The Nuclear Option



Dave is a part-time blogger that writes about whatever suits him at the time.

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29 Responses

  1. Avatar Mike Schilling says:

    The investors with the most to lose have deep pockets. They will fight this and hard. This isn’t anything else to say about it.

    And the Roberts Court will not only find in their favor but award quintuple damages for their costs.Report

    • Avatar Dave says:

      I was thinking triple.Report

    • Avatar Dave says:


      Would you want the courts to rule against investors? If so, why?Report

      • Avatar Mike Schilling says:

        There’s a genuine public interest in preserving neighborhoods and general livability by finding ways to keep existing homes occupied. So long as the current owners are paid market value under eminent domain, they have no legitimate complaint.Report

      • Avatar Dave says:


        There’s a genuine public interest in preserving neighborhoods and general livability by finding ways to keep existing homes occupied.

        I agree with this.

        So long as the current owners are paid market value under eminent domain, they have no legitimate complaint.

        The threshold under the Takings Clause is not “public interest”, it’s “public use”. Per Kelo, since a corporate facility does not equate to public use but was determined to have a public benefit through what I understand was a pretty extensive urban planning process, the court upheld it.

        As I mentioned above, the plan fails on both counts. The people at greatest risk of losing homes and contributing to further neighborhood deterioration either through foreclosure or not having the funds to upkeep the homes aren’t addressed (helping distressed homeowners stay in homes opens up a messy can of worms and I don’t think it ever gets off the ground unless it’s a cost to taxpayers) . Furthermore, given that private sector capital is involved, I’m as sure as I am short that they won’t pay market value. If they could, they wouldn’t need the threat of eminent domain.

        Setting the specifics aside and debating whether ANY kind of plan like this would work, I still think it fails the public use test. It’s one thing to hand over seized property to a developer, have that developer build a project and know what that impact is going to have via a study. This is a completely different animal. I think that keeping five people in their homes is a good thing, but I don’t see how that satisfies the “public use” language of the Fifth Amendment. I suspect that the impact has to be significant and something that can be studied. Otherwise, why should any judge accept speculations as fact?Report

      • Avatar Mad Rocket Scientist says:

        If I understand this all correctly, paying market value is part of the problem, since the properties are not owned outright.Report

      • Avatar Mike Schilling says:

        What do you mean by “not owned outright”? There’s someone to whom the mortgages are paid.Report

  2. Avatar Tim Kowal says:

    I have a mischievous hope that the takings approach works so that the same theory might then be tried with grossly underfunded pensions. But then again, we must contend with the deep-mystery-of-pensions doctrine which always seems to exempt them from the usual operation of law.Report

    • Avatar Dave says:


      How would that work with the pensions? Is this a matter of getting them written down to market? My apologies if I don’t sound savvy. I’m not sure where you’re going with this is all.Report

      • Avatar Tim Kowal says:

        The California Supreme Court held that public employee pensions are not technically a “debt” but an “actuarial estimate projecting the impact of a change in a benefit plan.” If it’s just an actuarial estimate, then just find a government actuary to estimate its present value based on, among other things, risk of default (recent Detroit travails should help bring those numbers down), and force pensioners to sell them at that “fair market value.” Given the California Supreme Court’s tap-dancing to avoid labeling them “debts” (they would have been unconstitutional if so), this doesn’t pose much difficulty, at least on its face. But again, the courts do a lot of tap dancing on these issues to avoid results unfavorable to public pensioners.Report

    • Avatar Mike Schilling says:

      Do you mean private or public pensions? Defaulting private pensions are already taken over by the public Pension Benefit Guaranty Corp, which pays some fraction of the promised benefits. That’s one of the main ways corporations dump liabilities when reorganizing.Report

  3. Avatar Burt Likko says:

    I appreciate the shout-out about halfway through the post, Dave, but the credit for this most excellent and rich post belongs entirely to you.

    My doubts about “quick-take” condemnation are:

    1. Difficulty in determining FMV of the condemned fractions of securitized and bundled mortgage loan and the corresponding diminution of value in the other, higher-risk mortgages from the bundle;
    2. Difficulty in articulating a public purpose for the condemnation, particularly in light of a spate of state laws limiting the condemnation power as part of the negative reaction to Kelo v. New London a few years ago; and
    3. The extra expense, above the value of the mortgages, of paying the lender’s attorneys out of public funds for the privilege of having had those attorneys prove that the actual FMV compensation for the condemnation was higher than the JPA’s pre-condemnation offer, which in most cases will double (or more) the out-of-pocket cost.

    This last point, in particular, might make the whole endeavor economically impossible, since as Dave points out, the risk of litigation in each and every condemnation is functionally 100%. We might invest some thought in clever ways this expense could be mitigated, but our ability to tinker with the process of establishing FMV will quickly run up against the Due Process Clause which will ultimately require an adversary proceeding before the finder of fact.

    Note also that establishing who the actual owner of those loans is, once the loans become bundled with other loans and those bundles are then fractionally sold out, is a non-trivial task. Presumably, the loan servicer has access to that information in some fashion — but my own experience indicates that in fact, this task is more difficult and time-consuming than it would seem.Report

    • Avatar Mike Schilling says:

      On other words, they’ve screwed us and they’ve screwed themselves, but it would be wrong for us to screw them. Screw that.Report

    • Avatar Mad Rocket Scientist says:

      Burts last paragraph is what I mean by “not owned outright”.Report

      • Avatar Mike Schilling says:

        Since they’re unowned, award the houses to the people who live in them.Report

      • Avatar Burt Likko says:

        Hard to tell if this is sincere or sarcastic, coming from my man Mike, always so quick with the quip.

        The houses are owned, of course. But we aren’t talking about the houses, we’re talking about promissory notes. And those are owned, too, but it’s hard to figure out who those owners actually are. The note on my home loan, for instance, is almost certainly fractionally divided and percentages of it owned through a bundled and securitized package by twenty to a hundred institutional investors.

        If you pulled the title on Casa Likko from the records of Los Angeles County, the titled owners would be Burt and Natasha Likko. You might be able to pull a copy of the promissory note secured by the trust deed on our house (the California equivalent of a mortgage). So then you could see how much money Burt and Natasha Likko borrowed to buy the house, and learn the name of the bank that originally lent the money, whom we will call Panopticon National Bank, NA.

        But about ten days after funding the loan to Burt and Natasha Likko used to buy Casa Likko, Panopticon National Bank, NA sold the promissory note for roughly one-third of its anticipated lifetime value to one of about six mortgage loan clearinghouses, which are owned and operated by a consortium of a whole lot of different banks. Let us call the clearinghouse in this case National Loan Amalgamator Services, Inc.

        National Loan Amalgamator Services bundled the note binding Burt and Natasha Likko with a whole lot of other loans, based on the kind of product they were creating. Maybe it was all-California loans. Likely not. Shares of “stock,” for lack of a better word, in that bundle of loans got sold to a bunch of other banks. And, the clearinghouse assigned “servicing rights” to a particular institution, whom we will call Big And Scary National Bank, NT&SA.

        Big and Scary National Bank then collects checks every month from Burt and Natasha Likko, keeps a small percentage of that money for itself, and then passes the rest on to the National Loan Amalgamator Services, which pools that money in with payments from the other ninety-nine mortgage loans in the bundle, and then passes out the money to the hundred or so banks — who might include Big And Scary National Bank and/or Panopticon National Bank but just as easily might not include either of them — according to their fractional ownership interest in the securitized bundle of loans.

        The result being that when the JPA comes along and pulls the title, it’ll see that the lender was Panopticon National Bank but Panopticon will tell the JPA, “Nope, we sold that loan to National Loan Amalgamator Services,” who in turn will say “We aren’t the owner, we’re just the clearinghouse, but you can address all questions to Big And Scary National Bank.” And then Big And Scary National Bank will say, “No, we aren’t the owner, either, we’re just servicing the loan.”

        To make a condemnation practical, someone needs to act on behalf of the actual noteholders collectively. National Loan Amalgamator Services seems the logical candidate to do this, but at least as of right now, none of the clearinghouses are set up to handle things like this and they probably aren’t real happy about the prospect of having to do it.Report

      • Avatar Mike Schilling says:

        Exactly, and this dilution in the notion of ownership, in addition to significant amounts of misrepresentation and fraud, created the perverse incentives responsible for the housing bubble and its consequences. And we continue to protect (or, was with TARP, subsidize) the deep-pocketed miscreants while holding their victims accountable for every last penny. The hell with that noise.

        At any rate, there’s no reason a condemnation has to be more complicated than a sale. Just distribute the proceeds. If no one can speak for the fractional owners, no one has standing to sue. Think of it Prop. 8 for the rest of us. The only problem is that, banks being corporations, the Roberts Court would take the opportunity to grant them the vote and the right to bear arms.Report

  4. Avatar George Turner says:

    Nice photo to accompany the article, and as someone who was there, let me state that that was the most EPIC. PARTY. EVER.Report

    • Avatar Glyph says:

      Police Chief Wiggum called the operation “an unqualified success”, noting that the equivalent of two marijuana cigarettes, or “joints”, was found amongst the rubble; along with the charred remains of what appeared to be a notorious Shih Tzu named “Precious” that had previously menaced deputies.Report

    • Avatar George Turner says:

      Oooo… That’s probably my fault. In the aftermath, I should have wondered what happened to the ankle-biting mop I shoved into the bedroom closet just before the girls showed up, but I was too hung over to care.

      R.I.P. Precious.

      I’m pretty sure the bud must’ve been Dwayne’s. He’s had them stuck behind his ears right before his hair caught on fire, and he never figured out where they went.Report

  5. Avatar Michael Drew says:

    As Taibbi says, “Something very interesting is happening,” and it’s something I was completely unaware of until this post. So since I am completely unable to make any further comment on the issues involved, I’ll just express my gratitude to Dave for bringing these developments to my (our) attention. Thanks, Dave!Report

  6. Avatar Brandon Berg says:

    It seems to me that none of the usual arguments for eminent domain apply here. The classical case for eminent domain involves the government needing to purchase a large, contiguous block of land, often in a particular location. This exposes them to holdout problems, either from people who have sentimental attachment to their properties, or from those who want to milk their monopsony power to get a good price. The purpose of eminent domain is to solve these problems, not to enable the government to get a discount on assets they could easily buy on the open market.

    There’s no holdout problem here. First, there isn’t even potential for one, because a handful of holdouts can’t block the whole project the way they can with a development Second, there’s no obvious reason anyone would hold out. An investor isn’t going to hold onto a mortgage for sentimental reasons, and since no one person can block the project, there’s no monopsony power to exploit.

    The only reason a government would prefer to use eminent domain to do this is because they think it will allow them to obtain the assets at below-market prices.Report

    • Avatar Burt Likko says:

      The core of the reason why the potential for litigation is so high. It really only has a chance at working if the judicial FMV computation comes in at less than true FMV or the private funding is so plentiful that the generously-available money would have driven down interest rates anyway, which hardly seems possible given that the Fed is literally giving money away and rates are already at historic lows.Report

    • Avatar Jim Heffman says:

      “The only reason a government would prefer to use eminent domain to do this is because they think it will allow them to obtain the assets at below-market prices.”

      The government would prefer to do this because it’s easier than waiting for FHFA to order banks to write down principals (or waiting for Congress to pass a law that does it.)

      The reason Eminent Domain seems so weird here is that it’s being used as an end run around Congress and the FHFA, to get what is effectively principle writedowns into place.Report

      • Avatar Brandon Berg says:

        In other words, they’re looking for a discount. They could buy the mortgages now at market prices, but they’d rather force the investors to sell them for less.Report

      • Avatar Jim Heffman says:

        Sure, if you insist on an uncharitable reading, if you insist in imputing greedy motives, then you could say that’s what they’re doing.Report

  7. Avatar Jim Heffman says:

    “The fact that bond investors that currently own pieces of private-label MBS deals oppose this plan is a sign of these flaws.”

    Bond investors oppose the idea for two reasons: First, the principal writedown means they lose a chunk of money right now. Second, if the mortgage is no longer underwater then it’s no longer a boat anchor attached to the homeowner’s leg; that owner will have a much easier time selling the house and paying off the mortgage at that time, which means all that potential interest income goes away. And that interest income is where the investment potential of a real-estate loan comes from. See, “risk”, to a real-estate investor, isn’t merely default; it’s early repayment.

    So if you take away the underwater principal, then the bankers lose twice; they lose overall dollars *and* there’s a higher likelihood of early repayment. Small wonder they’re against the idea.

    ” Not only are there constitutional concerns regarding the appropriate level of just compensation, but also if the values that are required by law mean that the profit margins become very thin for investors, changes are very good that investor interest in this opportunity will wane. ”

    But this action would no more be concerned about the investors’ interest than Prohibition was concerned about the brewers’ income.


    “Using sale comparables to set pricing guidelines for the MRP program is misleading. ”

    Really? Why? That’s how the bank would do it, if I were to go in and ask for a loan using my (underwater) property as collateral. The banks themselves are setting the value of my property at less than I currently owe. MRP is saying “okay, well, then we’ll take you at your word and repay you the market value, because that’s what you say it’s worth, and the rest of the principal just disappears because it’s an Eminent Domain taking”.Report

  8. Avatar Jim Heffman says:

    Oh, and another thought: The intent behind HAMP and HARP was not to help homeowners in general; it was to prevent the US Government (through FMA) to accumulate vast amounts of bad debt, thus weakening the position of the dollar on the global market.Report

  9. Avatar weinerdog43 says:

    I’m afraid I disagree. The ‘nuclear option’ has been a time honored and effective tool in a municipality’s bag of tools to get landowners to see the light. I can’t speak for other jurisdictions, but in Chicago and NY, this is simply the normal course of business. Chicago and NY have vast litigation budgets so their fear of litigation expense is essentially zero. Further, the municipality has extensive public safety arguments to get the reluctant owner to remedy the situation. Don’t forget, the city does not want to own the property in question… they only want the owner to keep it up. While time consuming, woe to the owner who blows off a condemnation process.

    Perhaps I’m misunderstanding the article, but I don’t think any local government is advocating seizing property merely because it is ‘underwater’. Rather, they are seizing it because it has become a public nuisance. The case law here is very well settled, and the banksters are not immune to being forced to comply. I think your argument has something of a strawman point to it because I’ve never heard of a governmental entity seizing property because it is underwater.Report