Robert J. Shiller, one of the Yale professors behind the Case-Shiller Index, penned a New York Times editorial this Sunday calling for “collective action” on the parts the government, banks and borrowers to fix the U.S. housing markets. Shiller suggested that local government use eminent domain laws to “take” mortgages from underwater borrowers, paying investors fair market value for them. Shiller wrote:
“But eminent domain law needn’t be restricted to real estate. It could be applied to mortgages as well. Governments could seize underwater mortgages, paying investors fair market value for them.
“Then it [the government] can pay them [the mortgages] off at fair value, or a little over that, with money from new investors, issuing new mortgages with smaller balances to the homeowners.”
This idea, proposed originally by Cornell University law professor Robert C. Hockett, is riddled with problems.
First, who defines “fair market value?” Government? Underwater borrowers? Or the investor in mortgage backed securities? Clearly, the government entity seizing the mortgage will determine “fair market value.” Both the borrower and the investor lose on this deal.
Secondly, which government agency is going to seize the mortgage? Federal wonks? State technocrats? Or local municipalities? If you think local municipalities can handle an eminent domain scheme like Shiller and Hockett are proposing, I have sewer system in Jefferson County, Alabama I want to sell you.
Third, who pays for this? We know the answer to this question. It’s you — the taxpayer. Shiller claims that: “Taxpayers are not involved, and no government deficit is incurred.” But we’ve heard those promises before from many of our esteemed politicians.
Finally, all of the housing market’s stakeholders would have to buy in to the idea for it to work. And that is unlikely to happen.
This is a radical idea. A massive government seizure of underwater mortgages through eminent domain has never been done before. This idea needs to be debated long and hard before anything like this becomes housing policy. We already have enough intervention in the U.S. housing markets. Do we need more?
Readers, what do you think? Do you approve of an idea that involves such a massive government intervention?
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