Today (7/13/12) it was reported that officials in San
Bernardino County (CA) have been in secret talks as to whether or not to
use the power of eminent domain to seize troubled mortgages from banks.
California has been one of the hardest states hit by the
financial crisis, and as a result has one of the highest rates of underwater
mortgages in the country. For those of
you who don’t know, being “underwater” on your mortgage means you currently owe
more on your mortgage than what your home is worth.
I have one question for the officials in San Bernardino County. Is it your intention to put the final nail in
the coffin of the state of California? Maybe
the officials in California truly believe they are doing the right thing, but
the road to hell is paved with good intentions.
Or are they just doing this to show they are doing something, anything, in
hopes of getting re-elected. It is
obvious that fiscally they have ran their county into the abyss, so this may be
the “Hail Mary” of their re-election efforts.
Details are still to follow on how this would play out. But here is what is most likely to happen
here. Banks are currently holding onto
these mortgages that are underwater, hoping for two things. Either the government comes in with QE 3 (quantitative
easing… or money printing) and purchasing mortgage backed securities which will
help get these under-performing mortgages off the bank’s balance sheet and onto
the federal reserve’s (or in other words… the taxpayers), or the U.S. Congress
comes in with some sort of bailout for the banks. This is why the banks have been for the most
part unwilling to help out these underwater homeowners. If there was an actual free market, where the
government didn’t pick and choose who they were going to bailout, the banks
would have started working with underwater homeowners a long time ago. It would
be in the banks best interests to do so in order to minimize the losses on that under-performing mortgage.
So while the banks are waiting on either the Fed or action
from Congress, the officials in the County of San Bernardino have decided to
take matters into their own hands. They
are going to force the banks to give these mortgages to the County. The county then will lower the outstanding
mortgage to the homes current market value.
This could literally knock off 100k or more in debt on that home in some
circumstances. The question remains… who
is going to be on the hook for that loss?
It’s either going to be the bank or the county. Since the county of San Bernardino is broke
along with most counties in California, it is certain the county will force the
banks to take this loss.
On the surface this doesn’t seem like a bad idea right? The homeowner is no longer underwater; this
gives them the ability to refinance to today’s record low mortgage rates. Now the homeowner also has more discretionary
income that could be used to help support the California economy. Seems all well and good right? Wrong!
The unintended consequences would be disastrous for
California. These banks that had these
mortgages “stolen” from them now have to write down these gigantic losses on
their balance sheets. Banks still have
not recovered from the financial crisis.
This giant blow to their financial standing would send bank stocks
plummeting as analysts scramble to figure out how big of a blow this will have
on bank earnings. I’m sure at this point
you’re thinking… who cares? The banks
deserve to have their stock prices collapse.
Fair enough.
But the biggest unintended consequence would be banks no
longer willing to write mortgages in the state of California. Or at least they will raise interest rates dramatically. Who can blame them? Just like with the bankruptcy of the auto
companies, contractual law has been thrown out the window by an iron-fisted
government. We look more like Soviet
Russia at this point than the “land of the free and home of the brave.”
With banks refusing to lend, or at a minimum higher mortgage rates in the state of California,
housing prices would go into free fall.
The rest of the country also wouldn’t
be immune from falling housing prices.
Banks would start to demand higher interest rates on mortgages
everywhere in the U.S. as they start to determine the likelihood that counties
in other states contemplate using eminent domain as well. Higher mortgage rates mean’s higher mortgage
payments. This means potential buyers
will have to lower the amount they can borrower in order to be able to afford
the payments. The result is sellers
having to come down on the asking price.
This is bad news all around.
We all know the saying, that what happens in California
tends to make its way into other states.
This is one of those times where I hope, “what happens in California,
stays in California.”
