The Fed’s Eminent Mistake

Despite the Fed’s massive inflationary efforts there’s still no real recovery of housing prices. So what’s the solution? In a curiously titled research paper, Paying Paul and Robbing No One: An Eminent Domain Solution for Underwater Mortgage Debt, Cornell law professor Robert Hockett says the government should use eminent domain to seize private mortgages, courtesy of the private beneficiaries. Rest assured, if Professor Hockett’s plan is carried out it will be anything but a victimless crime.

According to The Wall Street Journal:

The Federal Reserve has spent trillions of dollars trying to revive U.S. housing prices, and at long last a recovery is underway. So it’s more than a little surprising that amid this progress the New York Fed would suddenly lend its intellectual imprimatur to a dubious proposal for government to use eminent domain to seize underwater mortgages.

Yet there it was Monday on the New York Fed website: Paying Paul and Robbing No One: An Eminent Domain Solution for Underwater Mortgage Debt, a research paper by Cornell law professor Robert Hockett. The title is certainly arresting since it promises an economics free lunch.

Mr. Hockett notes with alarm in the paper that home prices still linger close to 30 percent below peak levels, and he avers that government must act to keep pushing prices back up. His solution?

He wants politicians to identify mortgages worth more than the homes, seize them via the power of eminent domain out of private trusts, refinance them with government help, repackage them into new securities, and sell those securities to new investors. He muses that the money to buy the mortgages could come from the feds (read: taxpayers) or private investors or both.

Bloomberg News

This might please underwater borrowers who would immediately pay less for their loan, and the politicians would take credit for the windfall. But the not-so-free lunch would be financed by the original mortgage investors, who would suffer losses without recourse. There’s also the little issue of higher interest rates for future borrowers as lenders price in this new political uncertainty into mortgage contracts.

Eminent domain is supposed to be used for public purposes, with adequate compensation to the private parties whose assets are seized. But in this case government would seize private assets—with uncertain compensation—for someone else’s private gain.

We couldn’t help but notice that Mr. Hockett’s idea closely resembles the eminent-domain pitch made by Mortgage Resolution Partners, a private investment firm out of San Francisco. MRP could be a big winner in such a scheme as the repackager of the seized mortgages into new securities in return for a fee. The firm has pitched the idea to the likes of Chicago and San Bernardino County, without success.

And wouldn’t you know, Mr. Hockett turns out to have been on the payroll of none other than Mortgage Resolution Partners.

Thus says The Lord: Unequal weights are an abomination to the Lord, and false scales are not good.