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Some Local Governments Looking to Eminent Domain to Solve Mortgage Crises

August 17, 2012

Municipalities across the country have seized on a novel approach to help resolve the current underwater mortgage crisis: using their power of eminent domain to seize mortgage loans from private investors through condemnation. 

For example, San Bernadino County, Calif., is considering using private capital to take current and underwater mortgages for air market value, write down the principal and then refinance them into a Federal Housing Administration loan. The well-established power of eminent domain has traditionally been applied more narrowly to claim property for new roads or facilities that have a public purpose and owners are provided with just compensation.

NAR has strong concerns regarding the viability of this approach.

The idea has also drawn the ire of the Federal Housing Finance Authority, the regulator of government mortgage giants Fannie Mae and Freddie Mac, which has threatened to stop local governments from seizing underwater homes through eminent domain.

Opponents of this approach have argued that seizing mortgages may make matters worse, because investors will not want any part of the mortgage bonds, unless there is a higher pay out. This means a higher cost of lending, if lenders even wish to originate mortgages in communities that are authorized to take them away.  In addition, only mortgages with up-to-date payments will initially be considered for purchase, thereby doing nothing for the most troubled households. 

A final concern is that credit will be less forthcoming in future in the areas where the plan is implemented, thereby further harming property values.

NAR is currently studying the issue, monitoring the public proceedings in San Bernardino County and are working closely with our California state and local associations to express our perspectives in this area.