California county considers using “Kelo powers” to seize mortgages

Before the ObamaCare decision, there was Kelo v. City of New London.  The two Supreme Court cases have a number of things in common.  Both did a huge amount of damage to the American ideal of limited, constitutional government.  And both created a dark connection between government power and politically connected private interests, a relationship shockingly vulnerable to corruption.

ObamaCare created vast new trans-Constitutional powers to force citizens to engage in commerce with private entities, at the direction of the ruling class.  The Kelo decision allowed the government to seize private property for the benefit of business interests, because the transaction was deemed highly beneficial to the community.  In the Kelo case, it was private land seized under eminent domain and given to a pharmaceutical company, which wished to build an industrial facility.  (As if this wasn’t outrageous enough already, the facility never got built, and the land is now a huge vacant lot.)

Dissenting justice Sandra Day O’Connor saw a huge genie escaping from its bottle, warning that property would now be seized for all sorts of reasons, for the benefit of “those citizens with disproportionate influence and power in the political process.”  Now that seizure under eminent domain wasn’t restricted to urgent public works projects, the number of reasons for seizure was certain to increase.  Corruption is creative.

Several California cities in San Bernadino county are considering what Reuters columnist Daniel Indiviglio calls “the nuttiest idea yet,” seizing not physical property, but mortgages, because the cities think they can dispose of them in a more socially just manner.  As Indiviglio explains:

The plan is simple enough. San Bernardino county wants to invoke existing eminent domain laws to seize mortgages that are bigger than the current value of the homes they’re lent against. That’s a radical departure from the way eminent domain is usually deployed – to commandeer land for public use, such as to build a road.

The county would then sell the loans to a fund called Mortgage Resolution Partners. The deal is a no-brainer for all concerned: the investment group makes a profit on the safer new mortgages – to qualify, borrowers have to be current on their payments. The homeowners get a loan that’s now worth less than their home, so also end up with some equity. And the local politicians look smart and may win some extra votes.

(Emphasis mine.)  This isn’t even a plan to rescue desperate homeowners teetering on the edge of foreclosure (not that this would make it any less offensive to property rights.)  It’s a “rescue plan” for select individuals who are particularly unhappy with the collapse of housing prices, and think they should no longer be held to the mortgage contracts they signed.

It’s also outright theft against the current mortgage holders, a dangerous assault on contract law, and pretty much guaranteed to throw the housing and lending industries into chaos.  It’s piracy backed up by mob rule, as a politically favored majority eagerly shreds the property rights of financial institutions and investors for their own benefit.

It would be a disaster if this nutty idea goes national.  $1.2 trillion in mortgage balances above the value of “underwater” homes is sitting out there, offering a tempting target for the San Bernadino strategy.

“That would cause enormous losses for bondholders and taxpayers alike,” Indiviglio warns.  “At the extreme, private investors would probably abandon any intentions of financing a private mortgage market in the future, leaving the U.S. government as the only entity willing to shoulder the risk.   At the very least, the successful use of eminent domain laws to seize mortgages, even if limited to a few municipalities, would make bondholders charge far more for the risk, pushing up the price of home ownership – which could hit demand for loans and send house prices down again, perpetuating the cycle of bubbles and bailouts.”

It’s not hard to imagine a politically desperate Barack Obama offering such “rescue” to an eager constituency of underwater mortgage holders.  He was actually dangling mortgage refinancing before his audience like dog biscuits during his post-horrible-job-report speech on Friday, and asking “Who can use $3000 a year?”  The response was eager applause.  An even more aggressive “refinancing” program could buy a lot of votes.

Both the ObamaCare and Kelo decisions illustrate the dangers of creating Big Government “partnerships” powered by coercive force, and remind us that property rights cannot be allowed to dissipate because the people exercising them are unpopular, or politicians are exceptionally confident that they have better ideas for disposing of private holdings.