Eminent domain
gives the power to the municipality to effectively rewrite contracts hijacked
by fraud and to restore justice and equity to the real-estate market place. There were other solutions but none have been
pursued except to push the losses of the banks onto the taxpayer and the
printing press.
It always needed
to be resolved from the bottom up not the top down. Top down unfortunately merely destroys the
national economy because ultimately you are making good all participants at the
top of a market price structure which has no future buyers whatsoever. The bottom tier which is you and I remain
unfinanced and unable to participate in the market to liquidate the
market. It amazes me just how blindingly
stupid all the participants have been and continue to be.
At least the
counties are getting control of the appropriate scalpel in order to create a
completely new market regime out of the corpse of the past.
The Stone That Brings Down
Goliath? Richmond and Eminent Domain
By
Ellen Brown, Web of Debt
In a nearly $13 billion
settlement with the US Justice Department in November 2013, JPMorganChase admitted
that it, along with every other large US bank, had engaged in mortgage fraud as
a routine business practice, sowing the seeds of the mortgage meltdown.
JPMorgan and other megabanks have now been caught in over a dozen major frauds,
including LIBOR-rigging and bid-rigging; yet no prominent banker has gone to
jail. Meanwhile, nearly a quarter of all mortgages nationally remain
underwater (meaning the balance owed exceeds the current
value of the home), sapping homeowners’ budgets, the housing market and the
economy. Since the banks, the courts and the federal government have failed to
give adequate relief to homeowners, some cities are taking matters into
their own hands.
Gayle McLaughlin, the
bold mayor of Richmond, California, has gone where no woman dared go before,
threatening to take underwater mortgages by eminent domain from Wall Street
banks and renegotiate them on behalf of beleaguered homeowners. A member of the
Green Party, which takes no corporate campaign money, she proved her mettle
standing up to Chevron, which dominates the Richmond landscape. But the banks
have signaled that if Richmond or another city tries the eminent domain gambit,
they will rush to court seeking an injunction. Their grounds: an
unconstitutional taking of private property and breach of contract.
[ the counter to that is when the contract
itself becomes illegal – arclein ]
How to refute those
charges? There is a way; but to understand it, you first need to grasp the
massive fraud perpetrated on homeowners. It is how you were duped into paying
more than your house was worth; why you should not just turn in your keys or
short-sell your underwater property away; why you should urge Congress not to
legalize the MERS scheme; and why you should insist that your local government
help you acquire title to your home at a fair price if the banks won’t. That is
exactly what Richmond and other city councils are attempting to do through the
tool of eminent domain.
The
Securitization Fraud That Collapsed the Housing Market
One settlement after
another has now been reached with investors and government agencies for the
sale of “faulty mortgage bonds,” including a suit brought by Fannie and Freddie
that settled
in October 2013 for $5.1 billion. “Faulty” is a euphemism for “fraudulent.” It
means that mortgages subject to securitization have “clouded” or “defective”
titles. And that means the banks and real estate trusts claiming title as
owners or nominees don’t actually have title – or have standing to enjoin the
city from proceeding with eminent domain. They can’t claim an unconstitutional
taking of property because they can’t prove they own the property, and they
can’t claim breach of contract because they weren’t the real parties in
interest to the mortgages (the parties putting up the money).
“Securitization”
involves bundling mortgages into a pool, selling them to a non-bank vehicle
called a “real estate trust,” and then selling “securities” (bonds) to
investors (called “mortgage-backed securities” or “collateralized debt
obligations”). By 2007, 75% of all mortgage originations were securitized.
According to investment banker and financial analyst Christopher Whalen, the purpose
of securitization was to allow banks to avoid capitalization requirements,
enabling them to borrow at unregulated levels.
Since the real estate
trusts were “off-balance sheet,” they did not count in the banks’ capital
requirements. But under applicable accounting rules, that was true only if they
were “true sales.” According to Whalen, “most of the securitizations done by
banks over the past two decades were in fact secured borrowings, not true
sales, and thus potential frauds on insured depositories.” He concludes, “bank
abuses of non-bank vehicles to pretend to sell assets and thereby lower
required capital levels was a major cause of the subprime financial
crisis.”
In 1997, the FDIC gave
the banks a pass on these disguised borrowings by granting them “safe harbor”
status. This proved to be a colossal mistake, which led to the implosion of the
housing market and the economy at large. Safe harbor status was finally
withdrawn in 2011; but in the meantime, “financings” were disguised as “true
sales,” permitting banks to grossly over-borrow and over-leverage.
Over-leveraging allowed credit to be pumped up to bubble levels, driving up
home prices. When the bubble collapsed, homeowners had to pick up the tab
by paying on mortgages that far exceeded the market value of their homes.
According to Whalen:
[T]he largest commercial banks became “too big
to fail” in large part because they used non-bank vehicles to increase leverage
without disclosure or capital backing. . . .
The failure of Lehman Brothers, Bear Stearns
and most notably Citigroup all were largely attributable to deliberate acts of
securities fraud whereby assets were “sold” to investors via non-bank financial
vehicles. These transactions were styled as “sales” in an effort to meet
applicable accounting rules, but were in fact bank frauds that must, by GAAP
and law applicable to non-banks since 1997, be reported as secured borrowings.
Under legal tests stretching from 16th Century UK law to the Uniform Fraudulent
Transfer Act of the 1980s, virtually none
of the mortgage backed securities deals of the 2000s met the test of a true
sale.
. . . When the crisis hit, it suddenly became
clear that the banks’ capital was insufficient.
Today . . . hundreds of billions in claims
against banks arising from these purported “sales” of assets remain pending
before the courts.
EMInent
Domain as a Negotiating Tool
Investors can afford
high-powered attorneys to bring investor class actions, but underwater and
defaulting homeowners usually cannot; and that is where local government comes
in. Eminent domain is a way to bring banks and investors to the bargaining
table.
Professor Robert Hockett
of Cornell University Law School is the author of the plan to use eminent
domain to take underwater loans and write them down for homeowners. He writes
on NewYorkFed.org:
[In] the case of
privately securitized mortgages, [principal] write-downs are almost impossible
to carry out, since loan modifications on the scale necessitated by the housing
market crash would require collective action by a multitude of geographically
dispersed security holders. The solution . . . Is for state and municipal
governments to use their eminent domain powers to buy up and restructure
underwater mortgages, thereby sidestepping the need to coordinate action across
large numbers of security holders.
The problem is blowback
from the banks, but it can be blocked by requiring them to prove title to the
properties. Securities are governed by federal law, but real estate law is the
domain of the states. Counties have a mandate to maintain clean title records;
and legally, clean title requires a chain of “wet” signatures, from A to B to C
to D. If the chain is broken, title is clouded. Properties for which title
cannot be established escheat (or revert) to the state by law,
allowing the government to start fresh with clean title.
New York State law
governs most of the trusts involved in securitization. Under it, transfers of
mortgages into a trust after the cutoff date specified in the Pooling and
Servicing Agreement (PSA) governing the trust are void.
For obscure reasons, the
REMICs (Real Estate Mortgage Investment Conduits) claiming to own the
properties routinely received them after the closing date specified in the
PSAs. The late transfers were done through the fraudulent
signatures-after-the-fact called “robo-signing,” which occurred so regularly
that they were the basis of a $25 billion settlement
between a coalition of state attorneys general and the five biggest mortgage
servicers in February 2012. (Why all the robo-signing? Good question. See my
earlier article here.)
Until recently, courts
have precluded
homeowners from raising the late transfers into the trust as a defense to
foreclosure, because the homeowners were not parties to the PSAs. But in August
2013, in Glaski v. Bank of America, N.A., 218 Cal. App. 4th 1079 (July 31,
2013), a California appellate court ruled that the question whether the loan
ever made it into the asset pool could be raised
in determining the proper party to initiate foreclosure. And whether or not the
homeowner was a party to the PSA, the city and county have a clear legal
interest in seeing that the PSA’s terms were complied with, since the job of
the county recorder is to maintain records establishing clean title.
Before the rise of
mortgage securitization, any transfer of a note and deed needed to be recorded
as a public record, to give notice of ownership and establish a “priority of
liens.” With securitization, a private database called MERS (Mortgage
Electronic Registration Systems) circumvented this procedure by keeping the
deeds as “nominee for the beneficiary,” obscuring the property’s legal owner
and avoiding the expense of recording the transfer (usually about $30 each).
Estimates are that untraceable property assignments concealed behind MERS may
have cost counties nationwide billions
of dollars in recording fees. (See my earlier article here.)
Counties thus have not
only a fiduciary but a financial interest in establishing clean title to the
properties in their jurisdictions. If no one can establish title, the
properties escheat and can be claimed free and clear. Eminent domain can be a
powerful tool for negotiating loan modifications on underwater mortgages; and
if the banks cannot prove title, they have no standing to complain.
The
End of “Too Big to Fail”?
Richmond’s city council
is only one vote short of the supermajority needed to pursue the eminent domain
plan, and it is seeking partners in a Joint Powers Authority that will make the
push much stronger. Grassroots efforts to pursue eminent domain are also
underway in a number of other cities around the country. If Richmond pulls it
off successfully, others will rush to follow.
The result could be
costly for some very large banks, but they have brought it on themselves with
shady dealings. Christopher Whalen predicts that the FDIC’s withdrawal of “safe
harbor” status for the securitization model may herald the end of “too big to
fail” for those banks, which will no longer have the power to grossly
over-leverage and may have to keep their loans on their books.
Wall Street banks are
deemed “too big to fail” only because there is no viable alternative – but
there could be. Local governments could form their own publicly-owned banks, on
the model of the state-owned Bank of North Dakota. They could then put their
revenues, their savings, and their newly-acquired real estate into those public
utilities, to be used to generate interest-free credit for the local government
(since it would own the bank) and low-cost credit for the local community. For
more on this promising option, which has been or is being explored in almost
half the state legislatures in the US, see here.
Ellen Brown is an attorney, president of the Public
Banking Institute, and a candidate for
California State Treasurer running on a state bank platform. She is the author of twelve
books including the best-selling Web of Debt and her latest book, The
Public Bank Solution, which explores successful public banking models historically and
globally.
1 comment:
Who is the injured party in the housing crash? Two groups: 1.Mainly investors who bought the debt. 2. Home buyers. How did it happen? (Without acknowledging the cause no cure can occur). The banks and the govt. conspired to break the law. Now Ellen wants us to believe that one of mechanisms responsible for the criminal conspiracy will give us justice. How? By using a moral blank check to rob, i.e., eminent domain law. She wants the govt. to cut out their partner in crime and take over the RE market. She wants to go from fascism to communism. These two systems are both versions of socialism. Neither is moral or practical.
Get govt. out of economics. A market free from govt. intervention is the only moral/practical solution. Govt. cannot even protect us from fraud. All private business - all the time.
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