The Real Deal New York

Eminent domain to rescue underwater mortgages: OPINION

City can use process to purchase underwater mortgages out of PLS trusts

June 30, 2014 06:20PM

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The answer to rescuing New York City homeowners from their underwater mortgages lies in the use of a foreclosure-prevention tool pioneered by President Franklin Delano Roosevelt, according to Cornell University law professor and Century Foundation fellow Robert Hockett.

In response to the 1929 stock market crash and housing fallout that left millions of Americans owing more on their homes than they were worth — and the subsequent foreclosures that ruined homeowners, communities and creditors alike — FDR introduced a number of agencies that partnered with private investors to purchase underwater loans at a fair value. Among them were the Homeowners Loan Corporation — later superseded by the Federal Housing Agency and the Federal National Mortgage Association, also known as Fannie Mae. The agencies kept housing markets stable from the 1930s through the mid 2000s, after which a return to 1920s-style private finance pushed them aside and brought back a bubble and subsequent burst.

Now, the city’s power of eminent domain can be used to purchase underwater mortgages out of the private label securitized — or PLS trusts — in which they are locked, Hockett wrote.

“The city then writes the loans down much as FHA did, thereby rescuing homeowners, its own ravaged communities, its tax base and even the trust investors — who, like banker snack in the 30s, can’t do the write-downs themselves,” Hockett wrote. “The plan is necessary because the state of the city’s housing market — especially for its African-American and Latino communities — remains dire.”

Such a plan, according to Hockett, carries a sort of poetic justice, as in the past eminent domain has been infamously used to remove communities of color from their homes and neighborhoods.

“By ‘taking the loans, not the homes,’ New York will be flipping that sordid history on its head — and benefiting itself and investors as well in the bargain,” Hockett wrote. [NYDN]Julie Strickland

  • TRU TRUE

    So the greedy home-owner who bought a home and made a bad investment, gets bailed out by the honest tax payer… Well I invested $500k into a penny stock and wanted to make a cool $5M, but then the stock went to zero. Maybe the gov’t should buy me out, for a “fair price” and take a write down. Send a check for $500k my way. (This situation is bogus, but an example of how absurd said article plan sounds).

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