Archives for June 2012

Will American Liberals Ever Wake Up?

From American Thinker:

America is in the throes of a presidential campaign that presents real hope for the future of America (Romney) versus the same-old, same-old (Obama).  While it appears right now that Obama and his socialist policies will lose in November, America will still be faced with many problems that have crept into society in the past fifty years.

While America has many liberal-caused problems, let’s examine just three of them: welfare, race relations, and education.

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Foie gras, junk cars, tattoos prompt Calif laws

From the Sacramento Bee:

SACRAMENTO, Calif. — Car buyers, ducks and geese, and those in search of tattoos or body piercing all get increased protections under new laws that take effect July 1.

Most bills passed by the Legislature and signed by the governor take effect on Jan. 1 each year. But all or part of about two-dozen other laws are taking effect at midyear, including measures to discourage bullies and encourage low-income seniors to eat healthier.

California’s nation-leading ban on the culinary delicacy foie gras has received the most attention. The product is created by force-feeding ducks or geese through funnel-like tubes until their livers grow to more than 10 times their normal size. State lawmakers voted to outlaw the practice known as gavage when they passed SB1520 in 2004. But they gave producers a seven-year window until July 1, when it will no longer be legal to produce or sell foie gras – French for “fatty liver” – in California.

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DOJ won’t prosecute Holder

From The Hill:

The Justice Department announced on Friday that it will not prosecute Attorney General Eric Holder for contempt of Congress.

Holder heads the department. Deputy Attorney General James Cole said in a letter to House Speaker John Boehner (R-Ohio) that Holder’s response to a congressional subpoena “does not constitute a crime” and that the department will not convene a grand jury.

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Long-term prognosis for Calif. state parks murky

From The Contra Costa Times:

SAN FRANCISCO — While California found ways to keep open most of the state parks earmarked for closure due to budget cuts, the long-term future of its 279-park system remains murky as most of the solutions are short-term fixes.

With a busy Fourth of July week looming, California parks officials announced Thursday most of the 70 state parks once slated to close Sunday would remain open.

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Photo courtesy of prayitno, flickr

Rep. McKeon Warns of Sequestration’s Dire Consequences for Military

From The Foundry:

Regardless of who wins the November presidential election, current law dictates that massive cuts in defense spending will take affect on Jan. 2, 2013. It’s a policy known as sequestration, and it will take $492 billion out of the defense budget.

Speaking at Heritage’s Bloggers Briefing this week, House Armed Services Chairman Buck McKeon (R-CA) said the consequences of those cuts would be catastrophic.

“I don’t think people understand the seriousness of it,” McKeon said. “The Pentagon will be just paralyzed.”

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Still a BFD, Obama Loses

From American Thinker:

The Supreme Court decision on the American Care Act is a loss for Barack Obama, despite how the president and his minions in the mainstream media will attempt to portray it. They will insist on selling this as a win for Obama.

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Big Government to the Rescue

Unions and the Voters

County, City Mortgage Grabs Could Spark New Housing Crisis in CA

In San Bernardino, the county has approved using eminent domain to seize bank-owned pools of “underwater mortgages” to get the county out of its over-indebted housing stagnation. The city of San Bernardino has the second highest poverty rate in the United States, after Detroit.

The cities of Fontana and Ontario have also approved joining the program.  The city of Hesperia, however, rejected the idea.  But such a bailout of underwater mortgages is likely to result in a number of foreseeable negative unintended consequences.

What happens if the county buys up underwater mortgages, but home values plunge again due to a double-dip recession triggered by an economic disaster, perhaps the European debt crisis? Economist Gary Schilling, who has called every recession correctly since the 1970s, is forecasting another 20 percent drop in national housing prices in 2012.

But this isn’t deterring those like John Husing, the chief economist for the Inland Empire Economic Partnership in San Bernardino, from promoting the notion of using eminent domain to acquire underwater mortgages and re-sell them to hedge funds.

Use of eminent domain to force loan write downs is the apparent brain child of Cornell University Professor of Law Robert C. Hockett in his June 2012 paper, “It Takes a Village: Municipal Condemnation Proceedings and Public/Private Partnerships for Mortgage Loan Modification, Preservation and Local Economic Recovery”. defines an underwater mortgage as “a home purchase loan with a high balance owed than the free market value of the home” on the open market. Homeowners with underwater mortgages typically cannot resell their homes unless they can come up with the cash to pay the loss off.

The median single-family home price in San Bernardino County is $158,500, as of May 2012.  The median home price in San Bernardino-Riverside Counties as of 2007 was $343,250. This reflects a 53.8 percent decline in value from the peak of the Housing Bubble.

Steven Gluckstern of Mortgage Resolution Partners, a private hedge fund proposing to batch the mortgages and re-sell them at a discount, says that roughly $1 billion would need to be financed to initiate eminent domain proceedings on 5,000 underwater mortgages.  The homes themselves would not be condemned.  That would reflect roughly $200,000 per home in loan write down needed.

Consider a home with, say, $315,000 loan balance as of 2012 — 50 percent its original value. In that case, a 60 to 70 percent loan discount would be indicated to provide a third-party investor a 10 to 20 percent profit. But this would result in a sale at less than the median home value of $158,500 today. It is not clear if homeowners would lose their rights to any future appreciation in their home as part of this deal.  If so, perhaps the entire property would need to be condemned as well.

A Redevelopment Agency for Over-Indebted Homes

The proposal to acquire underwater mortgages comes from Mortgage Resolution Partners, a San Francisco based group of venture capitalists. Mortgage Resolution Partners is led by CEO Graham Williams, who created Bank of America’s “award winning” Neighborhood Advantage low-income housing initiative.  Bank of America’s Neighborhood Advantage Program was essentially a “zero down” sub-prime loan program.

Reportedly, 150,000 homeowners have underwater mortgages in San Bernardino County.  About 20 percent of those mortgages — or 30,000 loans — are held in private mortgage-backed securities that could be acquired by eminent domain.  The eminent domain process would be funded privately. The re-selling of mortgages to hedge funds would be handled by private venture capitalists for a profit. But the county would hold the mortgages in a public/private joint powers agency.  Call it a “redevelopment agency for over-indebted homes.”

Eminent domain legal expert Gideon Kanner believes that eminent domain law is so broad in California that it could be stretched to allow the acquisition of underwater mortgages and still meet the legally required “public benefit” test.

Technically speaking, however, it is likely that a city could only legally condemn that portion of a mortgage that was “underwater” and not the whole loan. It would be unlikely that a “public benefit” could be justified for taking the portion of the loan that is not “underwater.”  This would be what is called a “partial taking” or “fractional interest taking.”  How that could be determined on 5,000 to 30,000 mortgages could be a logistic nightmare.

A ‘Lousy Idea’

But Kanner stated on his blog that this is a “lousy idea for a number of policy reasons”:

First, the county as condemnor would have to come up with the money to acquire the mortgages by a public-private partnership that would issue some sort of mortgage revenue bond.  Public-private partnership is a code word for what used to be called “redevelopment” in California until Gov. Jerry Brown and the state Legislature shut down redevelopment agencies in 2011.

Second, the standard for “just compensation” in eminent domain is Fair Market Value.  But banks and private mortgage lenders hold mortgages on their books for their higher “book value.”  The open market value of the homes serving as collateral for an underwater mortgage would be lower than the “book value” of the loans.

But you can’t use eminent domain law to acquire a home, or a mortgage, “on the cheap” at less than the balance owed on the loan.  The concept of just compensation is to “make the property owner whole.”  So eminent domain probably can only be used to force banks to sell their loans at full book value, not at a discounted value.

Nonetheless, mortgage loans would have to be sold at a discount in order for private investors to make a profit.  Thus, the county would have to be willing to buy loans at their face value and sell them for much less. The spread is called a discount, which reflects the margin of profit to the seller of the loans.

Steve Body, a commercial real estate appraiser and securities trader in Eagle Rock, California, stated that the expected discount on underwater mortgages would probably not be as low as the typical 10 to 12 percent in bankruptcy court.  He said it would also not be as high as 50 percent found in highly distressed assets.  That is because most homeowners with underwater mortgages are making their loan payments.  He believed a discount in the 20 to 40 percent range would be typical.  But Body stated that, paradoxically, if a public entity buys and guarantees payment on the loans, there would be less risk and thus less of a discount or profit for investors.

Both Body and Kanner mentioned that there would be another big impediment for banks selling their loans even at their full book value. Coercing banks to sell a portion of their loan portfolio might drop bank reserves to less than the minimum reserve of stress tests required by bank regulators.

Body cautioned that another impediment for banks could be what is called “fractional interest banking,” where banks loan out the same money, say, seven or eight times.  Could banks demand just compensation for the lost opportunity cost of a multiple of the book value of the loans? What bank would agree to a voluntary condemnation of their underwater mortgages and forego such profits?

Kanner warned of a repeat of the Savings and Loan Crisis of the 1980’s and early 1990s, when savings and loan banks had to sell their junk bonds at fire-sale prices by order of the federal government.  This resulted in the collapse of several savings and loan banks. 

Hazard of Non-Payments

But Kanner warns of even more “calamitous consequences.” There is hazard in reducing the loan balances on mortgages if borrowers are provided an incentive to stop making payments on their mortgages, hoping to get bailed out by the government.

And then there is the potential problem of the mass flight of property owners dumping their homes once their loans are reduced — to get out of California or take better jobs elsewhere.  Think of government-reduced mortgages as a one-way ticket out of San Bernardino.

And then there would be the prospective slippery slope problem that, if this were implemented in San Bernardino, where would it stop?  Other distressed counties would be politically pressured to reduce all the underwater mortgages in their jurisdictions, too.  A house of cards could result in the entire housing market collapsing.

And loans would likely be re-sold into a mortgage market at the same time as the federal government is dumping foreclosed homes on the market.

The proposal to use eminent domain to reduce over-indebted homes is filled with multiple unintended negative consequences.  But these consequences are foreseeable and thus potentially avoidable. Desperate cities should beware of hedge funds offering bailouts.

(Wayne Lusvardi is a contributor for CalWatchdog.)

Roberts’ historic surrender

Four decades ago Murray Rothbard wrote in his book, “For a New Liberty,” that the Supreme Court would tend to ratify the actions of the Legislative and Executive branches, rather than act as a constraint on the power of the federal government. In Rothbard’s opinion, the courts would become part of the problem of government expansion, rather than safeguard of our liberty.

The Supreme Court decision on Obamacare Thursday supports Rothbard’s warning and is a major setback for American liberty.

The Patient Protection and Affordable Care Act is bad public policy. Rather than address the problem of health care in the U.S. – that the system is based upon third party payment – it aggravates the problem. The system’s incentives are biased towards spiraling costs and the inability of lower income and elderly patients to get health care access. Rather than eliminate the government provisions that have produced these improper incentives, Obamacare sets up an eventual government takeover of health care in the US.

However, the Supreme Court is not called upon to rule on the efficacy of any piece of legislation. As Robert Bork pointed out in “The Tempting of America,” the court must decide only on whether legislation is within the bounds of the Constitution – not on whether the legislation is good policy or not. But the court’s 5-4 decision is not only an affirmation of bad public policy, but also the effective elimination of what little constraints on federal power remain.

Debating ratification of the Constitution, Alexander Hamilton argued that the insertion of a Bill of Rights might imply that the federal government had powers that were not enumerated within the document. For example, the First Amendment, which is part of the Bill of Rights, has a provision that says: “Congress shall enact no law regarding the establishment of religion, nor prohibiting the free exercise thereof.” Why would we put in such a provision if there is no provision in the Constitution that allows Congress to do such a thing? Asked Hamilton.

To make it clear that Congress did not have implied powers, the 10th amendment was adopted, which says: “The powers not delegated to the United States by the Constitution, nor prohibited by it to the States, are reserved to the States respectively, or to the people.”

This means that if you cannot find in Article 1, Section 8 of the Constitution that Congress has the power to do something then it does not have that power. As Friedrich Hayek wrote in “The Constitution of Liberty,” we would surely not grant power to others to rule over us if these powers were unlimited.

That is what makes us a free people and it is the Constitution that limits the power of the temporary majority. This is what is so threatening about the ruling Chief Justice John Roberts – and the four liberal members of the court – have agreed to. The federal government now has the power to require you to do almost anything.

If the federal government may require you to do something – and punish you for failure to do it by taxing you because it is under the taxing power of the Congress – it has effectively removed any Constitutional constraint.

This is worse than if there had been a Commerce Clause ruling.

It is bad enough that the federal government can now force you to buy the goods and services it desires. As was noted in oral arguments, the federal government can now require you to purchase broccoli. Indeed, the ruling means that the federal government can require you to purchase anything for which there is a majority in both houses and the signature of the president.

But Roberts’ ruling goes beyond that. Under its taxing authority, the federal government could require you to have only one child, as long as the punishment for having more than one child is a tax. So the next Congress can – under the U.S. Constitution – pass a law that if you have more than one child you must pay a tax of $150,000. Or the Congress could require you to be sterilized if you do not have a high school education or pay a tax of 90 percent of your income.

In a 5-4 ruling, the Supreme Court, under Chief Justice Roberts, has effectively eliminated all constraints on the power of the federal government – and therefore destroyed the Constitution of the United States. In the words of Thomas Paine: “These are the times that try men’s souls.” It is time for Americans to reassert their liberty and elect a Congress and President that believes in limited government and individual freedom.

(Dr. Gary L. Wolfram is the William E. Simon Professor in Economics and Public Policy at Hillsdale College. Originally posted on The Michigan View.)