after 2008 has shown a complete lack of regret.
cynicalkane 13y ago
The reporting of the so-called "Wonkblog"'s reporting is particularly un-wonkish, describing the plan as 'complex' and talking about it in one of those artificial newspaper pseudo-neutral points of view, affecting to be balanced while dropping loaded language like such as A courtroom victory for Richmond, a town of about 100,000, could give cities around the country the courage to act -- and potentially help keep millions of people in their homes. The plan doesn't target distressed mortgages, so it's not just a problem of loaded language designed to appeal to certain kinds of readers--it's also a bald lie. As for the other side: But even a win could spell defeat for Richmond if the financial industry cuts off lending to make an example of the city. Make an example of the city. Hmm. It's not that private industry is not obligated to do money-losing business with eminent domain thieves, it's that they want to make an example of people who cross them. Well, you can see what the writer actually believes, or at least what he pretends to believe in order to appeal to readers. The plan is not 'complex' but fairly straightforward and very obviously illegal and not in the best interests of the public. I'm not aware of any informed opinion to the effect that this is a good idea. I discussed this in an earlier post(https://news.ycombinator.com/item?id=6273836 https://news.ycombinator.com/item?id=6273836), which I think is worth reposting, because as far as I can tell little has changed since then. Repost below: ==== 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-equ.. 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.
Lazare 13y ago
The reporting is frankly terrible. Let me put it in simple terms. An idea has been floating around for a while now that, in theory, you could use eminent domain to seize not just the houses, but the mortgages on the houses. Let's say that someone had borrowed $200k, but the house was now worth $100k. If you were a local government, you could seize the mortgage from the mortgage holder paying them compensation of, oh, $80k, tear it up, then the home owner gets a new mortgage for $90k, and gives you the proceeds, which would pay you back for the compensation you had to give the mortgage holder, and leave you with $10k to cover your overheads, fees, court costs, and maybe even leave something over for the group of highly altruistic bankers pushing this scheme. This is normally where I would say "but there's just one problem", but that would be a lie, because there's at least three. 1) The constitution, post Kelo, is pretty lax about needing a good reason to deploy eminent domain, but it's still quite strict about the compensation needing to be fair (ie, the market value). The market value of a $200k mortgage for a $100k house is NOT $80k, or even $100k. Even if the mortgage is currently in default, it still represents ownership of a house worth $100k; by definition that makes it worth $100k, no $80k...and many mortgages won't default at all; even the ones who will eventually will be making payments in the meantime. So right off the bat, legal analysts are confident it's unconstitutional. (But the city can't offer the actual market value of the loan; they're broke.) 2) Banks are going to be very displeased. Except that's a lie; in the US banks don't actually make mortgages. The Federal government does (more than 90%, in point of fact), through the FHA. And they have already stated that they think this is the worst idea since forever, and they will take whatever steps necessary to shut it down, including just not making any more loans for houses in the region. Which in context is basically the nuclear option; the value of a house which can't get a mortgage is pretty much $0. The scheme absolutely relies on being able to get a new mortgage on the houses. 3) Just as if that wasn't enough, the IRS has a lot of very strict rules involving gifts. And buying someone's loan and tearing it up counts as a gift, and you have to pay tax on it. Quite a lot of tax, as it happens. And the homeowners in question don't have the cash, nor would they be thrilled at their massive tax bills even if they did. Which, again, kills the scheme. 4) It's also not entirely clear that this would be good policy even if it worked. This isn't the first attempt at trying to "fix" the problem of underwater mortgages, but results so far have been mixed at best. Then there's the broader policy implications of a bailout. Once you crunch through the likely results of the program, it's not exactly "take from the banks and give to the poor". The banks don't actually own mortgages, and the poor don't actually own houses. It actually ends up being "take from the pension funds and split the results between the middle class and some bankers". Makes for great soundbites, but it's not exactly Robin Hood and Sherwood Forest here. More like the Sheriff of Nottingham. TL;DR: The plan is illegal, the federal government has already announced that they're putting a stop to it (and they hold all the cards in the mortgage market), it wouldn't work anyhow, and it's probably bad policy even if it did. It's been called a "scam", and frankly, that's pretty accurate. Edit: From the article: "He's actually the guy responsible for it all: Steven Gluckstern, a former insurance executive who had teamed up with Vlahoplus to co-found Mortgage Resolution Partners, the firm that's lining up the capital -- from hedge funds, for instance -- to buy any mortgages that Richmond might seize. After that happens, Mortgage Resolution Partners would help the homeowner refinance through a Federal Housing Administration loan, and earns a $4,500 fee per successful transaction." Keep in mind that the FHA has said they won't make the loans. The scheme, at its core, is for some bankers to use hedge fund money to grab assets from pension funds, then refinance it using super-cheap loans from the FHA to turn a quick buck. But the FHA has stated it won't make the loans, so the scheme is D-E-A-D dead.
thrownaway2424 13y ago
Hacker News cognitive dissonance week: 1) Creating technical arguments against court-ordered search warrants: heroic civil disobedience. 2) Creating technical workarounds for mortgage debt paralysis: craven violation of sacred property rights.
- mmuuoi 13y ago
  Not really. Both 1 and 2 are reactions to government over reach.
- mikeash 13y ago
  Can you elaborate as to exactly why a person who does not have the same opinion on both 1 and 2 must be suffering from "cognitive dissonance"? I don't see much of a relation between them.
  - asdfologist 13y ago
    Because he's still offended by the massive downvotes on his illogical comments: https://news.ycombinator.com/item?id=6485956 https://news.ycombinator.com/item?id=6485956
    - mikeash 13y ago
      Oh no, my precious internet points!
    - thrownaway2424 13y ago
      Yes, because I personally give a shit about your stupid downvotes. I am devastated.
tytso 13y ago
It's not necessarily a fraud. The key is it only works in cases where the fair market value of the house is below the value of the mortgage. In that case, the city only has to pay the FMV. Now, there is always going to be some question about what is actually the FMV of a property. But this is true regardless of whether the city is in cahoots with a property developer who wants to put up some expensive shopping mall where single family homes once stood, or in this case where Richmond is proposing to seize by eminent domain houses which are underwater. Why are the banks against this? (1) they believe they could get more at auction than the FMV determined by the eminent domain process, and (2) the seizure happens at a time outside of their control, where as the bank might be holding off on the foreclosure process since if they were to actually foreclose on the property, and discover from the auction that they could recover significantly less than the mortgage, they would then realize a loss which would screw up their capital holdings. Either way, as far as the homeowners are concerned, they are effectively going to be foreclosed against. The only difference is that they will be offered a chance to continue to live in the house, and pay rent (which might or might not be at FMV; it's not clear from the description). Maybe it might be a rent with an option to buy, but basically the main goal of the city is to preserve the neighborhood instead of letting speculators buy the house at foreclosure. So I wouldn't necessarily call it a scam. Will the banks lose out? Probably. But I don't know that they would necessarily lose out that badly --- that is, unless you don't believe that people who lose their houses due to eminent domain when a city is enriching some real estate developer isn't paying FMV to people who are turned out of their homes to build a shopping mall or a new stadium....

110 points by MaysonL 13y ago

ars 13y ago

Good luck to anyone ever getting a mortgage in that town ever again.

nl 13y ago
Or maybe lending standards will increase (ie, you won't be able to get a loan unless you can prove you are going to be able to pay it off), and valuations will be more conservative. Neither are exactly a bad thing.
- zero_intp 13y ago
  I think big banks will actually avoid the municipality like a plague for several years. But a community bank will rise and the locals will laugh.
toomuchtodo 13y ago
If you were foreclosed on over a year ago, and were able to prove it was due to economic hardship, you can get an FHA loan. Disclaimer: Both my parents work in the mortgage underwriting business, one of them forcing BoA/Chase/Wells to take back th loans they made during the boom times. EDIT: I'm a sport, here's a citation: http://www.calculatedriskblog.com/2013/09/wsj-fha-cuts-waiting-period-to-1-year.html http://www.calculatedriskblog.com/2013/09/wsj-fha-cuts-waiti... http://online.wsj.com/article/SB10001424127887323980604579031053653261572.html http://online.wsj.com/article/SB1000142412788732398060457903...
hansgru 13y ago
They said the same thing about Iceland too :).
- zero_intp 13y ago
  I think this is the real and telling part. Yes, they had to give up a 34mm bond sale because the top level bond market was refusing to buy. This is a short term problem caused by butt hurt bankers, not actual investor class bond buyers. The city is not actually defaulting on any real bonds, the bond investor class is not being hurt. Yes it will cost more for 10 years until they can re-finance; but when the city offers a margin over market, actual people bond buyers will jump for the chance to make a % over market.
dmk23 13y ago
Moreover, the property values there will go even lower because of dried up financing. This could become a textbook case of government power abuse backfiring at the people the politicians claim to be "helping" There is a better description of what this city did: Theft
- dasil003 13y ago
  That's one way to look at it. Another way is that they're fully bursting the real estate bubble that the entire nation's financial systems have furiously been forcing compressed air into for the last 5 years in the name of "preserving home values" even though normal people can't actually afford a home anymore.
- zero_intp 13y ago
  While I agree with railing about bad decisions, it is almost willfully ignorant to continue to argue against settled law. This is as much theft as it was in Connecticut. As much as I hate it, "Wickard vs Fillburn", and "Citizens United v. Federal Election Commission", "Gonzales v. Raich", and lastly "Kelo v. City of New London" ARE the laws of the land. If the investment classes are going to be leveraging laws against homeowner to take property at 'current market prices'; how is it wrong for cities to force investor classes to do the same? Change the laws, but don't decry the victims of fraud and systemic false market inflation turning the current laws against those who perpetuated the pump and dump scheme on them in the first place. I think it will cost some financing issues/property costs, but then it will lead to the rise of a Community Trust bank or Credit Union. These are things that truly change communities.
Arnt 13y ago
Maybe. But keep in mind that the world's best-regarded borrower is the German federal government, which has defaulted twice in the past century. Past returns do not predict future performance, as the prospectuses say.
wintersFright 13y ago
If no one can get a mortgage there then house prices go to their cash only value, so one wouldn't need a mortgage to buy. So the good luck should go to anyone wishing to sell a house there
acdha 13y ago
You want to bet there isn't a credit union in the entire city? That entire category had much fewer problems because they didn't write bad-to-fraudulent loans during the derivative party era and the recurring theme throughout this story is that Richmond has been unable to otherwise motivate the big banks to do their jobs – something which would not be true for a local/regional bank which wasn't grossly irresponsible.

millstone 13y ago

If a mortgage is underwater and the debtor cannot (or will not) pay, then it hardly matters to the investors whether the owner is foreclosed on, or the city forces principal reduction. Either way, the investor takes a loss. But seizing current underwater mortgages would be terribly shortsighted. What intrigued me is the idea that investors would be willing to accept a principal reduction, but cannot because the logistics are too difficult. FTA: Although it was in the banks' interest to write down the principal on loans to avoid an outright default... ...so many different investors would have to sign off on the change. Because of that, these "private label securitized" loans are much more likely to default than the banks' portfolio loans. So maybe a deal could be crafted that is in the interests of both investors and homeowners. Home buyers might get the short end, with fewer foreclosed homes coming on the market, but I've heard that banks tend to sit on foreclosed properties for a long time anyways, so it may not affect the market supply much.

JumpCrisscross 13y ago
"If a mortgage is underwater and the debtor cannot (or will not) pay, then it hardly matters to the investors whether the owner is foreclosed on, or the city forces principal reduction. Either way, the investor takes a loss." Mortgage markets are not terribly liquid. The "market value" the City of Richmond picks may not be favorable to the investor. The extra-contractual origin of this market-value-by-fiat makes it doubly uncomfortable. Further, collateral can improve in value. The housing market is presently appreciating. A defaulting debtor's prospects are less certain.

josephagoss 13y ago

They say using Eminent domain as if thats the solution, take the banks property away. I am thinking the fallout from this move will be disastrous. These are the ideas that fundamentally change the fabric of a society. Now the Government will use Eminent domain whenever a private entity is acting against the social interests of the citizens, whilst many will applaud such a move I fear it gives the Government and elected officials far too much power. Also why bother obtaining property and wealth when the Government positions itself as the taker of all things whenever it suits them best?

nl 13y ago
Now the Government will use Eminent domain whenever a private entity is acting against the social interests of the citizens, whilst many will applaud such a move I fear it gives the Government and elected officials far too much power. Isn't the purpose of government to protect its citizens when a more powerful entity acts against them? Also why bother obtaining property and wealth when the Government positions itself as the taker of all things whenever it suits them best? I agree. That's clearly not what is happening here, though. For one thing, the people who have taken the mortgage out own at least some of the property, and secondly the banks that hold the mortgages are profiting form fraud (ie, the deliberate strategy of selling sub-prime mortgages to people who couldn't afford them). Finally, this isn't what suits [the government] best. It would suit the local government if the problem could be ignored, which is what other jurisdictions (including at the Federal level) are doing.
- JumpCrisscross 13y ago
  "the people who have taken the mortgage out own at least some of the property" By definition of being underwater they own no equity of value. When a company goes bankrupt, i.e. when a company's equity value hits zero, i.e. when a company's assets are worth less than its liabilities, shareholders are wiped out. At that point they have no residual claim to the assets.
  - nl 13y ago
    Yeah, but that's an outcome of the way US mortgage system works (ie, the mortgage holder is preferred over other equity holders). It doesn't have to be this way; for example in the event of a liquidation all parties with an equity interest could have money distributed to them in proportion to the interest the hold.

JumpCrisscross 13y ago

Richmond has decided to tear up a private contract to one side's advantage based on no pre-existing law. This is, generally, contrary to the principles of rule of law. The upside will be a short-term bump in Richmond's residents' balance sheets. Courts are likely to strike this down. This will trash Richmond's public balance sheet. If courts allow this one would eventually expect private sector credit availability, to anyone in a low income neighbourhood, to dramatically re-price or freeze. It could also trigger a national housing credit, and price, pull-back. Ironically either outcome will further impair Richmond property values, pushing more borrowers underwater and the city's tax income lower.

toomuchtodo 13y ago
You're right. You know what would be easier? For all of Richmond to default on their mortgages. Sidetrack: I put $50K into a townhouse in 2007 (my mistake!). I lost it all when the real estate market flopped. I walked away from the property because I wasn't willing to work for several years just to pay the principle down. End result: No matter what, the real estate lost value. Either write it down now, or enjoy the pain as you write it off later (ie "extend and pretend": http://www.americanbanker.com/bankthink/megabanks-extend-and-pretend-they-will-never-pay-for-foreclosure-fouls-1052937-1.html http://www.americanbanker.com/bankthink/megabanks-extend-and...). What's that? Default judgement? Oh no. Bankruptcy. I still get to keep $1MM plus in retirement accounts, and I just can't buy another house for ~7 years. How horrible.
- JumpCrisscross 13y ago
  Couldn't agree more - default is the proper way to do this. Others include Richmond (a) buying underwater mortgages off investors and tearing them up or (b) making mortgage payments for its residents (an ersatz bail-out to investors).
  - toomuchtodo 13y ago
    Agree. But! You're going to need to find a way to untangle which investor owns which mortgage (these are derivatives after all). I'd say you get 90 days as an investor to respond; after that, the city gets to take unilateral action.

tomohawk 13y ago

The US constitution says: "No State shall enter into any Treaty, Alliance, or Confederation; grant Letters of Marque and Reprisal; coin Money; emit Bills of Credit; make any Thing but gold and silver Coin a Tender in Payment of Debts; pass any Bill of Attainder, ex post facto Law, or Law impairing the Obligation of Contracts, or grant any Title of Nobility."

venomsnake 13y ago
And since when Richmond is a state? You can read the constitution by spirit or by the letter. You cannot have both.
- tanzam75 13y ago
  > And since when Richmond is a state? You can read the constitution by spirit or by the letter. You cannot have both. There is no local sovereignty in the United States, except for whatever a state chooses to delegate to its municipalities. (This is why you hear about states that take over failing cities' schools and finances. The city possesses no sovereignty.) All of Richmond's powers derive from the State of California. If California is prohibited from doing something, then so is Richmond.
- mikeash 13y ago
  Don't local governments simply operate as agents of the state they're in? I could be wrong about this, but I thought that they were simply organizational conveniences with no true independence, as contrasted with the states and the feds, here the states are independent entities bound by certain rules.
Maxious 13y ago
Wikipedia says: > The Framers of the Constitution added this [no Law impairing the Obligation of Contracts] clause in response to the fear that states would continue a practice that had been widespread under the Articles of Confederation—that of granting "private relief." Legislatures would pass bills relieving particular persons (predictably, influential persons) of their obligation to pay their debts. However it seems that in the Great Depression the Supreme Court held it to be okay for States to modify morgages under the "emergency exception doctrine" http://en.wikipedia.org/wiki/Home_Building_%26_Loan_Association_v._Blaisdell http://en.wikipedia.org/wiki/Home_Building_%26_Loan_Associat...

enko 13y ago

While I am pretty sympathetic to the anti-TPP cause, the video is awful. It started off with ridiculous scaremongering about "frankenfoods", ie GMO foods, which have the potential for incredible benefits for mankind. It even specifically calls out food grown in a lab - do these people not realise the environmental damage we could prevent if we could grow meat? The nutritional benefits? The cruelty averted? And that's the very first thing they said! I couldn't tell you the second thing, because I closed the video. What is it about these activist organisations that compel them to so consistently throw the baby out with the bathwater?

justincormack 13y ago
Thats a different story!

ig1 13y ago

They're making the fundamental mistake of fixing a problem now in a way that will cause huge problems in the future. Mortgage lenders will put huge premiums on mortgages in the town in the future because of "default by eminent domain" risk, if the government pulls freddie/fannie mae it'll be even more expensive. Basically they're robbing future mortgage owners in order to pay current ones. Worse yet, other towns with similar profiles might have their risk profile increased too, so they'll get extra premiums because of Richmond's behaviour without getting any of the benefits. So while it might seem like they're just taking the money from pension funds and other investors, in the longer term they'll be taking far more from future mortgage owners.

tmorton 13y ago
If this system becomes routine, mortgage rates will go up, though I'm not sure about "huge premiums." Is that a bad thing? The investment becomes risker and more expensive, so less money is available, so fewer mortgages are made. More people rent instead of buy their own homes. I would submit that fewer owner-occupied homes would be a positive thing for the national economy.
- different-opini 13y ago
  Fewer mortgages = lower property prices. No mortgages = 10x lower property prices.
  - ams6110 13y ago
    No mortgages = Detroit. The end result of this idea is not pretty.
    - tanzam75 13y ago
      > No mortgages = Detroit. The end result of this idea is not pretty. The lack of mortgages did not cause the collapse of Detroit. The causation runs the other way. The collapse of the auto industry led to the collapse of housing prices in Detroit, which in turn led to the collapse of the mortgage market. Who wants to issue mortgages for houses that are dropping in value?

negamax 13y ago

It's the money of other citizens. People don't realize it but money doesn't always gets invested from wealthy individuals. It could very well be from pension funds, mutual funds etc. So it's not that banks are getting hurt but other normal citizens. Also, stop painting banks as evil.

nl 13y ago
It's the money of other citizens. People don't realize it but money doesn't always gets invested from wealthy individuals. It could very well be from pension funds, mutual funds etc. Pension & mutual funds are big enough to force banks to act differently, and haven't. They should bear the risks associated with that behaviour. stop painting banks as evil Why? Their behaviour in the lead up to the 2008 financial crisis was unethical (to say the least), and their behaviour after 2008 has shown a complete lack of regret.

cynicalkane 13y ago

The reporting of the so-called "Wonkblog"'s reporting is particularly un-wonkish, describing the plan as 'complex' and talking about it in one of those artificial newspaper pseudo-neutral points of view, affecting to be balanced while dropping loaded language like such as A courtroom victory for Richmond, a town of about 100,000, could give cities around the country the courage to act -- and potentially help keep millions of people in their homes. The plan doesn't target distressed mortgages, so it's not just a problem of loaded language designed to appeal to certain kinds of readers--it's also a bald lie. As for the other side: But even a win could spell defeat for Richmond if the financial industry cuts off lending to make an example of the city. Make an example of the city. Hmm. It's not that private industry is not obligated to do money-losing business with eminent domain thieves, it's that they want to make an example of people who cross them. Well, you can see what the writer actually believes, or at least what he pretends to believe in order to appeal to readers. The plan is not 'complex' but fairly straightforward and very obviously illegal and not in the best interests of the public. I'm not aware of any informed opinion to the effect that this is a good idea. I discussed this in an earlier post(https://news.ycombinator.com/item?id=6273836 https://news.ycombinator.com/item?id=6273836), which I think is worth reposting, because as far as I can tell little has changed since then. Repost below: ==== 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-equ.. 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.

Lazare 13y ago

The reporting is frankly terrible. Let me put it in simple terms. An idea has been floating around for a while now that, in theory, you could use eminent domain to seize not just the houses, but the mortgages on the houses. Let's say that someone had borrowed $200k, but the house was now worth $100k. If you were a local government, you could seize the mortgage from the mortgage holder paying them compensation of, oh, $80k, tear it up, then the home owner gets a new mortgage for $90k, and gives you the proceeds, which would pay you back for the compensation you had to give the mortgage holder, and leave you with $10k to cover your overheads, fees, court costs, and maybe even leave something over for the group of highly altruistic bankers pushing this scheme. This is normally where I would say "but there's just one problem", but that would be a lie, because there's at least three. 1) The constitution, post Kelo, is pretty lax about needing a good reason to deploy eminent domain, but it's still quite strict about the compensation needing to be fair (ie, the market value). The market value of a $200k mortgage for a $100k house is NOT $80k, or even $100k. Even if the mortgage is currently in default, it still represents ownership of a house worth $100k; by definition that makes it worth $100k, no $80k...and many mortgages won't default at all; even the ones who will eventually will be making payments in the meantime. So right off the bat, legal analysts are confident it's unconstitutional. (But the city can't offer the actual market value of the loan; they're broke.) 2) Banks are going to be very displeased. Except that's a lie; in the US banks don't actually make mortgages. The Federal government does (more than 90%, in point of fact), through the FHA. And they have already stated that they think this is the worst idea since forever, and they will take whatever steps necessary to shut it down, including just not making any more loans for houses in the region. Which in context is basically the nuclear option; the value of a house which can't get a mortgage is pretty much $0. The scheme absolutely relies on being able to get a new mortgage on the houses. 3) Just as if that wasn't enough, the IRS has a lot of very strict rules involving gifts. And buying someone's loan and tearing it up counts as a gift, and you have to pay tax on it. Quite a lot of tax, as it happens. And the homeowners in question don't have the cash, nor would they be thrilled at their massive tax bills even if they did. Which, again, kills the scheme. 4) It's also not entirely clear that this would be good policy even if it worked. This isn't the first attempt at trying to "fix" the problem of underwater mortgages, but results so far have been mixed at best. Then there's the broader policy implications of a bailout. Once you crunch through the likely results of the program, it's not exactly "take from the banks and give to the poor". The banks don't actually own mortgages, and the poor don't actually own houses. It actually ends up being "take from the pension funds and split the results between the middle class and some bankers". Makes for great soundbites, but it's not exactly Robin Hood and Sherwood Forest here. More like the Sheriff of Nottingham. TL;DR: The plan is illegal, the federal government has already announced that they're putting a stop to it (and they hold all the cards in the mortgage market), it wouldn't work anyhow, and it's probably bad policy even if it did. It's been called a "scam", and frankly, that's pretty accurate. Edit: From the article: "He's actually the guy responsible for it all: Steven Gluckstern, a former insurance executive who had teamed up with Vlahoplus to co-found Mortgage Resolution Partners, the firm that's lining up the capital -- from hedge funds, for instance -- to buy any mortgages that Richmond might seize. After that happens, Mortgage Resolution Partners would help the homeowner refinance through a Federal Housing Administration loan, and earns a $4,500 fee per successful transaction." Keep in mind that the FHA has said they won't make the loans. The scheme, at its core, is for some bankers to use hedge fund money to grab assets from pension funds, then refinance it using super-cheap loans from the FHA to turn a quick buck. But the FHA has stated it won't make the loans, so the scheme is D-E-A-D dead.

thrownaway2424 13y ago

Hacker News cognitive dissonance week: 1) Creating technical arguments against court-ordered search warrants: heroic civil disobedience. 2) Creating technical workarounds for mortgage debt paralysis: craven violation of sacred property rights.

mmuuoi 13y ago
Not really. Both 1 and 2 are reactions to government over reach.
mikeash 13y ago
Can you elaborate as to exactly why a person who does not have the same opinion on both 1 and 2 must be suffering from "cognitive dissonance"? I don't see much of a relation between them.
- asdfologist 13y ago
  Because he's still offended by the massive downvotes on his illogical comments: https://news.ycombinator.com/item?id=6485956 https://news.ycombinator.com/item?id=6485956
  - mikeash 13y ago
    Oh no, my precious internet points!
  - thrownaway2424 13y ago
    Yes, because I personally give a shit about your stupid downvotes. I am devastated.

tytso 13y ago

It's not necessarily a fraud. The key is it only works in cases where the fair market value of the house is below the value of the mortgage. In that case, the city only has to pay the FMV. Now, there is always going to be some question about what is actually the FMV of a property. But this is true regardless of whether the city is in cahoots with a property developer who wants to put up some expensive shopping mall where single family homes once stood, or in this case where Richmond is proposing to seize by eminent domain houses which are underwater. Why are the banks against this? (1) they believe they could get more at auction than the FMV determined by the eminent domain process, and (2) the seizure happens at a time outside of their control, where as the bank might be holding off on the foreclosure process since if they were to actually foreclose on the property, and discover from the auction that they could recover significantly less than the mortgage, they would then realize a loss which would screw up their capital holdings. Either way, as far as the homeowners are concerned, they are effectively going to be foreclosed against. The only difference is that they will be offered a chance to continue to live in the house, and pay rent (which might or might not be at FMV; it's not clear from the description). Maybe it might be a rent with an option to buy, but basically the main goal of the city is to preserve the neighborhood instead of letting speculators buy the house at foreclosure. So I wouldn't necessarily call it a scam. Will the banks lose out? Probably. But I don't know that they would necessarily lose out that badly --- that is, unless you don't believe that people who lose their houses due to eminent domain when a city is enriching some real estate developer isn't paying FMV to people who are turned out of their homes to build a shopping mall or a new stadium....