Professional Documents
Culture Documents
or training opportunities. With so many Americans removed from the pool of potential buyers, those who own their homes with smaller mortgages or outright cannot sell their homes for decent prices, trapping them too in place and forcing some to delay retirement. The low house prices do not even benefit renters, who cannot easily buy in communities that are not decimated by foreclosures, sellers cannot afford to sell, and in communities that are decimated by foreclosures, banks refuse to lend. With everyone frozen where they were when the housing bubble burst, the workforce is not nimble enough to follow businesses that have quickly changing needs, and so American businesses outsource the work to companies in other countries both to assemble products and to assemble the engineering teams to develop those products. Eventually, underwater homeowners will have too little income to make their payments or will give up trying. Further foreclosures will not only drag housing prices down further, but lead to property hazards, fires, crime, and other social costs, threatening the nations tranquility. The logistics of providing homeowners relief from their troubled assets are not particularly complex, and similar programs have been done before. Any jurisdiction with eminent domain authority the federal government, state governments, or in some states, local government bodies could do it. Two general methods could be used, either triggered by a petition of the homeowner. One, which I first proposed in 2008, would allow the government to take primary residences at risk of foreclosure and then sell the homes back to the homeowners at current market prices, with new fixed rate mortgages that do not exceed the value of the home. Because just compensation in eminent domain is measured by the market value of the property, todays fire-sale home prices would be a boon to this plan. Lenders and investors would receive the lesser of the mortgage balance or the amount paid by the government as just compensation. A more elegant method, similar to one proposed by Professor Howell Jackson at Harvard Law School, would allow the government to take mortgages at risk of foreclosure, reduce the principal balances and renegotiate the terms with homeowners, without title to the home changing hands. The government would pay the lenders the market value of the mortgages, meaning what an investor today would pay for them; no investor would buy these mortgages for more than the value of the collateral securing them. The government could sell the new or renegotiated mortgages to private investors directly or could sell bonds backed by the mortgages. So long as the government underwrites the mortgages well, with documentation of borrower income and assets, fair appraisals and monthly payments the borrowers can afford, banks and investors will buy the mortgages or bonds. This plan is not entirely unprecedented; eminent domain has been used to boost homeownership in the U.S. before. At one time in Hawaii, concentrated land ownership was injuring the public tranquility and welfare by preventing ordinary families from owning the property on which they lived. To fix this market failure, the state took land from large landowners and compensated them at fair market value. The state then sold the property to the families who had been living
there and paying rent, offering them mortgages through the Hawaii Housing Authority. The Supreme Court had no trouble finding this to be constitutional. Naysayers will predict that banks will never lend to homeowners again in any jurisdiction that implements this plan. But banks are not giving out many new mortgages now. A state or locality with homeowners that are no longer weighted down by excessive debt would be the best place in America to lend. Others will say that forcing banks to realize the true deflated values of the mortgages on their books will send them back under. But history says otherwise. During the Great Depression, and against the strenuous objections and predictions of doom by creditors, the federal government nullified all clauses in contracts that pegged debt to the price of gold. By taking these contracts off the gold standard, debts were reduced by roughly 40 percent. Economist and former Federal Reserve Board Governor Randall Kroszner examined the effects of this sweeping debt reduction and found that both stocks and bonds responded favorably. Despite their prior opposition, creditors decided that the elimination of debt overhang and the avoidance of threatened corporate bankruptcies more than offset the cost to creditors of receiving 60 cents on the dollar. Like the abrogation of the gold standard clauses, eminent domain is a blunt instrument, one that inevitably will be more generous to some than others. Politicians may proclaim that irresponsible homeowners should not be given a helping hand. But in four years, underwater homeowners have already learned all they are going to learn, and to continue punishing them unfairly punishes the rest of us. Now that we know the Wall Street bailout will not flow out to buoy up the rest of the countrys families and businesses, it is time to help ourselves. Lauren E. Willis is a Professor of Law at Loyola Law School Los Angeles and an expert on the regulation of consumer financial products, including home mortgages.