Eminent domain for foreclosed houses

This idea’s been floating around for a while. Banks don’t like it, of course, and neither do investors. Apparently the only people who like it are the homeowners!

Major cities and some wealthy suburbs may have seen a recovery in the housing market, but between the coasts and in smaller towns nationwide, the flood of underwater homeowners continues.

Take Richmond, Calif., for example, where a staggering 46 percent of homes remain “underwater,” meaning borrowers owe more on the mortgage than the house is worth. These communities have needed a solution for years to prevent successive foreclosure waves and save their neighborhoods from a spiral of blight. And maybe they’ve hit on something.

The answer? Eminent domain.

“The banks aren’t helping us, so we’re stepping into the void and making it happen ourselves,” said Richmond mayor Gayle McLaughlin.

McLaughlin became the first U.S. mayor to take steps to use eminent domain authority — seizing mortgages from the lien holder and selling them back to the homeowner at an affordable rate, giving them the principal reduction that will allow them to stay in their home over the long term.

Other cities have flirted with the controversial strategy, which uses capital funding from a for-profit private investment firm called Mortgage Resolution Partners, but Richmond has actually made purchase offers on 624 loans. The servicers had until yesterday, August 13, to agree to the heavily discounted price, which MRP and Richmond determined through a third-party appraiser. No one has agreed to the terms, and so Mayor McLaughlin will go back to the City Council to get approval to begin the eminent domain process. Other cities are watching, seeing if this can be a national model.

But the mortgage industry has decided to make an example of Richmond, prolonging the fight and preventing relief for borrowers. Investor groups representing the nation’s largest holders of mortgage-backed securities, including government-sponsored entities Fannie Mae and Freddie Mac, filed a federal lawsuit last week against Richmond, arguing that the eminent domain scheme is unconstitutional.

Eminent domain seizures of private property must have a public purpose and must offer just compensation to the property owners. The investors allege in their suit that preventing foreclosures is not a valid public purpose, and they say that the compensation they’re being offered is not just.

“Just.” That’s such a relative term, isn’t it? You might argue that people who bought high-risk, high-yield derivatives might as well have thrown that money on the roulette tables in Atlantic City. You might also argue that anyone who bought such high-yield investments should have smelled a rat — but they were too intoxicated by the smell of all that easy money. Oh well!