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October 31, 2014

Cities Weigh Eminent Domain for Underwater Mortgages

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Cities Weigh Eminent Domain for Underwater Mortgages

Several local governments across the country are considering using the power of eminent domain to seize underwater mortgages — a controversial move that has been drawing widespread criticism in recent weeks. 

While the governments are considering various ways how to use eminent domain, the basic approach seems to be that the local government would seek court approval to pay a “fair market” value to a lender or investor holding the home owner’s underwater mortgage. If the local government is granted approval to take control over the mortgage, it would then offer to sell the mortgage — which would then be at a smaller amount — back to the home owner. The home owner would then be able to refinance the outstanding balance by obtaining a new loan. 

However, many have criticized such a move in recent weeks. 

“In cities or counties where they pass ordinances to do this, they’re going to make credit availability extremely limited,” David Stevens, president and CEO of the Mortgage Bankers Association, told NBC News. “And that’s just going to hurt recovery of those communities much greater than families that would be helped.”

The Federal Housing Finance Authority also has recently spoken out about the use of eminent domain to seize underwater mortgages as well, and has threatened to take action to prevent it (although the FHFA has been vague on how it would prevent it). Critics are also arguing that using eminent domain to seize mortgages creates a “moral hazard,” which allows troubled home owners’ loan balances to be cut while possibly encouraging other home owners to fall behind on their payments so they can receive similar treatment. 

On the other hand, in communities like San Bernardino, Calif., outside of Los Angeles, city officials say eminent domain may be the answer to help their home owners get above water again. The city faces a high unemployment rate, fallen home values, and a foreclosure rate among the nation’s highest, and it has recently filed for municipal bankruptcy. 

“Our issue is not the individual home owner,” Gregory Devereaux, administrator for San Bernardino County, told NBC News. “Our issue is our economy. And what is the moral rightness of keeping these people underwater and keeping our unemployment rate high because we can’t get the housing market going again?”

Source: “Governments Mull Radical Solution to Underwater Mortgages: Seize Them,” NBC News (Aug. 16, 2012)