Eminent Domain - Solution to Foreclosure Crisis

EMINENT DOMAIN

Many economists, including Joseph Stiglitz and Mark Zandi, agree that the best solution is “principal reduction,” where banks lower the borrower’s mortgage principal. This is not an act of charity but a way to reverse the economy’s freefall. If underwater mortgages were reset to fair-market values of homes, it would help homeowners and communities alike, and pump about $102 billion into the economy annually, according to a Home Defenders League report.

But homeowners who have asked banks to modify their mortgages typically get a cold shoulder or a bureaucratic runaround. So far, the Obama administration and Congress have been unwilling to require intransigent banks to reset loans.

Faced with this quagmire, a growing number of cities—with the support of community groups and unions—are taking things into their own hands. Thanks to a legal strategy initially formulated by Cornell University law professor Robert Hockett, city officials have discovered that they can use their eminent domain power—which they routinely use to purchase property for sidewalks, infrastructure, school construction and other projects—to buy underwater mortgages at their current market value and resell them to homeowners at reduced price and mortgage payments.

Richmond is the first city to pursue this strategy. Its city council—with the support of the Alliance of Californians for Community Empowerment (ACCE), which for years has organized homeowners against predatory banks—recently voted 6-0 (with one member absent) to make offers to buy underwater mortgages. If lenders refuse, the city will take them by eminent domain and work with a group of friendly investors (Mortgage Resolution Partners, or MRP) to refinance the loans with the Federal Housing Administration.

In this city of 103,000, dominated by a big Chevon oil refinery, home prices have plummeted by 58 percent since the 2007 peak. Homeowners lost over $264 million in wealth last year alone. Thousands of Richmond homeowners have lost their homes to foreclosure, and many others, like the Conways, are just hanging on. About 12,000 families—half of all homeowners with mortgages in the city—are underwater. The city government, which has lost millions of dollars in property tax revenues, has cut funds for road repairs and significantly reduced the number of municipal employees, including librarians. Meanwhile, it has had to spend scarce funds to deal with abandoned buildings, crime and drugs, and other problems caused by the foreclosure epidemic.

If banks reset Richmond’s underwater mortgages to fair market value, homeowners would save an average of over $1,000 per month on their payments. If those savings were spent on local goods and services, it would generate about $170 million in economic stimulus and create at least 2,500 jobs.

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