</p

Therernare a number of issues to be confronted; (a) the selection andrnvaluing of appropriate loans; (b) securing government and/or privaterninvestors; (c) commencing the eminent domain procedures; (d)rnmodifying and possibly re-securitizing the loans; (e) working withrnhomeowners; and (f) compensating investors at appropriate stages. </p<pHockettrnsees no legal issues with using eminent domain in this way; all typesrnof property has been secured in the past in this way – tangible andrnintangible, contractual and realty-related alike. The question thenrnis whether the public purpose justifies the taking and whether fairrnvalue is paid. The public purpose – “Preventing morernforeclosures, blighted properties, revenue base losses, and cityrnservice cutbacks is recognized by courts as the most compelling ofrnpublic purposes justifying use of the eminent domain authority.”</p<pTherernare many ways of setting value and it is not necessary to “robrnPeter to pay Paul”. Eminent domain proceedings need notrnrepresent zero sum games. The plan recoups value which can then bernequitably distributed to render all stakeholders better off. First,rnlien holders who help finance the purchases from their PLS trustsrnreceive loans that are higher in expected value in exchange for thosernwith lower expected values. </p

First lien holders who do not sornparticipate receive fair value for otherwise unmarketable assets. Homeowners gain modest equity and diminished default and foreclosurernrisk. Neighbors see their communities, property values, andrnmunicipal services stabilized, while municipalities see property taxrnrevenue restores and abatement costs drop. Even second lien holdersrncan benefit if paid a small fraction of the value of the asset. </p<pThernconcerns that will probably be raised fall under two headings,rnHockett says, those that debt write-downs always seem to raise – thatrnit induces moral hazard and reduces credit availability – andrnconcerns that the plan relies on state rather than federal authority.</p<pThernquestion of moral hazard, he says, is a personal issue that he cannotrnresolve but there seems to be little need to fear long-termrncontraction in liquidity or credit. Bubbles inflate only when creditrnis overabundant. The best way to get to safe middle groups is tornclear out the overhang of negative equity then to ensure that poolingrnand servicing agreements mirror those in commercial MBS, anticipatingrnthe possible eventual need to salvage value. It is also important tornremember, he says, that write-downs are done are mortgage debt allrnthe time. It is called bankruptcy. </p<pConcernsrnabout using state rather than federal authority resolve around thernproblem of lack of uniformity in application. While some degree ofrnnational uniformity would be welcome, Hockett says, local conditionsrndo vary and so fairness itself dictates some variation. Federalrnagencies, however, could be helpful in confining local variationrnwithin reasonable bounds as well as promoting efficient and amicablernloan workout nationwide along lines like he proposes. </p

Hockett does not mention in his paperrnthat something very similar to the eminent domain proceedings hernsuggests were recently announced by several cities and resulted inrncries of outrage, threats, and proposed legislation. </p

In June 2012 thernBoard of Supervisors in San Bernardino County California announcedrnthey would use their power of eminent domain to take underwaterrnmortgages from lenders and restructure them for borrowers at the fairrnmarket price.  Local governments in Chicago, Brockton,rnMassachusetts and other cities quickly followed suit There was alsornan almost immediate response from SIFMA, the trade organizationrnrepresenting the securities industry. It announced it would litigaternany attempts to implement such programs and threatened that anyrncommunity that did proceed would effectively find itself, shall wernsay, credit starved. </p

InrnAugust FHFA posted a notice in the FederalrnRegister</iinviting comments on the issue. Thernnotice said the agency had significant concerns about the use ofrneminent domains to revise existing financial contracts and thernalternation of the value of GSE or bank securities holdings, and thatrnit had determined that it might need to take action both asrnconservator of the GSEs and regulator for banks to avoid a risk tornsafe and sound operations and avoid taxpayer expense.  Anyrnaction it might take was unspecified</p