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Robert Shiller: “Reviving Real Estate Requires Collective Action”

By JLP | June 25, 2012

Read this over the weekend:

Reviving Real Estate Requires Collective Action

What does he mean by “collective action”? Well, here’s one idea, which I find scary:

ROBERT C. HOCKETT, a Cornell University law professor, has outlined another approach, which uses the principle of eminent domain, to solve this collective action problem. Eminent domain has been part of Western legal tradition for centuries. The principle allows governments to seize property, with fair compensation to owners, when a case can be made that such seizure serves the public interest.

Traditionally, we think of eminent domain law as applying to land and buildings. For example, a government can use eminent domain to seize real estate along a proposed new highway route so the highway can be built in a nice straight line. It would be absurd to expect the government to bargain with each property owner to buy a strip of land along the proposed highway route and to have to redirect the highway around a farm whose owner refused to sell. That is common sense.

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. This is common sense too. The true fair market value for these mortgages is arguably far below their face value, given the likelihood of default, with its attendant costs.

Professor Hockett argues that a government, whether federal, state or local, can start doing just this right now, using large databases of information about mortgage pools and homeowner credit scores. After a market analysis, it seizes the mortgages. Then it can pay them off at fair value, or a little over that, with money from new investors, issuing new mortgages with smaller balances to the homeowners. Taxpayers are not involved, and no government deficit is incurred. Since homeowners are no longer underwater and have good credit, they are unlikely to default, so the new investors can expect to be repaid.

The original mortgage holders, the investors in the new mortgages, the homeowners and the nation as a whole will generally be better off. There will surely be some who may not agree, like the holdout farmer opposing the highway, but eminent domain ought to be able to push ahead anyway.

So if eminent domain can move from land and buildings to mortgages, where else could it move to? I don’t know about you guys but this scares me.

But, beyond that, how would such a strategy work? Seems like a confusing mess once you consider the fact that we don’t know who owns the mortgages in the first place. And, who are these new investors going to be?

I have said it many times but we should have just let the people’s homes go into foreclosure and let the market it work it out instead of all these “fixes” to try to get people to stay in homes they can’t afford. Let’s get these people out of their homes, let the prices fall to a point where people will buy them again and start over that way. Of course, my way won’t get any votes for politicians.

Topics: Credit Crisis, Housing Market, Mortgages | 4 Comments »


4 Responses to “Robert Shiller: “Reviving Real Estate Requires Collective Action””

  1. Mark Says:
    June 25th, 2012 at 11:52 am

    Hockett’s comments are absurd. The only reason he can say that taxpayers are not involved and no deficit is incurred is because he is proposing to steal from the current owners of the investments.

    One of the great strengths of the US capitalist system is confidence in ownership. If any investment could be confiscated by the government at any time, we would be living in a completely different environment in which every decision would be based on short-term profit.

    The fair value of any investment is determined by the market. If the government wants to take the mortgages, they should go out into the market and buy them. If they then feel like forgiving the debtors, then they should do so. But it is ridiculous to suggest that somehow this government policy should be paid for by robbing the current owners of the investments.

    I suggest that the government should also go into all exisitng pharmacies in the nation and confiscate all “expensive” drugs. Pay the pharmacies a fair price for the drugs and then sell them to more cooperative merchants who will sell them to ehe public at a “fair” price.

    The true fair market value for these drugs is arguably far below their face value, given the exhorbitant profits of the drugmakers.

    After all, haven’t ideas like this have made South American economies such as Venezuela and Argentina into economic powerhouses?

    My version of the article is below:

    ROBERT C. HOCKETT, a Cornell University law professor, has outlined another approach, which uses the principle of eminent domain, to solve this collective action problem. Eminent domain has been part of Western legal tradition for centuries. The principle allows governments to seize property, with fair compensation to owners, when a case can be made that such seizure serves the public interest.

    Traditionally, we think of eminent domain law as applying to land and buildings. For example, a government can use eminent domain to seize real estate along a proposed new highway route so the highway can be built in a nice straight line. It would be absurd to expect the government to bargain with each property owner to buy a strip of land along the proposed highway route and to have to redirect the highway around a farm whose owner refused to sell. That is common sense.

    But eminent domain law needn’t be restricted to real estate. It could be applied to prescription drugs as well. Governments could seize overpriced drugs, paying pharmacies fair market value for them. This is common sense too. The true fair market value for these drugs is arguably far below their face value, given the likelihood of diseases not being cured.

    Professor Hockett argues that a government, whether federal, state or local, can start doing just this right now, using large databases of information about drug costs and drug success rates. After a market analysis, it seizes the drugs. Then it can pay for them at fair value, or a little over that, with money from new pharmacies, which will sell the drugs to consumers at lower prices. Taxpayers are not involved, and no government deficit is incurred. Since consumers are still ill, they are unlikely to stop buying drugs, so the new pharmacies can expect to be profitable.

    The original pharmacies, the new pharmacies, consumers and the nation as a whole will generally be better off. There will surely be some who may not agree, like the holdout farmer opposing the highway, but eminent domain ought to be able to push ahead anyway.

  2. Sam Says:
    June 27th, 2012 at 4:49 pm

    The housing market will revive when prices are where a significant number of people can afford to buy.

  3. Valkyrie Frost Says:
    July 3rd, 2012 at 11:25 am

    It’s so scary I do not want to comment.

    Really, I had 5 paragraphs I just killed because this “idea” is REALLY BAD!

  4. JLP Says:
    July 3rd, 2012 at 11:28 am

    Valkyrie,

    Agreed! It’s scary to think about because where would it end? What door would it potentially open? We must respect property rights.

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