The Wall Street Journal had a front-page article entitled "Cities Consider Seizing Mortgages" just two days ago.
The information in the article allows us to derive a formula that tells us how Emperor Obama and imperial functionaries plan to convert private property and rearrange capital markets for the "public good."
San Bernadino County officials -- together with the venture capital firm Mortgage Resolution Partners (MRP) and particular investment banks -- are looking for California judges who are willing to join with them in order to steal private property for the purpose of self-enrichment and, of course, for the purpose of advancing the public good.
The thieves' tool is eminent domain. A key player is Mr. Roger Altman, who "served in the Clinton administration and is raising funds for President Obama's re-election effort."
According to the article, Mr. Altman's investment bank, Evercore Partners, together with the investment bank Westwood Capital, has been retained by MRP for the purpose of raising funds from private investors. The goal is to channel those funds to cities that will then seize, via the gavels of judges, certain underwater mortgage bonds currently held by firms who seem not to be as selfless as our valiant protagonists.
Just call it a novel play in what might be a burgeoning "post-securitization" market.
You see, San Bernadino County, and many other areas, have high percentages of homeowners saddled with underwater mortgages.
The poor homeowners -- so loaded with debt that they don't buy enough things! And think of what more foreclosures would do to home prices! In turn, what would that do to property tax revenues?
But wait -- the proposed program is geared only toward a certain segment of the mortgage bond market:
... [u]nlike the beneficiaries of most recent mortgage-modification efforts, who must show hardship, these borrowers would have to be current on their payments to participate. And the program initially would focus only on mortgage-backed securities that aren't federally guaranteed -- about 10% of all outstanding U.S. mortgages.
So, there's clearly a very "big problem," and obviously government must fix it. But they can't do it alone -- they need an assist from "private" capital.
The preceding quote shows that the "big problem" is that there's a chunk of homeowners who have, for whatever reason or reasons, decided not to walk away from underwater mortgages. Since they're also current on their payments, there is every reason to believe that they're pretty good credit risks -- which, statistically speaking, probably has something to do with why they aren't eligible for Mr. Obama's mortgage modification programs.
The problem is now obvious to anyone who's given any thought to how things should work. The problem is: how can one steal (sorry, it's not stealing -- it's eminent domain) reliable debt instruments from presumptively honest investors, thereby safeguarding the public interest, while somehow managing to enrich oneself in the process?
Enter our protagonists. Wouldn't it be terrific for everyone involved if cities could successfully petition courts to seize reliable mortgage bonds at 80 cents on the dollar? Then, one could split the difference in part by arranging reduction (through the Federal Housing Administration) of the mortgage principal (thereby creating equity out of nothing on behalf of certain homeowners so that they can buy more things and better avoid foreclosure). What's left over can be divided among cities, MRP, and its investors!
That's the plan. All that's needed are public-spirited courts.
What's the medium- to long-run effect of seizure of reliable mortgage derivatives? Higher borrowing costs and therefore depressed home values, you say? What about fixing the problem of borrowers already in default, you ask? MRP chairman Mr. Steven Gluckstern responds to these twinned objections of soulless reactionaries like us:
There's no private market right now ... [u]ntil you clear out this problem [of underwater loans], private lending will not come back.
Clearly, it's all about public/private partnerships in the long-run service of capitalism.
We haven't even addressed what is truly dangerous about the scheme from the standpoint of local governance. The Wall Street Journal notes:
The three local California governments have created joint powers authorities that don't need permission from their city councils or board of supervisors to move forward unless they need public money. That means if the agencies back proposals that are privately financed, the plans could only be stopped from moving forward in court.
Thus, county chiefs executive have been given Obama-like powers at the local level!
What's this, you say -- courts would never support the scheme because doing so would be unconstitutional?
Sick jokes aside, consider former Justice Sandra Day O'Connor in Hawaii Housing Authority vs. Midkiff (467 U.S. 229 ). In that 1984 case, a unanimous Court upheld a Hawaii legislative plan, administered by the Hawaiian Housing authority, to seize, via eminent domain, property from landowners for the purpose of resale to Hawaiian Housing Authority clients -- even though the plan allowed for "purchases" to be made by the conveyance of HHA sponsored bonds, and even though HHA could itself finance up to 90% of the resale purchase price!
In ruling on behalf of the HHA, O'Connor ominously reaffirmed that a government seeking to exercise eminent domain simply has to show "public use" in order to satisfy Fifth Amendment's Takings Clause. Furthermore, as to what constitutes public use for constitutional purposes, O'Connor cited approvingly the standard that deference to the legislature's "public use" determination is required "until it is shown to involve an impossibility."
An "impossibility"! When do those happen?
What restraint! Was O'Connor precognitively channeling Mr. John Glover Roberts, Jr.?
True, the plan under discussion involves "public use" determinations made by county chief executives and cuts out city councils and boards of supervisors.
What do you think the "restrained" Roberts Court will do with this distinction, particularly when it can satisfy itself with a spurious commitment to federalism?
Is California going to buck the federal trend and adopt a more restrictive "Takings" standard under the California Constitution?
Right. And what about other jurisdictions?
Kelo vs. New London (545 U.S. 269 ) is really no different. There, the Court authorized the seizure of private property and subsequent transfer to private developers for purposes of city-approved "economic rejuvenation."
The Obama Empire's formula for wealth-creation is now clear: raise funds for the party, secure the cooperation of federal regulators, and fill in the gaps with theft authorized by judicially "restrained" courts.
Jason Kissner, Ph.D, J.D. is associate professor of criminology at California State University, Fresno. You can reach him at firstname.lastname@example.org.