Eminent domain or money grab?

Ever since the Supreme Court issued its astoundingly bad decision in Kelo v. City of New London, local governments have been encouraged to use eminent domain schemes to grab private property for the commercial benefit of their well-connected cronies -- all in the name of public welfare.  The schemes are getting more sophisticated now.  An enterprising company called Mortgage Resolution LLC has put together a package that's tempting a number of municipalities, especially in the law-free zone known as California, though nibbles of interest are coming in from Seattle and Newark as well.  The gambit is to identify home mortgages that are underwater but current on their payments.  Mortgage Resolution LLC puts together a local package of these mortgages whose borrowers pass a credit test, then persuades the local government to "condemn" the mortgages at a price equal to 80% of the home's fair market value.  The lenders (typically owners of mortgage-backed securities pools) take a hit equal to the excess of the mortgage balance over the home's value, plus 20% of the home's value.  Mortgage Resolution LLC then refinances the homes through the FHA and pays the local government a percentage of its profits.  It's like a tax on highway robbery:  the more we rob, the more the city collects in taxes!  And the people we rob mostly live out of state, anyway, so who cares?

Boston law firm Ropes & Gray has filed a lawsuit challenging the scheme on constitutional grounds.  At issue is the horrendously confused law of eminent domain and "public use" in the wake of the Kelo decision.  That case left open the possibility of relief for eminent domain schemes in which the seizure of property was a mere "pretext" rather than a good-faith pursuit of the public welfare.  Later courts, however, have struggled to develop a workable definition of "pretext."

The Kelo decision spurred action in many state legislatures to curb the power of local government to grab any property they thought might be convenient for the visionary real estate development schemes of their cronies.  These legal fixes evidently hadn't much teeth in California, Washington, or New Jersey.  In any event, the idea of grabbing and reselling mortgages rather than homes is a fresh and exciting abuse that offers up the possibility of ensuring that the loss lands on faceless profit-grubbing lenders instead of photogenic local homeowners.  It still amounts to theft, however, and in the long run it won't help homeowners ensure access to a reasonable mortgage market.


E Hines said...

It seems to me that Berman began this sad charade, when the Supremes rewrote the Takings Clause from public use to public purpose, an entirely different thing. (And a naked usurpation of We the People's sole right to alter our Constitution.) This opened the flood gates.

As to the Richmond Doctrine, the taking is worse than described. The value of the mortgage to the lender includes the totality of the interest payments over the life of the loan. For a "typical" 30-yr mortgage, that interest income amounts to roughly twice the purchase price of the home. Confiscating the home through eminent domain, which is tantamount to confiscating the loan itself, and doing so for 80% of the current value of the home deprives the lender--the bond holder in the case of peddled and bundled mortgages--of all of that loan value and then some.

There's also the pseudologic of the Richmond Doctrine: if FMV is the lower price ("current value" as determined by the loan's "underwater" status), then the homes in question aren't underwater—the claimed prices are inflated—and so those homes don't meet the city's doctrinal criterion for eminent domain. If the lower price isn't the local market's FMV, then the taking is plainly unconstitutional: the Supremes have held that just compensation is FMV, not some fraction of FMV.

There's also the practical outcome:

Supporters say their plan would help not only specific homeowners but also the broader community by reducing foreclosures that are hurting property values and eroding the tax base.

Eminent domain seizures under these circumstances--a performing loan--will have similar effects to foreclosures through this pathway: lending into that community, with potential lenders knowing that as soon as the community finds it inconvenient to honor its commitments, it'll go the eminent domain route and invalidate the loan, will dry up. Home sale rates will fall because the mortgages can't be trusted. Indeed, this will be more devastating than a rash of foreclosures: an entire community cannot be trusted, it won't be a matter of a number of citizens who just ran into bad luck.

Further, with FMV defined down by 20% through a successful eminent domain proceeding under the Richmond doctrine, the city's property tax base will...erode...commensurately. Even in California.

Eric Hines

Grim said...

I understand eminent domain, but I regard it with great suspicion. The idea of a 'fair-market price' which the owner would not accept always struck me as dubious. Usually the fair market price of something is what it would take to get him to sell it to you voluntarily. Sometimes there is no such price, if it's something he wants to hang onto.

I understand why there have to be cases when the government uses this power, but any time you're forcing the sale at gunpoint, you're not really paying what it was worth to the owner. If you were, he'd sell it to you willingly.

Yu-Ain Gonnano said...

Well, there's a reason it's Fair Market Value and not Fair Owner's Value.

The Market is more than just a particular seller and/or a particular buyer. It is the expected value across all such sellers and buyers.

In other words, just because it will cost you $10 to buy my Snicker's bar doesn't mean that Snicker's bars are worth $10.

In those rare cases (such as building an Interstate so that military hardware can be moved quickly) where the .gov must take land to fulfill a legitimate .gov purpose paying for a person's wildly exagerated sense of worth isn't good stewardship of the citizenry's tax money.

I'm more concerned about the .gov taking property unjustly than I am about the concept of paying FMV rather than the owner's asking price.

Grim said...

The Market is more than just a particular seller and/or a particular buyer. It is the expected value across all such sellers and buyers.

Yes, that's what the market is. But every seller in the market is there for a reason, and the 'market price' isn't necessarily his price. He has a choice not to sell if the market won't bear a price he finds acceptable for his product.

Now, every seller may have a different price in mind. Some of them may be motivated to find buyers, such that their actual price may not be what they believe it to be. Others may be entirely unmotivated sellers, such that their price is quite firm.

If the market is -- as you say -- the value across all buyers and sellers, what would be the effect if we could take some of those unmotivated sellers and force them to sell at the same price motivated sellers would take?

Well, that artificially increases the supply. But another way of saying that is that it lowers the market price of X, where X is whatever the market is in. It used to be that the unmotivated sellers could only be induced to sell at a very high price, which means that the market price was competing among the other owners of X who might be motivated to sell for some reason. Lower supply, assuming the demand is steady, means a higher price.

Now the supply is up, and the price is fixed (at an artificially low level, because we are treating the unmotivated sellers' property as being available for sale at the motivated seller's average price). What's that going to do to demand?

Presumably, it will increase it. If the courts don't stop this kind of thing, it will become increasingly popular. Market forces at work, yes?

So yeah, as I said, I understand what eminent domain is and what it is properly for. But I regard its use with a great deal of skepticism.

Yu-Ain Gonnano said...

what would be the effect if we could take some of those unmotivated sellers and force them to sell at the same price motivated sellers would take?

1) It depends on how many. A handful would be negligible.

2) It depends on how much. Forcing the average price does less than forcing the motivated seller's price.

3) It depends on how many motivated sellers received *more* than they would have accepted in an open market. You can't neglect the upside either. If the distribution of seller's prices are symetric around FMV then the effect is 0.

Like I said, I worry more about unjust takings and a proper assessment of FMV than that FMV is the rubric.

Paying 1 person [Dr. Evil]1 billions dollars[/Dr. Evil] not to bottleneck an expansion on an existing highway because he is an "unmotivated" seller is not a good use of my tax money.

Grim said...

I'll admit that it is possible to construct cases in which the number of people is too few to create a substantial effect, or that the amounts might be marginal. But in case (2) where the amounts are marginal, why not just pay the price? That's not your Dr. Evil case.

(3) doesn't necessarily strike me as very important. Yes, it's true, I might receive more for my ancestral family home than if I had put it on the market. However, if my real reason for wanting to keep the property was to keep it from getting plowed under, the extra cash isn't relevant.

So that leaves us with (1). Well, in Tex's case, how rare are these sellers? It sounds like they may not be rare at all. It sounds like the government is being used to condemn a fair number of mortgages that the owners don't wish to sell -- certainly not at 80% of the already-suspect FMV.

Ymar Sakar said...

I'm sure the Democrats in the South and North will point out that Republicans have a fair share of the profits in these types of endeavours.

However, that's never really been the strategic goal of the Left: to enrich Republicans. Their operations, if they get people in their debt, are merely a bonus. The real objective is something beyond politics.

What Southern and Northern Democrats have no concept of.

Ymar Sakar said...

"The idea of a 'fair-market price' which the owner would not accept always struck me as dubious."

It's no less fair than the reimbursement firesale for the property of Japanese Americans in WWII under Democrat 16 year consul Roosevelt.

Texan99 said...

I spent most of my professional career embroiled in these arguments over a theoretical market value when there were not any real willing buyers or sellers. The analysis works OK when you have generic property for which you can find something you can credibly call "comparable sales." As soon as you're dealing with something with unusual value for the owner, or unusual value for a strategic buyer who'd love a chance to team up with a powerful partner who can force the owner to play ball, you get into trouble. That's when you see one expert come in with a valuation of $X on the basis of one set of wildly speculative assumptions and another with a valuation of $3X on the basis of another set of assumptions. It's a thin tissue of imaginary analysis.

You can't always avoid this problem, and courts have to sort out how reasonable and credible the experts sound and make a decision, but it's a good idea to minimize the situations in which this kabuki performance is called for. Eminent domain is a necessary evil whose application should be limited strictly to public projects that face extraordinary difficulty in putting together contiguous swaths of real estate, and in which there is no whiff of cronyism. It should go without saying that using it to redistribute wealth is a horrible idea.

E Hines said...

...arguments over a theoretical market value when there were not any real willing...sellers.


Eminent domain is a necessary evil whose application should be limited strictly to public projects that face extraordinary difficulty in putting together contiguous swaths of real estate....

It seems to me that the former--a marked lack of willing sellers--should sorely constrain the legitimacy of any eminent domain action. If the public doesn't want the project badly enough to sell to make room for it, then there is no legitimate public use for that project.

The court's role there begin with a determination of whether a larger public should take precedence over a local public for a particular project.

Eric Hines

Texan99 said...

But a FMV analysis always has to look at other similar projects, since you wouldn't be doing it at all if the buyer and seller for that particular property were in fact willing.

Grim said...

If the public doesn't want the project badly enough to sell to make room for it, then there is no legitimate public use for that project.

Well, take the Tellico Dam project. Now there were some people who really wanted it -- and, I suppose, a legitimate public use in terms of the electricity generated by that part of the TVA's program.

On the other hand, the people who owned the land really, really did not want to go along with it. That was some of the best farmland in that part of Tennessee, and a family farm that is happily located on good land is hard to replace. Their ancestors graves were often on that land. As were, of course, several important Cherokee sites.

So nobody was selling, and for very good reasons, but the TVA was insisting that it was buying. How do you get to a "fair market value" when the side being forced to sell is adamantly opposed to being in the market at all? What's really fair to them?

Oddly enough, the only thing that almost stopped that dam was the Endangered Species Act. The outrage and heartbreak of thousands of human beings didn't matter, but the snail darter was taken to have a greater claim.

E Hines said...

The court's role there begin with a determination.... should have read The court's role there should begin with a determination....

Fershlugginer keyboard didn't type what I was thinking. It considers mind reading a waste of talent....

It's better that a court make the determination than the buyer make it. Or the seller ("Now take my Love Canal lot. Please."). And hopefully the consideration is based on the two publics' interests and a careful weighting of them.

As to darters and yellow-spotted, two lobed liver warts, the courts usually do catch up with bad science, just too slowly to suit many of us.

Eric Hines

Yu-Ain Gonnano said...

Grim, there are 3 distinct items in your scenarios. I'll treat them somewhat independently.

1) *When* is an eminent domain taking legitimate?
2) What is the appropriate value?
3) How is this value to be fairly and accurately determined?

In the case of codemning contracts, I'm going to say that unless someone can blow me away with an argument for it, that it is never legitimate. This renders points 2) and 3) moot.

As for why you wouldn't want to pay the marginal difference, you must first define "marginal". Is it 1% over FMV? Is it 5% over FMV. Given that this must be set by law, what this really means is that the .gov will *always* pay FMV+Margin as everyone will always say that their house is worth more to them even if it isn't. Five percent, over and over and over again adds up quickly.

Second, having now established that the .gov will pay a premium for your land, there is now an incentive to get the .gov to condemn your own land (and those of your neighbors) rather than sell on the market.

Lastly, you still get the market distort you had hoped to avoid.

As for the motivated seller effect. I'm not just referring to those whose property value is primarily sentimental. For instance, I own two homes. One here in Charlotte, the other in Memphis. I tried to sell it two years ago, but being the bottom of the market trough decided not to sell at the market price. I was motivated, but not *that* motivated. I owned that house outright: no mortgage. I am now renting it out and socking the money away for upgrades to prepare it to sell come spring. If the city were to condemn it and give me FMV right now I'd walk away a happy man. I'd lose 7% just on Real Estate Agent commissions and I really want the house off my books.

Now, most people are somewhere in between. They aren't motivated sellers (as they would already have put the item up for sale), but neither are they unmotivated either (most people would be more concerned about the cost to move than attachment to the physical structure).

That said, most takings don't occur for the construction of a Wal-Mart, apartment complex or dams, but for road expansion. In most cases the entire parcel is not taken. Just a 15-20 foot strip along the road frontage. Again, most of these owners are neither "Motivated" nor "Unmotivated" sellers as this strip of land has essentially $0 market value. No private party would ever buy just that strip and so no private party would ever list it for sale.

This get's to T99's issue. How exactly do you determine a equitable value for something for which no market even exists?

Texan99 said...

"How exactly do you determine a equitable value for something for which no market even exists?"

I can't say how you might do this in the abstract, or in an intellectually defensible way. I can say how it's actually done before an ideal judge, that is, one who is intelligent and fair-minded and receiving arguments from honest and able counsel advocating for a variety of perspectives. You analogize as best you can to the most comparable assets you can think of. It gets pretty crazy when you deal with very large or unique items in a thin market. This happens in bankruptcy a lot, where the thing you're trying to "auction" off, so to speak, is an odd business facing odd market forces. (It's not really an auction, but is treated a little like one for the purpose of balancing the competing claims of different groups of shareholders who are being asked to bear all or part of a loss.)

Each side hires experts, who produce reports and defend their positions on the stand. If you're lucky, the parties all consider how persuasive these arguments are and reach a settlement, which lets the judge off the hook.

Grim said...


Your argument against paying the price if it is marginally over your (suspect and artificial) FMV actually strikes me as reasonable, even though I still consider the FMV concept suspect and artificial.

Nevertheless, I never said eminent domain was never appropriate -- just that I always view its exercise with suspicion. I think that's the proper way to view it, given both its distorting effects and its inherent unfairness to the property owner.

But I confess to holding a grudge here, too, which may make it impossible for me to evaluate the issue with complete detachment. I've had beloved and important family land seized and plowed under by the government, destroying beloved trees to build a sewer for a housing project that actually never even came off. Not just our family but the entire area was universally opposed to the development, but the developers had money for campaign contributions and who knows what else. So, they "bought" the land for what they said it was worth, and plowed it up, and put in sewer lines. When the developer's money ran out, well, the presumed public good didn't happen -- and I don't know that it would have been an actual good anyway -- but they'd already done permanent damage.

So, while I believe I'm thinking clearly about this, the fact that I can still feel a very deep rage whenever I ponder that taking suggests to me that I may not be entirely unbiased in my reading.

Grim said...

It occurs to me on reflection that there is a problem with saying that there isn't a market for things like a small right of way because nobody would normally want to buy one. Of course, in the case of the sewer, that was exactly what the developers of the proposed complex did want to buy. They just didn't want to buy it at a price that might have made it acceptable, or in fact to pay for it themselves instead of foisting their cost off on the taxpayer.

But as I said, I'm doubtless biased here.

Yu-Ain Gonnano said...

In those cases, Grim, the issue is whether that land should have been taken at all.

Let's say that yesterday you bought a new TV for $1000. Last night I broke in and took it.

If I left $1050 in cash on your coffee table in "payment" does that really make it OK?

An improper taking is unreasonable at anything less than a punishing price.

So a completely above board taking is a complete prerequisite. *If* that hurdle has been reached, *then* it is appropriate to address the issue of just compensation. Here, FMV seems to balance the legitimate interest of the owner and the equally legitimate interest of the neighbors whose taxes are being spent.

So I'm not really suspicious of the concept of using FMV. I'd be very suspicious that either the owner's or the city's quoted prices actually *are* FMV.

But being suspicious of whether someone adheres to a standard is different than being suspicious of the standard itself.

Texan99 said...

The usual approach to something like a narrow strip of right-of-way is to focus instead on the diminution in value of the remaining land. The strip itself was unmarketable and couldn't have been said to have value until it turned out that someone needed the street to run just in that spot. But we can come up with comparables, sort of, for the difference between a piece of land of this size, in this relation to a street, and another piece of land of this larger size, not adjacent to a street. Sometimes we may find that, although the state wants to take only a piece of your land, it has pretty much destroyed all reasonable value in the remaining piece and should have to pay you for the whole thing.

Grim said...

Ah, well. I don't know that the court would have understood me, had it come to that. What I thought was valuable there had nothing to do with markets.

Yu-Ain Gonnano said...

But under what equitably rubric do you require your neighbors to incur expenses for your sentimentality?

This is essentially the crux when the necessary evil of emminent domain rears its head.

Yu-Ain Gonnano said...

...and furthermore, how do you determine how much of a sentimentality premium is reasonable and how much is not?

Texan99 said...

That's just why eminent domain is so fraught with difficulty, right? If we confine ourselves to free transactions between willing buyers and sellers, all the problems with subjective sentiment and idiosyncratic preferences for particular possessions take care of themselves automatically. It's only when we want to force a sale on an unwilling seller that we run into trouble. Then we have to construct a theoretical edifice of what a hypothetical seller of a hypothetical "similar" piece of property would think of as a fair price. We have to guess which aspects of the real seller's preferences are peculiar or unjustifiable, and which are the "market," which is to say, the kind of preferences that generic people would have about generic property of that kind.

Grim said...

But under what equitably rubric do you require your neighbors to incur expenses for your sentimentality?

I have no desire that they should do so. My sentimentality was paid for in advance: we owned that land. All I ask of my neighbors is that they respect that.

And actually, my neighbors were happy to do so: they wanted just the same thing themselves. It was only the developers and their pet county commissioners who wanted the right to force the sale. I don't feel the least bit bad about not caring about their feelings, since they certainly didn't care about mine.

This inability to value the sacred or the personal is a general problem with markets, not just with Eminent Domain issues. But ED makes it worse, because it forces you to sell that with which you would not have otherwise parted; and it sets the value of it as if it were something ordinary and menial, not sacred or personally valuable. It's one of the places where this general problem about the market is set in sharpest relief.

Texan99 said...

I would say, of course, that the market takes care of it brilliantly. It's when you start consulting the preferences of someone besides the seller and the buyer that you get into trouble. If the seller is sentimentally attached to the property, he need never sell it at any price in a free market. If a third party can interfere between the seller and buyer, the market is no longer free.

Grim said...

We've had the talk before, and at this point I'm less inclined to rehash old arguments when we have entrenched positions than I used to be. Rather, let me point you to this paper from the Claremont institute which you will find in agreement with your own position. The argument under the heading "The Original Moral Case" is one I think I can support, although it doesn't require us to accept the market's intrusion into every aspect of life.

Yu-Ain Gonnano said...

my neighbors were happy to do so:

I was speaking more in the generality, but let me ask you this. Whose money did you receive from the forced sale? Your neighbor's tax money, or the developer's private funds?

A proper ED taking should always have the .gov as the buyer. Otherwise it isn't for "Public" use.

An, as I've already said, an improper taking is unreasonable at anything other than a punishing price. It's no different than theft, to me.

Grim said...

Tax money. I think part of the joy of it for the developer was the pleasure of getting to have other people's money spent for their purposes instead of their own.

Yu-Ain Gonnano said...

So if it was your neighbor's tax money, then you were asking them to pay for your sentimentality.

Which is a tall order to ask of them, if the taking is proper. If it isn't, then using their tax money at all is a tall order.

It sucks that the development wasn't completed. If it had been, infrastructure items, like sewers, are a legitimate function of the local gov't. But necessary evils are still evils.

Grim said...

So if it was your neighbor's tax money, then you were asking them to pay for your sentimentality.

No, I was asking them not to pay for it. We had already paid for the sentimental value of the land by buying the land.

I don't want more money. I want my trees back.

Ymar Sakar said...

Trees were harvested to print more money for Democrats.

Grim said...

In point of fact, the commissioners are all Republicans.