Sep212013

Eminent Domain fever might be spreading to San Francisco

It was a big news week with the unTaper, plus with the Debt ceilings battles and Obamacare fights.   There is now a lot of volatility in the market and of course the media has been following those stories.  What didn’t make a big news splash was that San Francisco (and now Seattle) might be exploring eminent proposals just like the City of Richmond.   Richmond brought the issue back to the forefront after it was declared dead earlier in the year.  Now, with the  possibility of San Francisco it will make lenders even more nervous.  I just don’t think it will be big in the news cycles until San Francisco or Seattle agrees to participate in this program.

Et tu, San Francisco? Eminent domain heading to larger cities

September 13, 2013 Kerri Ann Panchuk

The municipalities that have caught the eminent domain bug all share something in common – they’re all near or in California and exposed to a political ideology that generally believes the end always justifies the means – even if the chosen “means” is always much crueler and political than the initial harms reported to the public through the media.

Now we know at least one official associated with the city of San Francisco would like the larger municipality to take on eminent domain as a solution to help underwater borrowers, in the same way that Richmond, Calif., has been pursuing that strategy.

As reported by HousingWire, San Francisco Supervisor David Campos revealed plans to propose a similar resolution to get the County Board of Supervisors in San Francisco behind eminent domain as a tool for dealing with underwater borrowers.

After all, the proverbial torch was lit when the city of Richmond approved eminent domain in a 4-to-3 vote Tuesday night.

But the impact of eminent domain, which has yet to be used officially in this proposed fashion, could reverberate in a way that shocks various dimensions of the housing system, harming companies – even future homebuyers.

These proposals make mortgages less secure for the lenders, so the risk to the lender for mortgages becomes closer to consumer debt.  Mortgages rates would have to compensate for the increase in risk, so expect higher rates.

As HousingWire reported, the stocks of title insurers tumbled earlier this week in trading.

Early on, a slowdown in housing was suggested as the cause for the insurers’ market woes. But, perhaps, the American Land Title Association sent the market a clearer picture as to why the stocks took a tumble a day after Richmond’s city council moved forward with eminent domain plans.

“The use of a municipality’s power of eminent domain to seize mortgage loans raises profound Constitutional and other legal concerns,” said Michelle Korsmo, chief executive officer of the American Land Title Association (ALTA).  “It is clear that the recent proposal in Richmond, California, and subsequent legal filings are likely the start of a long and drawn out legal process.”

Korsmo went on to say the chief problem with eminent domain is that it upsets a complex legal and financial structure already in place, leaving future homebuyers and homeowners on the hook.

“Until these lawsuits are resolved, homeowners may not know who to pay or the amount they need to pay off their mortgage. Additionally, any purported extinguishment of an original mortgage obtained through the eminent domain process may cause title insurance to be unavailable in subsequent transactions, or, at a minimum, result in exclusions from title insurance coverage. Title insurance protects real property owners and mortgage lenders against losses from possible defects in the title.  In addition, rulings on eminent domain challenges in one jurisdiction will likely create a ripple effect impacting the legality of this type of eminent domain in all jurisdictions.”

So if it was a mystery Wednesday as to why title insurers took a tumble on the New York Stock Exchange, perhaps the above stated fears were the underlying cause.

Either way, what’s in store for the market with eminent domain on the table could be even more legal infighting.

If any of these proposals do stick long-term, it won’t be surprising if consumers on the other side of the market end up picking up the bill one way or another.

Consumers would have to pick up the bill with higher mortgage rates and probably with higher mortgage insurance, this is a cost we probably won’t be able to just HARP away.  With housing affordability being at a all time low, much higher mortgage rates would put immense pressure on housing prices.  Effectively doing what the non-Taper didn’t do, increase the cost of borrowing   Also, Wall Street might not just originate loan in areas that that precipitate in this eminent domain theft scheme.   Finally, a judge gave the go ahead for the City of Richmond to proceed with their Eminent Domain.   But I think this is the not full story of this eminent domain news.

The first areas in the state to consider eminent domain was the Inland Empire. In fact, I was in Palm Springs over the last few days and there are bill boards promoting meetings to discuss the foreclosure crisis, so it’s still an issue.  But Wall Street put pressure on these local municipalities and the proposal die out.  However, if San Francisco  follows Richmond then these municipal governments might re-consider like El Monte, Fontana, and few cities in the Northern part of the state.  It’s easy to threaten not to lend in City of Richmond, however can banks stop lending to whole of California if hundreds of cities follow San Francisco?  Also, threatening not to lend would undermine 5 years of trying to hide cloud inventory and artificially increase home values.   This would change the nature the California housing market over night and probably be a bigger event than the Taper event (or non-Taper now.)

Mike