Eminent Domain: A Foreclosure Fix From The Trenches

Roy Oppenheim’s commentary was originally published on Yahoo! Homes and is being redistributed on South Florida Law Blog with their permission.

Eminent domain, where the government can seize properties without an owner’s consent, is meant to be used for significant public benefit.

Usually when the government takes a home under eminent domain, it is expanding a road or building an airport.

Or it is using it to eradicate blight in urban areas.

But now we have a twist in which it is not the homes themselves but their mortgages that might be seized under eminent domain.

As you may have seen, a company called Mortgage Resolution Partners is suggesting that local municipalities use it to help keep people in their homes.

They are proposing that local governments use eminent domain to pry underwater mortgages away from the banks. MRP says that it would then assist these municipalities by structuring a more equitable loan, which could then be sold back to investors.

The people living in these homes would be allowed to continue to stay in their homes, under the terms of this new mortgage.

It’s a bold idea, one that’s not necessarily new, but one that’s finally getting some attention.

Officials in several counties in California are listening, including San Bernardino County, which is itself in bankruptcy.

And really, shouldn’t they be?

Whether you like this plan or not, and plenty in the real estate community do not, how can you rationally argue that preventing foreclosure isn’t the embodiment of a significant public benefit?

It is what eminent domain was made for.

Here’s the truth about the housing crisis. The solutions to fixing it are not coming from the crystal towers or Washington D.C. They are coming from the trenches, from the minds of entrepreneurs and local officials who actually have a stake in their communities and know what it’s like to go broke.

It’s that good old American spirit that will bring our economy back, and innovative solutions like this will fuel that recovery.

The federal government has tried to address the foreclosure crisis in numerous ways, with very mixed results.

Like it or not, you’re going to need private investors and their capital to really make this concept work.

Such investors can take the unusual risks few can, and if they want to take those risks in the name of the greater good, why should we tell them no?

Now Mortgage Resolution Partners might not have altruistic intentions, certainly they would not be involved if there wasn’t a profit for them to make.

But that’s not the point. They may be piranhas to some extent, but that doesn’t mean they can’t serve a useful purpose.

Can this work? Absolutely. Investors don’t want to be saddled with these underwater mortgages any more than homeowners do.

And once banks see that the threat of losing homes through eminent domain is real, banks would have to seriously consider other forms of remediation, such as short sales and loan modifications with serious principal reduction.

It is a better option than letting the banks move into your neighborhoods. When the banks foreclose, these homes usually stay off the market and end up as part of their shadow inventory.

When that happens, you get banks as your neighbors, and they have proven that they aren’t very good neighbors. Lawns don’t get mowed, garbage piles up, and homes are basically left for dead.

If I were sitting on the San Bernardino County commission, I’d be jumping at this idea. But I would go even farther.

I would suggest that eminent domain should also be used to reduce that shadow inventory.

Local governments could further condemn and then fix up some of those blighted properties.

They could then resell those houses back to a first-time homebuyer, or a family that has been renting.

If we ever expect to see a pre-2008 housing economy, drastic steps will need to be taken.

I am intrigued by the idea of eminent domain as a foreclosure fix.

I hope the commissioners in San Bernardino have the gumption to see it though, and that other local governments continue to experiment with their powers of eminent domain.

We need the let the banks know — that as a force — ‘We the People’ are still far more powerful than they are.

We just need to re-find our collective nerve.

From The Trenches,

Roy Oppenheim