- - Thursday, August 1, 2013

The Supreme Court’s Kelo v. New London, Conn., decision in 2005 made eminent domain a threat to everybody, and since then local governments have been seizing houses from plain folks and turning them over to developers in return for increased property-tax revenues. One bad idea inspires another. Richmond, Calif., a bedroom suburb of San Francisco, is trying to use eminent domain now to take houses from wealthy banks and other financial institutions and turn the proceeds back to certain residents.

Like a lot of bad ideas, it’s spreading in California. La Puente, Orange Cove, Pomona and San Joaquin are considering the possibilities. North Las Vegas, Nev., is trying it out. Richmond has identified 626 potential participants. The idea is to bully the banks, always politically popular villains, into reducing monthly mortgage payments for homeowners who owe more than their houses are worth. If the banks don’t agree, the municipal government will compel them with eminent domain.

It works like this: A homeowner, for example, owes $300,000 on a house that has plunged in value to $200,000. Using eminent domain to “condemn” the mortgage, not the property, the city pays the bank $160,000 for the fair-market value of the mortgage. This is a $140,000 loss for the bank, but everyone else is, in the eyes of the politicians and bureaucrats at City Hall, a “winner.” The homeowner’s mortgage debt is reduced to $190,000, erasing the consequences of his bad financial decisions. The city pockets $9,500, and Mortgage Resolution Partners, the private company managing the Richmond scheme, gets $20,500.

The losers in this scenario are the thousands of families eager to take advantage of the depressed housing market to buy a house. If the scheme is adopted, buyers in Richmond must find a lender foolish enough to write mortgages within the city. With the threat of eminent domain lying in wait, banks and other lenders will look for businesses in other places, where property rights are respected. Finding buyers will become difficult, depressing the price of houses.

This isn’t so much a Robin Hood scheme of robbing the rich to give to the poor as just politics as usual. Mortgage Resolution Partners has close ties to the investment banking firm Evercore Partners, founded by Roger Altman, the former deputy secretary of the U.S. Treasury under President Clinton, who was forced from office following revelations that he tipped his friends at the White House to pending criminal referrals made by Resolution Trust Corp. Once the eminent domain scheme kicks in, the first on the scene will make a mint writing, packaging and selling new mortgages to a fresh wave of private investors.

Rep. Jeb Hensarling of Texas, chairman of the House Financial Services Committee, proposes legislation to prohibit the federal government from backing mortgages where local governments use eminent domain to seize mortgages. The Fifth Amendment recognizes the power of governments to take private property in return for “just compensation,” but just compensation would be the sum of the mortgage, not a “fair-market value” dreamed up by municipalities and their crony enablers.

Milton Friedman, the distinguished economist, warned “there’s no such thing as a free lunch.” Someone, somewhere, always pays. In this case, it would be the taxpayers and responsible homeowners who pay for the foolishness of their elected officials.

The Washington Times