Devastated by foreclosures, three local governments in California are considering a plan that would use eminent domain to acquire underwater homes and restructure their mortgages.
San Bernardino County, east of Los Angeles, has some of the highest levels of unemployment coupled with some of the highest foreclosure rates in the country. Home prices there have plunged by half, and many families are struggling with large mortgage payments on homes that are underwater.
To stem the tide of foreclosures and keep more homeowners from losing their homes, the county and its two largest cities, Fontana and Ontario, joined together to consider a controversial idea put forth by newly formed finance group Mortgage Resolution Partners.
Under the plan, participating municipalities would condemn homes where the owners have been making timely payments, but are severely underwater. The government would pay fair market value to the owner of the mortgage and then facilitate a refinance through Mortgage Resolution Partners, which would profit through a $4,500 flat fee on each loan.
Eminent domain poses a unique opportunity. But to use eminent domain powers, municipalities must prove that there is a public benefit, something legal scholars question.
“Is any public benefit enough? Is this enough of the right kind of public benefit?” asked David Dana, professor of law at Northwestern University Law School.
Because the housing crisis is so deep and pervasive, Mortgage Resolution Partners Chairman Steven Gluckstern argues that it is.
“We’re in a unique situation where housing prices [in this area] have declined 50 percent, and this is a unique solution,” Gluckstern said.
But the plan has rankled bankers and investors, who claim that the government is overstepping its bounds and will discourage lenders from granting loans in the area.
“It will hurt the very jurisdictions that this is supposedly intended to help,” said Bob Davis, executive vice president of the American Bankers Association.
His group and others that oppose the plan argue that by snapping up these performing loans, it makes mortgages in the area riskier. Future lenders will be unwilling to invest in those mortgages, limiting the availability of credit or increasing its costs, Davis said.
By cherry-picking the people who have a demonstrated ability to repay, the government is taking away the customers investors are eager to keep.
To that end, it also ignores the people who are already delinquent and are at the greatest risk of default.
That’s the biggest issue, says Randall Wray, senior scholar at the Levy Economics Institute and economics professors at University of Missouri-Kansas City.
“These homeowners are at risk, and it’s only a matter of time before they too are delinquent,” Wray said. But leaving out the most distressed borrowers who are already in default and in more immediate need of help will limit the program’s effectiveness.
Help is needed for these homeowners, and it’s needed quickly. Whether this plan is really the way to deliver that help is questionable.
“The No. 1 issue in America is foreclosures,” Wray said. “It is the thing that won’t allow us to recover. Anything that will stop that I think is worth looking at.”