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Cities adopt law professor’s plan to fix mortgage crisis

Posted August 2, 2013

Cornell Law Professor Robert Hockett’s plan advocating that cities partner with private investors to purchase troubled mortgages at market value and refinance them is gaining traction with U.S. municipal government officials.

Underwater mortgages – loans with a higher balance than the market value of a home – remain a drag on U.S. economic recovery. “Even the loan holders themselves recognize that writedowns [reducing the principal on a loan by the lender] maximize the expected values of their troubled loans,” said Hockett.

Adopting Hockett’s plan could reverse urban blight and keep mortgagors in their homes. On July 30 Richmond, Calif., became the first city to offer to purchase underwater mortgage loans, and Irvington, N.J., and Seattle, Wash., have consulted with Hockett to deal with their city’s foreclosure problems. About 20 other cities are in various stages of implementing versions of Hockett’s plan to exercise their eminent domain authority.

“What is particularly exciting about this,” Hockett said, “is that all of these cities are acting independently, and that all of them are showing interest in different variations on the plan tailored to their own unique foreclosure crises.”

Some cities are interested in working with nonprofit organizational funding. Others want to employ government foreclosure-prevention funds, and some are partnering with private service providers with whom Hockett is working and who offer variants of his plan’s template.

“The problem is that a host of classic creditor collective action problems … prevent creditors’ acting in their acknowledged self-interest,” Hockett said. “Collective action problems require collective agents for their solution – agents authorized to act on behalf of all. The best situated agents right now are municipalities, which are first to feel the impact of mass foreclosure, homelessness, property value and revenue base declines, and consequent blight.”

Hockett predicts his plan will play well with a variety of constituencies. “Because it’s a local solution, federalists should be as happy with it as are debtors and creditors,” he said. “And because it amounts to an inverse of the action upheld in the infamous Kelo decision of 2005, property rights advocates should love it as well.”

“After years of first quietly, then not so quietly pushing this idea, it is very exciting to see that it now is becoming a fully fledged ‘movement,’” Hockett said. “The cities and the nation at large might now at long last emerge from their six-yearlong debt-deflationary slump, and they have my great colleagues in government and [in] the financial, community advocacy and legal communities to thank for it.”

Hockett’s plan is detailed in two papers “It Takes a Village: Municipal Condemnation Proceedings and Public/Private Partnerships for Mortgage Loan Modification, Value Preservation and Economic Recovery” and “Paying Paul and Robbing No One: An Eminent Domain Solution for Underwater Mortgage Debt that Can Benefit Literally Everyone.

Source: Cornell University

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