Can Eminent Domain Solve the Housing Crisis?

One mortgage firm, in conjunction with many prominent financiers from the West Coast, has come up with a new idea for helping to solve the housing crisis. They are trying hard to get politicians in California, as well as other states, to use eminent domain for restructuring underwater mortgages.

Declaring eminent domain on homes with upside down loans would take the mortgages out of the hands of bondholders and private lenders, and place them in the hands of the states. This would give the states the power to condemn the mortgages altogether. Mortgage Resolution Partners, a firm located in San Francisco, believes that this would help to solve the US housing crisis on a large enough scale to actually make a difference.

Eminent domain gives local governments the power to take over a property with the use of a court order. Its purpose is to take over the property only when its for the good of the public. Generally, its been used to use the land for highways, bridges, even to clear up slum areas. In these cases, eminent domain took the power away from the property owners and gave it to the local government. But, in the case of the firm’s proposal, it would also take the mortgages from the lenders, something that’s never been done before.

How the Plan Works

Under the terms of the proposal, Mortgage Resolution Partners would take on the task of finding investors that would assist with financing. The goal would be to get the to invest tens of billions of dollars to fund the project. This would help to acquire millions of US mortgages currently owned my distressed homeowners. The title would become the property of the local government, who would pay the mortgage holder the current fair market value from the investor funds.

Then, the loans would be restructured by the firm so that homeowners could get reduced, more affordable monthly payments on their mortgages. The newly restructured loans would be sold to institutional investors, pension funds and hedge funds in order to pay back the investments made by the financiers. Once the process is complete, Mortgage Resolution Partners would get a negotiated fee for each underwater loan they successfully condemn and restructure.

The proposed plan is an alternative to another plan that’s been helping the problem of abandoned homes in communities hard hit by foreclosures. With that plan, investors are raising money in order to purchase single-family homes that have become foreclosures, then renting them out. Once the local housing prices get back to normal, they will be sold in order to pay the investors back. However, this unprecedented plan proposed by Mortgage Resolution Partners could actually be a way to help homeowners avoid foreclosure altogether and keep their homes.

It Just May Work

Currently, San Bernardino County, California and other municipalities in that local area seem to be about ready to get started with the plan. In the meantime, the firm has been actively discussing the plan with other California politicians in another county, as well as some in the states of Florida and Nevada.

The chairman of Mortgage Resolution Partners, Steven Gluckstern, says that the US and state governments have been trying to solve the housing crisis all this time. Nothing they’ve done has worked. So, this is a good way to help by allowing the risks to fall in the hands of the private sector.

Even though the idea of states using eminent domain to acquire mortgage loans has never been tested, the lawyers for the firm are optimistic. They believe that any legal challenges brought on by the banks and bondholders could be withstood by the strategic plan. They really don’t believe there would be much opposition from them, though. The current market prices are causing millions of homeowners to be underwater anyway. This is a way for them to recoup some of the money owed, versus foreclosing on them and getting nothing. This will also help them to liquidate large amounts of distressed homes at one time.

Today, in the US, the underwater mortgage crisis is possibly one of the biggest impacts of the country’s financial crisis. CoreLogic recently estimated that about 22 percent of all of the homeowners in the US now owe more on their homes than what they are worth. In San Bernardino County alone, officials say that there are about 100,000 homeowners with underwater mortgages.

Many are concerned about the fact that Mortgage Resolution Partners hasn’t been open about their role in the eminent domain proposal. But, they say that they haven’t spoken publicly about their role simply because no government has decided to work them yet. Even so, the real estate communities don’t lack the “lack of openness” related to the issue. According to Inland Valleys Association of Realtors’ director of government affairs, Paul Herrera, there have been four public meeting held on the subject within two months. Not once has the firm’s name ever been brought up.

Kiesha Joseph

Kiesha Joseph is a content marketing geek with a true love for the world of real estate. She believes that real estate is not just an industry. It's an art that deserves to be treated as such. It's a complex world that includes many aspects, all of which have a story that needs to be told.

This Post Has 5 Comments

  1. If you get to thinking about it a little more, think about what could happen if the states use the eminent domain laws to obtain ownership of the mortgages owned by banks and private lenders, while the federal government own all the rest of the mortgages through Fannie Mae or Freddie Mac.  Then think about all the corrupt politicians we have in power already, dictating the laws and use of land in the U.S.

  2. To me, it sounds like the states are going to try to force the banks and private lenders to modify the mortgage loans for homeowners with underwater mortgages.  The federal programs for these homeowners didn’t work out too well because the majority of lenders refused to work with the homeowners.  The real primary con to this approach is that the same states that have the highest problem with underwater mortgages have recently passed laws that limit the use of the government’s powers of eminent domain authority.  They will have to convince everyone that the government isn’t trying to illegally gain the ownership of the property, since owning the mortgages will legally give the states the right to do whatever they want with the homes. Although the intention is good for now, it could become a real nightmare later if the power was abused.

    1. PennyV, that makes a lot of sense. It seems like every time what seems to be a good idea comes along, we have to pay close attention to what the end results could be. When I first read about this, it really sounded like a good way to help homeowners in crisis. But, as I kept digging into it, it really started to scare me. I’m with you. The idea of government entities being the mortgage holders could have some serious consequences later on.

  3. what a lousy idea. let the prices fall, so real investors can invest and others can buy houses. Make it more difficult for people to get out of their mortgages.  Why involve the taxpayers? Let the banks deal with it, they lent to people who couldn’t get approved for a $50 line of credit at Best Buy. Also this ‘article’ reads like an advertisement.

    1.  I apologize if the article reads like an advertisement. I am in NO way endorsing this policy, any company or anything else. I am just reporting on one of the new ideas that’s come to the table.

      If you read the article, you will see that I include one of the main cons of the program… the fact that the company is being very secretive about their involvement. For the record, I’m not even sure how I, myself, feel about the idea. I’m neither for it or against it at this point. I believe more research and information is needed for me to form an opinion.

      Thanks, by the way, for your comment. Your opinion is very controversial. I love it! I hope it sparks some debate here on this post. Keep ‘um coming!

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