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Investments

When you hear eminent domain, get the muskets

Kelo decision shows why ED for underwater mortgages won't work

February 6, 2014
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It’s been nine years since the Supreme Court decided to throw centuries of American jurisprudence on the ash heap and let government bodies seize private property for the benefit of private developers.

You remember Kelo v. City of New London, right? The small town in Connecticut decided it wanted to help a private developer build a new urbanist, trendy, mixed-use, upscale development.

The problem was they wanted to build it right on the Long Island Sound where an older, lower-income neighborhood called Fort Trumbull had the audacity to exist.

A little thing like property rights never gets in the way when businesses jump in bed with government, so they all decided the best course was to raise the officially approved Jolly Roger of eminent domain and set to work like pirates.

Now eminent domain has long been a part of American law, but it had always been employed to seize land to build public necessities like highways, electrical lines and public schools.

Eminent domain is specified in the Constitution, which allows seizures for “public use.”

The residents fought back and in 2005 it went before the Supremes. The city of New London argued that it was a “public benefit” that the new development would generate more tax revenues.

In a moment of judicial insanity, the Supreme Court agreed.

The bulldozers rolled and all the cronies cheered, despite the outrage of property right advocates from across the political spectrum.

Flash forward nine years.

Sure, it was a travesty of justice and a despicable precedent. But at least New London got a trendy, hip, creative-class magnet full of upscale shops, restaurants, high-density lofts and all the other great offerings that the hipper-than-thou crowd worships, right? Who can be mad when there is a Starbucks and sushi place crammed in next to an Urban Outfitters and a lululemon, with rows of filing cabinet apartments and condos?

The problem is, nine years later and the city got nothing. It's a vast, empty, bulldozed, weed-choked swath of acreage. (Ironically, it’s generating even less in tax revenue than the modest homes of the community that were dispossessed, like that should even matter.)

Take in all this awesome New Urbanism!

And this, dear fellow subject citizen, is why investors put out the call to arms every time someone suggests that governments should use eminent domain to seize all the underwater mortgages out there.

Investors last month at the Structured Finance Industry Group’s convention in Las Vegas didn’t mince words, saying “Eminent domain is theft!” like they were chanting a battle mantra.

The most recent call for eminent domain for underwater mortgages comes from the city of Richmond, Calif., where the city council is pursuing a plan to use the city’s power of eminent domain to force bondholders to sell underwater loans, allowing homeowners to restructure their mortgages.

Mayor Gayle McLaughlin has led the charge toward a partnership with San Francisco investment firm Mortgage Resolution Partners to buy 624 city residents’ mortgages that are underwater, or that owe more money than the home is currently worth.

(Other cities in areas still suffering through this housing recovery have considered it, as well. North Las Vegas, for example, rejected the notion.)

It's not surprising that investor groups continue to be fundamentally opposed to such actions.

If a city’s public-private partnership can’t even put together a deal to build one more lousy urban development after taking their case all the way to the Supreme Court, how could these people ever possibly unwind the underwater mortgage mess?

More importantly, how do they justify stealing the money owed to those mortgage bondholders?

They’d probably just point to their theft, label it a “public benefit” and move on without losing any sleep.

What did C.S. Lewis say of this mindset?

“Of all tyrannies, a tyranny sincerely exercised for the good of its victims may be the most oppressive. It would be better to live under robber barons than under omnipotent moral busybodies. The robber baron's cruelty may sometimes sleep, his cupidity may at some point be satiated; but those who torment us for our own good will torment us without end for they do so with the approval of their own conscience.”

Of course, when the government and the robber barons are on the same side, whoever is in their sights is well and truly screwed.

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