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Richmond’s rules: Why one California town is keeping Wall Street up at night

washingtonpost.com

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Re: Richmond’s rules: Why one California town is keeping Wall Street up at night

#51

Post by _delirium »

Lazare wrote: post #44

The reporting is frankly terrible. Let me put it in simple terms. An idea has been floating around for a while now that, in theory, you could use eminent domain to seize not just the houses, but the mortgages on the houses. Let's say that someone had borrowed $200k, but the house was now worth $100k. If you were a local government, you could seize the mortgage from the mortgage holder paying them compensation of, oh,…

I don't think the plan will work either (for many of the reasons you've given), but I'm not as sure about this one:

The market value of a $200k mortgage for a $100k house is NOT $80k, or even $100k. Even if the mortgage is currently in default, it still represents ownership of a house worth $100k; by definition that makes it worth $100k, no $80k...

The market value of the mortgage is whatever it would actually sell for on the open market. I don't see a strong reason to believe it would always be equal to the price the underlying asset would sell for. Sometimes owning the mortgage is more valuable than the underlying property, because you've locked in a good interest rate and cash stream. Other times it's less valuable, because you have potential hassles over eviction, damage, etc., or because you've locked in a bad interest rate (the latter being the same reason bonds can be worth less than their face value).

In a situation like Richmond's housing market, with high default rates, it wouldn't be too surprising that an unencumbered property could sell for more than a mortgage on the same property would sell for. If I were buying, I would certainly demand a discount on the property to compensate for the risks of taking over the mortgage and a house with a resident in it, versus the situation of buying the property completely free and clear. That's not even specific to mortgages; any asset with a contract attached to it will be valued by taking into account the contract.

Re: Richmond’s rules: Why one California town is keeping Wall Street up at night

#52

Post by tanzam75 »

different-opini wrote: post #37
tmorton wrote: post #30

Earlier quoted context omitted.

If this system becomes routine, mortgage rates will go up, though I'm not sure about "huge premiums." Is that a bad thing? The investment becomes risker and more expensive, so less money is available, so fewer mortgages are made. More people rent instead of buy their own homes. I would submit that fewer owner-occupied homes would be a positive thing for the national economy.

Fewer mortgages = lower property prices. No mortgages = 10x lower property prices.

> No mortgages = 10x lower property prices.

Without mortgages, housing would simply stabilize at the rental value. This will be lower than the current price -- but not anywhere close to 90% lower. The price floor would be the cost of new construction -- in other words, all the value in the structure, zero value in the land.

Instead of buying MBSes, investors who wished to have real estate exposure would simply supply capital to REITs that owned the properties directly. Banks would run these REITs for a fee, equivalent to the mortgage origination fee.

The equilibrium condition would not be objectively worse than the current equilibrium. You may have a subjective preference for an ownership society, but Germany does just fine with a rental society.

The problem is that it's socially costly to move from one equilibrium to another. If you go from the German model to the US model, then you hurt the renters. If you go from the US model to the German model, then you hurt the owners. You don't start out with a blank slate, so you cannot just pick an equilibrium.

Re: Richmond’s rules: Why one California town is keeping Wall Street up at night

#53

Post by tanzam75 »

ams6110 wrote: post #50
different-opini wrote: post #37

Earlier quoted context omitted.

Fewer mortgages = lower property prices. No mortgages = 10x lower property prices.

No mortgages = Detroit. The end result of this idea is not pretty.

> No mortgages = Detroit. The end result of this idea is not pretty.

The lack of mortgages did not cause the collapse of Detroit. The causation runs the other way.

The collapse of the auto industry led to the collapse of housing prices in Detroit, which in turn led to the collapse of the mortgage market. Who wants to issue mortgages for houses that are dropping in value?

Re: Richmond’s rules: Why one California town is keeping Wall Street up at night

#54

Post by tanzam75 »

venomsnake wrote: post #24
tomohawk wrote: post #18

The US constitution says: "No State shall enter into any Treaty, Alliance, or Confederation; grant Letters of Marque and Reprisal; coin Money; emit Bills of Credit; make any Thing but gold and silver Coin a Tender in Payment of Debts; pass any Bill of Attainder, ex post facto Law, or Law impairing the Obligation of Contracts, or grant any Title of Nobility."

And since when Richmond is a state? You can read the constitution by spirit or by the letter. You cannot have both.

> And since when Richmond is a state? You can read the constitution by spirit or by the letter. You cannot have both.

There is no local sovereignty in the United States, except for whatever a state chooses to delegate to its municipalities. (This is why you hear about states that take over failing cities' schools and finances. The city possesses no sovereignty.)

All of Richmond's powers derive from the State of California. If California is prohibited from doing something, then so is Richmond.

Re: Richmond’s rules: Why one California town is keeping Wall Street up at night

#55

Post by mikeash »

venomsnake wrote: post #24
tomohawk wrote: post #18

The US constitution says: "No State shall enter into any Treaty, Alliance, or Confederation; grant Letters of Marque and Reprisal; coin Money; emit Bills of Credit; make any Thing but gold and silver Coin a Tender in Payment of Debts; pass any Bill of Attainder, ex post facto Law, or Law impairing the Obligation of Contracts, or grant any Title of Nobility."

And since when Richmond is a state? You can read the constitution by spirit or by the letter. You cannot have both.

Don't local governments simply operate as agents of the state they're in? I could be wrong about this, but I thought that they were simply organizational conveniences with no true independence, as contrasted with the states and the feds, here the states are independent entities bound by certain rules.

Re: Richmond’s rules: Why one California town is keeping Wall Street up at night

#56

Post by zero_intp »

jbooth wrote: post #48
cynicalkane wrote: post #46

Earlier quoted context omitted.

The eminent domain plan simply lies about the value of a mortgage, saying it's worth less than not only best accounting practice but the market value required for their plan to work. Kelo doesn't apply because using a clearly unfair valuation in eminent domain is directly against the Constitution.

I don't disagree, but the definition of "clearly unfair" floats on the whims of Justice Kennedy.

indeed.

Re: Richmond’s rules: Why one California town is keeping Wall Street up at night

#57

Post by pron »

ams6110 wrote: post #49
pron wrote: post #45

Earlier quoted context omitted.

Without discussing the merits of this particular case (of which I have no knowledge aside from the article, and the facts might be, as cynicalkane claims, quite different), I'd like to say something about the premise of your argument from a more philosophical point of view. Elected officials are representatives of the populace. "Government" is, then, is not some alien entity, but at least in principle, the voice of t…

government is therefore not the taker of all things, but the giver of all things It is dangerous to view it literally this way. To think that government and/or society is giving you things, assumes that they owned them to begin with. Government owns your rights, and then "graciously" allow you to exercise them? No. Government exists to protect your rights. It's an important distinction. You rights to life, liberty, p…

Of course I used a little hyperbole. Still, property is not innate – it is a social construct. When agriculture started, society decided to allow people to own property. People need society, they don't need property (as they've lived without it for over a million years). Society therefore can define the limits of private possession.

Obviously, we need to take into account that now, unlike 10,000 years ago, people no longer have the option of leaving society completely, so they have little choice in the matter, and in order to restore some of that freedom, private property needs to be protected by law. But again, property is not a natural right; it's a social convention. That should be the premise.

Re: Richmond’s rules: Why one California town is keeping Wall Street up at night

#58

Post by [deleted] »

Lazare wrote: post #44

The reporting is frankly terrible. Let me put it in simple terms. An idea has been floating around for a while now that, in theory, you could use eminent domain to seize not just the houses, but the mortgages on the houses. Let's say that someone had borrowed $200k, but the house was now worth $100k. If you were a local government, you could seize the mortgage from the mortgage holder paying them compensation of, oh,…

[deleted]

Re: Richmond’s rules: Why one California town is keeping Wall Street up at night

#59

Post by Daniel_Newby »

Lazare wrote: post #44

The reporting is frankly terrible. Let me put it in simple terms. An idea has been floating around for a while now that, in theory, you could use eminent domain to seize not just the houses, but the mortgages on the houses. Let's say that someone had borrowed $200k, but the house was now worth $100k. If you were a local government, you could seize the mortgage from the mortgage holder paying them compensation of, oh,…

> buying someone's loan and tearing it up counts as a gift

Through 2013 forgiveness of the mortgage on the debtor's principal residence is not taxable. If the law is not extended, there will spring up an industry to do wash sales of property so that the capital loss can be taken at the same time as the forgiveness.

Re: Richmond’s rules: Why one California town is keeping Wall Street up at night

#60

Post by Retric »

Lazare wrote: post #44

The reporting is frankly terrible. Let me put it in simple terms. An idea has been floating around for a while now that, in theory, you could use eminent domain to seize not just the houses, but the mortgages on the houses. Let's say that someone had borrowed $200k, but the house was now worth $100k. If you were a local government, you could seize the mortgage from the mortgage holder paying them compensation of, oh,…

The far market value of a house is not the sales price or the appeased value. You need to subtract transaction costs. For your average bank trying to do a quick sale they might get ~80% or less of the appraised value depending on a host of factors which is why 20% down payments are considered so important. As to mortgages if you look at the mortgage resale market you again need to subtract servicing costs which significantly impact actual value.
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