Legal Intern, Manhattan Institute's Center for Legal Policy
In a recent Featured Column on POL, Richard Epstein criticized a proposal put forth by law professor Richard Hockett that would allow local governments to address the mortgage crisis via eminent domain. Epstein explained the proposal as follows:
Now we have another equally bad proposal to intervene in the mortgage market. Recent pieces in the New York Times by Joe Nocera and Robert Schiller, have eagerly embraced an idea put forward by Cornell University Law Professor Robert C. Hockett. In an incredibly tedious and self-important article, Hockett suggests that local government agencies use eminent domain power to condemn mortgages that are underwater but not yet in default--at reduced prices (what Nocera calls "steep but fair discount")--and then let some municipal authority refinance the loans and resell them in bundles for a profit to the agencies in question. Naturally such a scheme would require a middle man, and a fat fee. Mortgage Resolution Partners (whom Hockett advises) is happy to play that role.
Earlier this week, Hockett's eminent domain proposal found another skeptic. Edward DeMarco, chief regulator for Fannie Mae and Freddie Mac, issued a public notice under the auspices of the FHFA expressing concerns about using eminent domain to condemn underwater mortgages:
FHFA has significant concerns about the use of eminent domain to revise existing financial contracts and the alteration of the value of Enterprise or Bank securities holdings. In the case of the Enterprises, resulting losses from such a program would represent a cost ultimately borne by taxpayers.
Among other things, the FHFA is worried about the constitutionality of the proposal, its possible effects on holders of existing securities and contracts, and the potential cost to taxpayers. The FHFA even warned that it might take action against local governments that institute such proposals:
FHFA has determined that action may be necessary on its part as conservator for the Enterprises and as regulator for the Banks to avoid a risk to safe and sound operations and to avoid taxpayer expense.
The FHFA's public notice included an invitation for public commentary on the matter up until September 7th as the agency "moves forward with its deliberations on appropriate action." In the meantime, taxpayers have a well-placed ally in the fight against this "fancy con game."