News
Local governments consider seizing mortgages
Some local officials in California are considering a novel but controversial way to fix troubled mortgages: Condemn them. The governments would use their power of eminent domain to seize mortgages from private investors and then refinance them for the homeowners at lower rates, according to The Wall Street Journal.
The governments — San Bernardino County and two of its largest cities, Ontario and Fontana — have formed a local agency to consider the plan. Mortgage investors think it’s a terrible idea, saying it would drive up borrowing costs and further depress property values. But officials in the working-class region east of Los Angeles, one of the epicenters of the housing crisis, say using eminent domain is appropriate because the housing bust is a public blight.
That message was driven home last week when another city in the region, San Bernardino, announced it would file for bankruptcy. The city of about 210,000 people, the second largest city in the nation to approve bankruptcy, was battered by financial headwinds, including plummeting tax revenues due to the housing bust.
Governments use eminent domain to acquire private property for public use, typically to clear the way for infrastructure projects like highways or sewers. Owners of the property are compensated at “fair value,” usually determined by a court.
The California governments want to use that authority differently, as a way to keep homeowners with large mortgage payments from sinking into foreclosure. The governments would condemn certain mortgages and their private partner, San Francisco-based Mortgage Resolution Partners, would find private investors to pay “fair value” for the mortgages. The company would receive a fee for its services.
Right now, the governments are just exploring the idea, which would certainly face legal challenges. But officials say they must do something. “We just have too much pain and misery in this county to call off a public discussion like this,” David Wert, a county spokesman, told The Associated Press.
Eminent Domain has a very
Eminent Domain has a very narrow “public use” standard to meet. I’ll be the first to admit that these local officials in California are well-intentioned in their attempts to fix troubled mortgages to avoid possible bankruptcy, but this is clearly outside the bounds of what this powerful use of government authority was intended. As unfortunate as plummeting tax revenues due to the housing bust are on local revenues, eminent domain was never intended as a way to keep homeowners with large mortgage payments from sinking into foreclosure. This is a true abuse of both the letter and the spirit of eminent domain.
Brian, I agree that Eminent
Brian, I agree that Eminent Domain was not intended to be used in this manner, but when a large jurisdiction in the northeastern US used it to condemn properties that were a blight and then sold them to a developer to bring in new occupancies, the US Supreme Court agreed that they could do so. I considered that a bad day for the average American.
If I recall correctly, the results of that action have failed to produce anything beneficial to anyone. Those whose properties were condemned were uprooted and left without a place to go. The developer who was supposed to execute the neighborhood renewal has failed to do so, and thus, that jurisdiction is now REALLY stuck as they have these properties without any revenue from taxes because they have been abandoned – by force!
There is a very serious
There is a very serious interventionist notion being pursued very hastily the last few years. Lots of governments are jumping in with both feet. Are we really thinking through the long term ramifications of getting involved in every problem? (The answer is no I’m afraid.) Good intentions can lead to disastrous consequences. I sure hope we aren’t setting ourselves up for more and worse problems in the future.
The role of government is the
The role of government is the safety and welfare of its citizens. If this is a misuse of the intent of Eminent Domain, then its a noble misuse. Investors are going to the investment anyway. Why not find a way to keep people in their homes.
The best way would be to form
The best way would be to form an agency to buy up part of the First Mortgage paper so that the remaining part held by the bank would be a viable and current payment asset, able to be sold into the marketplace. The Agency would receive deferred interest, accumulating, but not required to be paid currently over a fixed period — say five years. It would be in a second position to to the First Mortgage.
At the end of the five year period, if the financial condition of the borrower and the housing market had improved, a refinance would take place and part or all of the second position be paid down. Upon a sale, the bank would be paid first, the Agency, second, the residual to the Mortgagor. If the Agency’s position could not be liquidated on sale, the purchaser would be required to carry the remainder of that piece..
Because the original owner now meets the finance ratios in the marketplace — no more than 28% of his income devoted to PITI — he would be automatically re-liquified and could buy goods and services in the marketplace, the very thing he is now avoiding and one of the major causes of the recession.
We will have no new prosperity until the consumer has confidence in his position.
As a suburban dweller on the
As a suburban dweller on the edge of one of these metroplexes, I like the idea. My property would not be affected so I would have the better property by comparison. It would also keep the riff raff in the city.
Great idea bring back the
Great idea bring back the secondary market
This might be the motivator
This might be the motivator to get banks to do what is “right” instead of just foreclosing. Something needs to be done, and they are not acting on their own to help the situation. Too often, they are allowing the properties that they foreclose on to fall into total disrepair. This could be a great tool to force the issue.
I don’t think this is a good
I don’t think this is a good idea at all. Government should be concerned about delivering services to the people. Leave personal finance to the private industry and government to serving the people.
Government has enough problems with Section 8 and public housing. Why would agencies want to mess with one more area that can cause the public harm?