By: Catherine Bourque
The economic climate, particularly that of distressed homebuyers, seems to have become stagnant. Even in the District of Colombia, which has resisted some of the financial troubles suffered in much of the country, for sale signs populate the front yards of houses around the city, and people, particularly young adults, struggle to find meaningful and long-term employment.
In an effort to help troubled homeowners, a new proposal to use the legal principle of eminent domain would allow county and city governments to seize underwater mortgages, refinance the mortgages, give some earnings back to investors, and keep homeowners in their homes. The controversial plan, originally proposed this summer by Mortgage Resolution Partners, has excited some mortgage experts and city governments, but others, such as the Federal Housing Administration (FHA), have opposed the proposal.
The new plan has caught the eyes of officials in San Bernandino County in California and some Chicago City Council members. Both of these areas were hit particularly hard by the foreclosure crisis and are currently struggling to maintain home values and keep neighborhoods from becoming rundown and blighted.
The legal principle of eminent domain is embodied in the United States Constitution. The Fifth Amendment of the Constitution allows the government to seize private property for “public use” and as long as the property holders are given “just compensation.”
In the 2005 decision of Kelo v. City of New London, the Supreme Court upheld the City of New London’s seizure of private homes to construct a new business zone, claiming it met the public use requirement because it was part of a comprehensive plan to revitalize the economically depressed town. Under this decision, it is likely that the plan to seize underwater mortgages to prevent economic blight and revitalize the neighborhood would be upheld by most courts under eminent domain.
However, as a matter of policy, it is worthwhile to consider whether the cost of having to defend likely legal challenges is outweighed by the benefits reaped from the policy. In my opinion, the potential benefits of the eminent domain plan do not outweigh the probable costs and policymakers should instead focus on alternative, long-term plans rather than considering the eminent domain proposal.
Just because it is possible that this eminent domain plan could survive a legal constitutional challenge, does not make it sound policy. While I applaud the desire to change tactics and help homeowners stay in their homes, this is neither a sustainable nor policy-smart idea.
Additionally, the plan will provide profit to investors, who will be paid back at 20-30% profit, but may only help homeowners who are current on their payments. This means that the plan will really only benefit a small sub-section of troubled homeowners, so called “low-hanging fruit,” or homeowners whose property is underwater but who make regular payments. What happens to homeowners who have lost their jobs or are under-employed and can no longer keep up with their mortgage payments? At the very least, there needs to be a plan implemented in conjunction with such eminent domain plans to provide loan modifications to these homeowners.
The other problem with the eminent domain plan is that it is a short-term solution to the problem. Yes, by keeping homeowners in their homes and allowing them to refinance underwater mortgages, cities and counties may be able to prevent home values from sliding further and keep neighborhoods from becoming blighted. But the system needs reform and eminent domain is neither sustainable nor designed to be a long-term solution. It may be simply a stalling technique.
While the eminent domain plan is admirable for thinking outside of the box nature, cities and counties should seriously consider the costs and consequences as well as compare the idea with more long-term solutions before adopting such a radical policy.