Eminent domain is always a touchy topic to bring up. Usually, the utilization of eminent domain is met by fierce protest from those who stand to have their homes razed for a new airport, railway or other project deemed a “public use.” In Stockton, eminent domain was used to clear a path for the crosstown freeway, displacing many.
But what if eminent domain could be used to protect the little guy? Instead of kicking people out of their homes, what if a city used eminent domain to help homeowners stay put? That is the exact concept being discussed in several cities stricken by the housing crisis: Using the power of eminent domain to stop the deluge of foreclosures. With Stockton leading the nation in foreclosures, city officials would be wise to at least take a look at this option.
A novel— if not controversial– idea to help mitigate the effects of the housing bubble is being floated by San Francisco-based Mortgage Resolution Partners (MRP), and some municipalities, including San Bernardino (our bankruptcy buddy) and Chicago, are listening. The idea is simple: Use eminent domain to acquire the mortgages of homes that are underwater, pay the mortgage holder the “fair market value” of the property, and allow occupants to remain in their homes by refinancing at a much lower rate. Moreover, money saved through refinancing would then be freed up to purchase goods and services, providing a boost to the local economy.
While the idea is simple, the specifics are rather complex. First, what city can afford to acquire houses at a high enough rate to make this policy effective? Certainly not Stockton, where we can’t even pay for graffiti to be removed. That is where MRP comes in. Working with the municipalities, MRP claims they will be able to find institutional investors to finance the condemnation process. This would remove the need to use taxpayer dollars while also moving any risk associated with the process to investors, not the city.
Of course, there are several questions being asked of this nascent concept. Is it legal? Many say yes, as eminent domain law allows for the acquisition of property that is for “public use.” By acquiring distressed properties, the city is working to help homeowners stay in their homes, which in turn would reduce vacant properties, keeping blight to a minimum. Sounds like a good public use to me. There is also some precedent, with the case of Kelo vs. New London, where the Supreme Court found that the under the “takings clause,” cities are allowed to take land for the purpose of rejuvenation through economic development.
There is also an ethical argument to be made, as some view the plan as a bailout of irresponsible home buyers at the expense of the trusts and banks that hold the mortgages. Whether or not this is true is essentially a matter of one’s personal opinion, and I personally don’t feel bad for the creditors who stand to lose from this new policy as they created the housing bubble through predatory lending practices in the first place. Furthermore, the plan being discussed would target only homeowners who have been making regular payments, so those who have started skipping payments can be excluded (i.e., people who decide to simply walk away from a property).
Not surprisingly, those not in favor of this policy are those who stand to lose money: banks and trusts that hold the mortgages on underwater properties. However, the downside for these creditors does not appear as bleak as they make it out to be, as the likelihood that they will get those mortgages paid in full is low anyways. Besides, if a bank is willing to do a short sale– selling the house for less than what is owed– how is this much different? At least the mortgage holders will be compensated, versus going through a costly foreclosure process leading to vacant houses bringing in no revenue.
Nevertheless, this potential new interpretation of eminent domain has proven to be quite divisive. So controversial is this topic that Lieutenant Governor Gavin Newsom had to release a statement asking the Securities Industry and Financial Markets Association to cease making threats against San Bernardino officials for even considering this strategy.
The federal government has floundered for years trying to figure out a good response to the foreclosure crisis, and it does not appear that any federal help is coming any time soon (I previously wrote about legislation that could have helped underwater homeowners– the right to rent program— that sadly never gained traction). With that in mind, innovative approaches to stop the deluge of foreclosures are sorely needed. The use of eminent domain surely qualifies as innovative, and deserves full consideration.