Governments in Chicago, San Bernardino, CA, and Suffolk County, NY plan to use eminent domain powers to provide mortgage relief.
Created by Mortgage Resolution Partners, the plan being considered would allow local government to seize mortgages on homes of underwater borrowers using eminent domain laws. The bank holding the mortgage would then receive current fair market value on the mortgage, as opposed to the amount owed by the homeowner.
Gregory Devereaux, administrator for San Bernardino County is considering the program, saying, “Federal programs have not been very successful at all and private programs have been of limited help.” The local government would not pay the money to the lender itself, but instead will use Mortgage Resolution Partners’ money to acquire the loan so the homeowner has the option to refinance the loan at the new, lower balance. Mortgage payments would then be made to local government as owner of the loan.
Representative.John Campbell (R-CA) has come out strongly against the plan, calling them, “awful policy, an unfair banana republic kind of idea.” His bill, The Defending American Taxpayers from Abusive Government Takings Act would halt the plan by preventing any government insured mortgage loans from being made for 10 years in counties implementing the program. According to Campbell government-backed loans make up 97% of all mortgages made nationwide.
Currently, the federal government has principal reduction loan modifications available to borrowers but only in some states and with limited circumstances for Fannie Mae and Freddie Mac borrowers. Loan modifications that use interest rate reductions or longer loan terms as opposed to principal reduction are more widely available.
Ed DeMarco, head of the Federal Housing Finance Agency has long opposed any principal reduction option, along with and numerous Republican legislators. Many Democrats, including President Obama, support principal reduction, asserting that it will lower default rates and ultimately save taxpayers money.
David H. Stevens, president and CEO of Mortgage Bankers Association (MBA) is opposed to eminent domain. “Beyond the obvious legal issues of using eminent domain in such a radical way, government seizing mortgages will set a precedent… it will hurt those communities and borrowers it is most designed to help.”
San Francisco mayor Gavin Newsom believes the restrictions on lending in areas using eminent domain may rise to a civil rights issue. “San Bernardino County, which is furthest along in considering the use of eminent domain, has a predominantly minority population that suffered a disproportionate amount of subprime loan origination during the bubble,” he wrote in a letter to the Justice Department. “Limiting credit in those areas because the local government acts to acquire and refinance these homeowners’ loans is geographic redlining.”
South Orange County 912 Project co-founder Cathy Richardson opposes most uses of eminent domain but also disagrees with Federal restriction of local governments. “Many knew the big real estate bubble was going to burst and when it did, it was going to be huge. This burst is partly to blame for our financial crisis. Congressman Campbell wants to federally regulate what local governments can do to help their municipalities even though it was the federal government’s fault in the first place. He wants to punish local governments if they find another way out. Eminent domain should only be used in extreme cases and as little as possible. I’m more in favor of getting the federal government off the backs of state and local authorities.”
Government Accountability Network