It Takes a Village: Municipal Condemnation Proceedings and Public/Private Partnerships for Mortgage Loan Modification, Value Preservation, and Local Economic Recovery
Hockett, Robert, Stanford Journal of Law, Business & Finance
Respected real estate analysts forecast that the U.S. is now poised to experience a renewed round of home mortgage foreclosures over the coming six years. Up to eleven million underwater mortgages will be affected. Neither our families, our neighborhoods, nor our state and national economies can bear a resumption of crisis on this order of magnitude.
I argue that ongoing and self-worsening slump in the primary and secondary mortgage markets is rooted in a host of recursive collective action challenges structurally akin to those that brought on the real estate bubble and bust in the first place. Collective action problems of this sort require duly authorized collective agents for their solution. At present, the optimally situated such agents for purposes of mortgage market clearing are municipal governments exercising their traditional eminent domain authority. What is required, in short, is a manner of "inverse Kelo" action, pursuant to which eminent domain authority is exercised in order to keep people in their homes rather than to eject them.
I sketch a plan pursuant to which municipalities, in partnership with investors, can condemn underwater mortgage notes, pay mortgagees fair market value for the same, and systematically write down principal for mortgagors. Because in so doing they will be doing what parties themselves would do voluntarily were they not challenged by structural impediments to collective action, municipalities acting on this plan will be rendering all parties better off. They will also be leading the urgently needed project of eliminating debt overhang nationwide and thereby at last ending our ongoing debt deflation.
Introduction: A Missing Collective Agent
Six years after residential real estate prices peaked and then plunged, U.S. primary and secondary mortgage markets continue to languish in a self-worsening slump.1 As the modifying phrase "self-worsening" suggests, feedback effects constitute a critical component both of the problem and of its stubborn persistence.2 These effects operate both as between property prices and mortgage default rates, and as between primary and secondary mortgage markets and broader local and regional economies.3 Collective action hurdles can prevent forward or hasten backward movement by endowing individual expectations with significant "self-fulfilling prophecy" properties.4 These are the source of the aforementioned "feedback" effects-effects that can amplify optimism into dysfunctional bubble or boom, and pessimism into bust and protracted depression.5
As it happens, the mentioned feedback loops are themselves critically mediated through uncoordinated market decisions taken by multiple actors who face formidable. Because the hallmark of such "recursive collective action problems," as we shall here call them, is their aggregation of multiple individually rational decisions into collectively self-defeating and even self-worsening outcomes,6 their solution requires the presence of a collective agent empowered to act on behalf of all parties to optimize joint outcomes.7
Against this structural backdrop, some acute observers have come to recognize that some such "collective agent" will be required to solve that collective action challenge which lies at the heart of that self-worsening slump which continues to afflict U.S. local and regional mortgage markets- and, through them, our local, regional, and hence national economies.8 The question is, what person or entity is best situated to discharge this critical function?
For a number of reasons comprehensively elaborated below,9 many, though not all of them, rooted in the inherently state-centered character of contract, commercial, trust and real property law under our constitutional order,10 the federal government and its instrumentalities are not now well suited to this task.11 At best they are but complementarily situated.
States and their instrumentalities- municipalities in particular- are by contrast very well situated to play the appointed role. …