Finance attorney Bruce Cahan has another idea. If the Fed is not inclined to renegotiate mortgages itself, it can provide very-low-interest seed money to capitalize state-owned banks, on the model of the Bank of North Dakota. These publicly-owned banks could then buy up mortgage pools secured by in-state real estate at a discount off the face amount outstanding, and refinance the mortgages at today's low long-term interest rates.
The Eminent Domain Alternative
The Fed has the power (particularly if given a mandate from Congress), but so far it has not shown the will. Some cities and counties are therefore taking matters into their own hands.
Attracting growing interest is Professor Bob Hockett's eminent domain plan, called a "Local Principal Reduction program." As described by the Home Defenders League:
The city works with private investors to acquire a set of the worst, hardest to fix underwater mortgages (especially "Private Label Securities" of PLS loans) and refinances them to restore home equity. If banks refuse to cooperate, cities may use their legal authority of eminent domain to buy the bad mortgages at fair market value and then reset them to current value.
This plan was initially pursued by San Bernardino County, California. Then Richmond, California, took up the charge, led by its bold Green Party mayor Gayle McLaughlin. Now some councilmen have gotten on the bandwagon in New York City, a much larger turf that encroaches directly on Wall Street's. At a news conference on June 25th, New York City Council members and housing advocacy groups called on the mayor to use the eminent domain option to help underwater homeowners in distressed areas.
The latest breaking news on this front involves the City of San Francisco, which will be voting on a resolution involving eminent domain on July 8th. The resolution states in part:
That it is the intention of the Board of Supervisors to explore joining with the City of Richmond in the formation of a Joint Powers Authority for the purpose of implementing Local Principal Reduction and potentially other housing preservation strategies . . . .
The MERS Trump Card
If the eminent domain plan fails, there is another way local governments might acquire troubled mortgages that need to be renegotiated. Seventy percent of all mortgages are now held in the name of a computer database called MERS (Mortgage Electronic Registration Systems). Many courts have held that MERS breaks the chain of title to real property. Other courts have gone the other way, but they were usually dealing with cases brought by homeowners who were held not to have standing to bring the claim. Counties, on the other hand, have been directly injured by MERS and do have standing to sue, since the title-obscuring database has bilked them of billions of dollars in recording fees.
In a stunning defeat for MERS, on June 30, 2014, the US District Court for the Eastern District of Pennsylvania granted a declaratory judgment in favor of County Recorder Nancy J. Becker, in which MERS was required to come up with all the transfer records related to its putative Pennsylvania properties. The judgment stated:
Defendants are declared to be obligated to create and record written documents memorializing the transfers of debt/promissory notes which are secured by real estate mortgages in the Commonwealth of Pennsylvania for all such debt transfers past, present and future in the Office for the Recording of Deeds in the County where such property is situate.
IT IS STILL FURTHER ORDERED AND DECLARED that inasmuch as such debt/mortgage note transfers are conveyances within the meaning of Pennsylvania law, the failure to so document and record is violative of the Pennsylvania Recording Statute(s).
Memorializing all transfers past, present and future, probably cannot be done at this late date -- at least not legitimately. The inevitable result will be fatal breaks in the chain of title to Pennsylvania real property. Where title cannot be proved, the property escheats (reverts) to the state by law.
Only 29% of US homes are now owned free and clear, a record low. Of the remaining 71%, 70% are securitized through MERS. That means that class-action lawsuits by county recorders could potentially establish that title is defective to 50% of US homes (70% of 71%).
If banks, investors and federal officials want to avoid this sort of display of local power, they might think twice about turning down reasonable plans for solving the underwater mortgage crisis of the sort proposed by Senator Merkley, Professor Hockett and Attorney Cahan.
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