by James Stefanile, ABR, GRI, SRES, QSC, gCertified, REALTOR/Salesperson, Berkshire Hathaway Home Services New Jersey Properties, Montclair Office
You may recall my posts of August and October 2013 (you can re-read them – check the sidebar) where I dealt with the issue of local governments using the power of Eminent Domain to buy distressed loans on behalf of citizen homeowners. I, unlike the National Association of Realtors, think it’s an idea worth exploring.
In the August 2o14 issue of the Realtor Party News, the successes of the Realtor organizations in Maryland and Louisiana were reported in opposition to this idea. Maryland, bowing to pressure from Realtors, has now passed a law mandating a 2 year moratorium on the Eminent Domain practice of buying distressed loans and Louisiana has banned it outright I’m confused as to how you legislate away part of a basic right of local governments. Does this mean that all other uses of Eminent Domain are banned in these states – of course not. Only this selective slice of the municipality’s constitutional power. Look for court and constitutional challenges.
So, what is the Realtor Party? It’s the political action arm of the National Association of Realtors and its state organizations. We are one of those dreaded special interest groups and our lobbying protects our narrow interests. The Realtor lobby is very aggressive and successful on the state and national level and its main purpose is to make the real estate industry lucrative and to protect the vested interest of Realtors everywhere. It’s stated purpose is “to protect home ownership and property rights” and, in my view, this is a mask for its real purpose – to protect the status quo. No one from the Realtor Party rises up when a city uses eminent domain to flatten a neighborhood to install railroad infrastructure (an event that occurred in the township I live in about a dozen years ago resulting in the loss of 29 residential properties). Where is the protection for homeowners and the defense of their property rights in that case? I didn’t see Realtors picketing that decision or lobbying against it. On the contrary, the Realtor community was quite excited about this transportation upgrade since it would make the community more attractive to buyers – and the 29 homeowners be damned. Also, by the way, no Realtor mourned for the lenders holding the mortgages on those 29 properties. So, in that case, if a lender got shorted it was ok.
You can’t have it both ways. I have no problem with a city using Eminent Domain when, in the view of the local government, it will improve the quality of life for its citizens. When a city uses its powers to cajole (ok – force) a recalcitrant lender into selling a mortgage to the city, it’s stated goal is to help that underwater homeowner find a responsible way out and to provide an alternative to the blight of abandoned, foreclosed homes which will impact the quality of life of all its citizens. Realtors are opposed to this because it lessens the instances of short sale commissions and commissions earned working for the banks who seize homes. This part of Eminent Domain is wrong in the view of the Realtor Party while other uses of Eminent Domain are ok. A very selective point of view.
Critics of this form of Eminent Domain say the original investor will be shorted as the municipality seizes the mortgage at 80% of the home’s current value and re-sells it back to the homeowner at a higher value. If a foreclosed mortgage goes to auction the investor(s) will get only 40-50 cents on the dollar. Is that a better deal for the investor? They say cities are not qualified to judge a home’s value. An appraiser hired by the city would do that nicely. Further criticism of this method states that the seizures target mortgages that may be underwater but current. That’s simply not true in all cases and it doesn’t matter whether the loan is current or delinquent – an underwater mortgage, more often than not, leads to delinquency and default. Critics point out that mortgages have value to their investors over time with the interest paid on the loan. It’s very nice for an investor to be making money on an asset that’s lost a major percentage of its value, where a homeowner is still paying on an obsolete, inflated value and paying an interest rate 3 or 4 percentage points above today’s standard. If Realtors are on board with this thinking they’re working for the banks, not the public. It’s the public – the homeowner – whose benefit is not being discussed when Realtors point out the negative impact on lenders. We’re much more focused on selling these distressed assets rather than enabling homeowners to stay in their homes. So much for us as champions of home ownership.
Further, it’s naïve to think lenders will continue to collect mortgage payments on underwater loans for the life of those loans. Something like 85% of these loans default. You would think the lenders and their investors would be looking for any way out of this dilemma but, apparently, they’d rather just hold their breath till they turn blue and we Realtors are ready to hold their hand while they do.
The fear based arguments used in opposition to the Eminent Domain idea include the possibility of a lender boycott of the city in question (illegal), the unchecked authority of government, lawsuits, disapproval by HUD and FHFA, tax liability and the flight of qualified buyers – all unproven. Fear based arguments pander to our basest, most selfish and paranoid fears and demean the purveyors of such corrosive and unproductive tactics. I believe this process will play out in the courts over time and the opponents of this form of Eminent Domain have already lost once in Federal Court. The good news is that special interests (like the Realtor Party) have far less sway over the courts than legislatures.
While the Realtor Party has done some legitimately good work in the past, we are still, and more than ever, on the wrong side of this Eminent Domain vs. underwater loans issue. And, as time has passed, the Realtor lobby has been able to crank up its institutional muscle to pressure lawmakers to its way of thinking. Don’t forget we also contribute to the campaigns of many of our pandering public servants and this is yet another blunt instrument used to get results.
The Eminent Domain idea has not been fully studied with regard to distressed mortgages. If, after thorough review it becomes apparent it’s a bad idea or it’s proven to have negative consequences for homeowners, that’s one thing. Working for its abolition in the knee-jerk manner of the Realtor Party is quite another. The impact of this issue would be very small in terms of the overall real estate industry, even if the practice was widespread. It would not be the Armageddon the lobbyists paint. To kill this practice in the cradle, as the lobbyists are trying to do, is a blatant attempt to annihilate a new idea. Our Realtor lobby opines that less and less homeowners are underwater because of rising home prices – nonsense. It will take years from now for an underwater homeowner to regain a full equity position and the lender is not going to cut that homeowner a break on the inflated interest being paid in the meantime on an inflated value and that homeowner is not going to make payments on an inflated value forever.
I believe the Realtor Party is afraid that the Eminent Domain practice will be successful in leading to the end of the foreclosure crisis and, as a result, will obliterate some percentage of Realtors’ incomes. This is a narrow, callous and mean-spirited point of view and an attitude unworthy of our profession.