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Eminent Domain Expected to Help Struggling Homeowners

Published on Thursday - August 08, 2013

Distressed homeowners across the United Stats are concerned about a proposition entertaining the idea of eminent domain. The government has suggested using its power to buy underwater mortgages and reduce homeowner debt by refinancing each individual loan. Despite growing controversy, however, a city in California intends to be the first to implement the once feared practice. Richmond, California intends to be the first city to use eminent domain as a means to help distressed homeowners maintain their property.

While Richmond is the first to take action, several cities have taken the prospect of eminent domain into consideration. In fact, approximately two-dozen local and state governments – including Newark, N.J., Seattle, and several other cities in California have considered the possibility.

However, opposing arguments have prevented other cities from implementing this particular technique. Lawmakers, banks, and members of the real estate industry — including the National Association of Realtors (NAR) — have argued against using eminent domain in such a way, referring to it as unconstitutional and unprecedented.

“The banks have warned that such a move will bring down a hail of lawsuits and all but halt mortgage lending in any city with the temerity to try it,” The New York Times reports.

Nearly half of all Richmond homeowners are currently stuck with underwater mortgages. Therefore, it is imperative that action is taken as soon as possible. However, funding from the government has ceased. Void of anything that resembles aid, the city of Richmond has decided to take the matter into their hands. The Mayor is tired of waiting for foreclosure aid from the federal government that may never come.

“We’re not willing to back down on this,” says Richmond Mayor Gayle McLaughlin. “They can put forward as much pressure as they would like, but I’m very committed to this program, and I’m very committed to the well-being of our neighborhoods.”

Through the power of eminent domain, city officials intend purchase current and delinquent loans from struggling homeowners for fair market value. The New York Times provides us with the following example:

“In a hypothetical example, a home mortgaged for $400,000 is now worth $200,000. The city plans to buy the loan for $160,000, or about 80 percent of the value of the home, a discount that factors in the risk of default. Then, the city would write down the debt to $190,000 and allow the home owner to refinance at the new amount, probably through a government program.” The $30,000 difference would be distributed among the city and investors who put up money for the loan, as well as go toward closing costs. “The home owner would go from owing twice what the home is worth to having $10,000 in equity.”

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