Monday, October 1, 2012

Use Of Eminent Domain To Condemn Underwater Mortgages: A Pro-Homeowner Viewpoint

Brooklyn Law School Professor David Reiss writes in The National Law Journal:

  • Local governments across the country are considering an innovative use of eminent domain. They propose to condemn underwater mortgages (those that exceed the fair-market value of the home) in their communities and restructure them so that home­owners can afford their payments and so that the new mortgage is for less than the fair market value of the property.

    If this proposal is implemented, the local government will pay the owner of mortgages of "underwater" homes the fair market value for the mortgages. The local government will then restructure each mortgage by reducing the principal amount owed to be in line with a mortgage that would be appropriate for the fair market value of the home. This will result in lower monthly payments. It will also result in a sustainable transaction, one in which homeowners can imagine ultimately paying off their mortgages, the American Dream of owning one's home free and clear.

    The financial industry is alarmed by this proposal, claiming that the sky will fall if it is implemented. But this proposal is constitutional, beneficial and administratively feasible. Local governments should give it a try as they seek to stabilize their communities.

    Eminent domain is an ancient prerogative of sovereign governments. Federal and state governments have limited that power by requiring that a government use eminent domain to achieve a public purpose and pay just compensation upon its exercise. See, e.g., Brown v. Legal Foundation of Washington, 538 U.S. 216, 231-32 (2003).

    The U.S. Supreme Court has taken an expansive view of the "public purpose" requirement, holding that use of eminent domain to achieve as broad a purpose as economic development is a legitimate exercise of government power even when it involves taking land from one private party and giving it to another. Kelo v. City of New London, 545 U.S. 469 (2005).
For more, see Eminently reasonable (Using the power of eminent domain to restructure underwater mortgages is constitutional, beneficial and administratively feasible).

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