A controversial proposal has been reintroduced that would allow local government officials to use the authority of eminent domain to condemn residences with distressed mortgages. Acceptance of the proposal would generate a voluntary agreement between servicers and banks to reduce the principal owed on underwater loans. However, the recently resurrected idea has the potential to “forcibly seize the loans and restructure them at a lower price,” resulting in a breach of previously agreed upon contracts.
Efforts to implement such a proposal were recently met with harsh opposition by several Wall Street trade associations. The Securities Industry and Financial Markets Association and the Association of Mortgage Investors, as well as investors in mortgage-backed securities, are all opposed to the idea of reinstating eminent domain.
Mortgage Resolution Partners (MRP), in association with five California towns, has seemingly revitalized the idea. According to Reuters, should the proposition pass, MRP would be permitted to negotiate “a sharp reduction in the dollar value of distressed loans that are held in securities administered by banks and mortgage service firms.” MRP has gained the cooperation of the following cities in California:
- El Monte
- La Puente
- San Joaquin
- Orange Cove
According to proponents of the idea, eminent domain provides municipalities an opportunity to help homeowners who are struggling to pay their mortgage. Threatening individuals with this concept may give local governments, previously victimized by the housing crisis, an opportunity to help cash-deprived homeowners struggling to pay their mortgage.
Opposition insists that forcibly condemning home loans and rewriting them is in direct violation of contractual agreements that were previously agreed upon between financial institutions and borrowers. According to Chris Katopis, executive director of the Association of Mortgage Investors, “this type of government interaction is only going to harm the housing market.”
While the housing sector is in the early stages of recovery, the revival of eminent domain as a means of restructuring distressed mortgages could serve as a valuable tool. “It’s not a panacea to deal with the broad issue of foreclosure, but it is another tool that could be potentially effective,” said Bill Lindsay, the manager for Richmond, California.
However, not everyone feels that by forcibly seizing control of assets will assist in the economic situation we are currently in. Regardless, there are still an estimated 10.4 million U.S. homeowners who are underwater on their mortgages and something needs to be done.