Eminent domain an imminent solution to foreclosure crisis? Reply

Last month, Judge Michael Posner upheld Springfield’s foreclosure ordinances after several banks sued the city.  The ordinances require that banks engage in mediation with homeowners in danger of foreclosure, require that banks maintain vacant properties, and require that the banks put up a $10,000 bond to ensure the maintenance of those vacated properties.

The City of Homes isn’t the only city that has passed ordinances regarding foreclosed properties, nor is it the first.    Boston, New Haven, Las Vegas, Chicago, Oakland are just a few cities across the country that have passed similar ordinances.

While cities have adopted ordinances to address the large number of foreclosures seen in recent years as a result of the financial crisis, San Bernardino County in California is exploring the use of eminent domain.  Eminent domain is when government takes property for public good with just compensation.

The idea is for governments to use eminent domain to take ownership of underwater mortgages so that homeowners can refinance for a much lower monthly payment.  Private funds would be used to purchase the loans, according to news reports.

Under the proposal,  only mortgages where the homeowner is current on their mortgage, but owe more than what the property is worth would be purchased under eminent domain.   The loan also must have been sold to a private investor.  Mortgages backed from Fannie Mae and Freddie Mac would be excluded from the program.   According to Bloomberg.com, private mortgage securities fund less than 1% of new loans, which is down from more than 1/3 prior to the mortgage collapse in 2007.

Those in the financial services industry said that the using eminent domain could hurt the real estate market as investors would be less confident in areas that utilize eminent domain.  They say that it could also make borrowing more expensive as banks raise interest rates in those areas—something banks are already doing in Springfield as a result of its foreclosure ordinances.

Others in the financial industry have contended that the use of eminent domain could be unconstitutional.  According to the LA Times, several bankers organizations sent a letter to the county stating that the use of eminent domain would, “also be immensely destructive to U.S. mortgage markets by undermining the sanctity of the contractual relationship between a borrower and creditor, and similarly undermining existing securitization transactions.”

According to Banker and Tradesman, Massachusetts Attorney General Martha Coakley said that she is open to the proposal, but hasn’t examined it thoroughly.  A poll in the same publication did not indicate much favorability for the proposal with 80% voting against it.

San Bernardino is still exploring the proposal and started a new agency, the Homeownership Protection Program Joint Powers Authority, charged with the task of exploring the eminent domain proposal and other solutions.

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