This is why California can’t have nice things: idiotic local governments edition

The new flag of California?

There are so many levels of “dumbass” in this, I scarcely know where to begin. If encouraging banks to issue unsafe mortgages that are then bundled by the US government and sold into the securities market lead to a national financial crisis, how much stupider is it to seize underwater mortgages under eminent domain and leave the public holding the bag?

Answer: Lots.

Eminent domain allows a government to forcibly acquire property that is then reused in a way considered good for the public—new housing, roads, shopping centers and the like. Owners of the properties are entitled to compensation, which is usually determined by a court.

But instead of tearing down property, California’s San Bernardino County and two of its largest cities, Ontario and Fontana, want to put eminent domain to a highly unorthodox use to keep people in their homes.

The municipalities, about 45 minutes east of Los Angeles, would acquire underwater mortgages from investors and cut the loan principal to match the current property value. Then, they would resell the reduced mortgages to new investors. …

For a home with an existing $300,000 mortgage that now has a market value of $150,000, Mortgage Resolution Partners might argue the loan is worth only $120,000. If a judge agreed, the program’s private financiers would fund the city’s seizure of the loan, paying the current loan investors that reduced amount. Then, they could offer to help the homeowner refinance into a new $145,000 30-year mortgage backed by the Federal Housing Administration, which has a program allowing borrowers to have as little as 2.25% in equity. That would leave $25,000 in profit, minus the origination costs, to be divided between the city, Mortgage Resolution Partners and its investors.

“Investors.” As if anyone is going to buy a devalued mortgage that was seized by the government in an utter ravaging of private property rights? What’s to guarantee the government won’t seize it from the next investor latest sucker in the name of “helping people?” Only a fool would buy one of these, and, since successful investors aren’t fools, that means the public will be left on the hook when the inevitable defaults occur.

In the linked post (1), Ed Morrissey describes some of the many problems with this:

Furthermore, it will hand a carte blanche to local politicians looking to curry favor with residents — and we can expect them to use it as often as they think they can get away with it.  Nothing sells like populism, and nothing in populism sells better than “sticking it to the banks,” even when the “banks” really means lots of investors, large and small, who bought mortgage-based securities for retirement funds and the like.  On top of that, the process heightens the moral hazard of government intervention, which then encourages people to take irrational and damaging risks by expecting private gain with public loss.

Ed’s right, this is the spawn of the Supreme Court’s horrid Kelo decision, which ruled that a city could take real property from one private citizen and give it to another private citizen in the hope of higher tax revenue under a twisted notion of “public purpose.”  Now the county of San Bernardino and the cities of Fontana and Ontario want to extend that perverse principle to financial instruments –private property nonetheless– and shaft one set of citizens in favor of another, because the latter are voters.

I’m sure, at some point in the process of coming up with this bright idea, someone invoked the Orwellian magic words “fairness” and “social justice,” which makes it all better.

Respect for property rights is essential to ordered liberty and the economy’s well-being. All this will really do is drive troubled city and county finances further into train-wreck territory as real estate lending comes to a halt or investors demand sky-high interest rates to compensate for the risk. Hiding behind the emotional blackmail of “helping people,” these schmucks are instead going to salt their own economic fields, crippling any chance of real growth. It is a stupid, stupid plan that should never see the light of day.

Which means Sacramento will likely love it and adopt it for the whole state.

Footnote:
(1) The original article is behind a subscriber pay-wall.

PS: Graphic courtesy of The Open Clip Art Library.

UPDATE 7/27/2012: Naturally, California’s “progressive” Lieutenant Governor, Gavin “Brylcreem” Newsom, just loves this idea.

(Crossposted at Sister Toldjah)

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One Response to This is why California can’t have nice things: idiotic local governments edition

  1. [...] Public Secrets points out why California’s can’t have nice things [...]

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