Wednesday, July 18, 2012

The Housing Crisis and Eminent Domain: Society’s Powers

An article in the New York Times by Jennifer Medina reports on a novel way to address the housing crisis faced by many cities where home values have plummeted and have led to numerous foreclosures. 

The approach was suggested, and is being touted by, Steven M. Gluckstern who is chairman of an entity called Mortgage Resolution Partners (MRP). The plan being promoted is for MRP to survey the mortgage holders in an area and select those whose house value is worth much less than their current mortgage, but who have kept up to date on their mortgage payments. Those who are at risk of defaulting on payments, or of just walking away from a bad investment, are the most likely foreclosure threat. The local government would then use eminent domain to claim these homes and reimburse the owners (mortgage holders) for fair market value. The home can then be refinanced at current low interest rates and the homeowner can end up with a much lower payment and a mortgage that is consistent with the current value of the property. The goal is to limit foreclosures and to stabilize housing prices. MRP would receive a fixed fee for the selection process and for facilitating the refinancing.

This path, as suggested by MRP is receiving active consideration in San Bernardino County east of Los Angeles where foreclosure rates are among the highest in the nation and about half the homes have mortgages that exceed the value of the home. The city of San Bernardino recently made the news when it voted to declare bankruptcy. The cities of Fontana and Ontario would be the focus of any initial effort. It is estimated that 20,000 homes could be included in the project.

This path seems like a winning solution for the homeowners who get to keep their homes and are returned to a firmer financial footing. Banking and mortgage firms are outright hostile to the notion. What is interesting is that they don’t seem to think the idea is illegal; their argument is that the cities who take this action will poison the confidence of investors and end up hurting their housing markets in the long run. How many times can financial types cry "confidence" before people stop listening?

Surprisingly, the use of eminent domain in this way is well-founded in precedent, and its constitutionality has been upheld many times. Wikipedia provides a nice summary of the concept and its long history.

"The power of governments to take private real or personal property has always existed in the United States, being an inherent attribute of sovereignty. This power reposes in the legislative branch of the government and may not be exercised unless the legislature has authorized its use by statutes that specify who may use it and for what purposes. The legislature may delegate the power to private entities like public utilities or railroads, and even to individuals...."

"The Fifth Amendment imposes limitations on the exercise of eminent domain: the taking must be for public use and just compensation must be paid."

The concept of "public use" is quite obvious if cities feel this action is necessary to stave of financial collapse. The owners of the original mortgages would be compensated for the current market value of the property. There was a famous case decided by the Supreme Court in 2005, Kelo v. City of New London, that illustrates the extent to which eminent domain can be pushed.

"The Supreme Court's decision in Kelo v. City of New London, 545 U.S. 469 (2005) affirmed the authority of New London, Connecticut, to take non-blighted private property by eminent domain, and then transfer it for a dollar a year to a private developer solely for the purpose of increasing municipal revenues. This 5-4 decision received heavy press coverage and inspired a public outcry that eminent domain powers were too broad."

The action proposed here is much more easily justified than that taken by the city of New London, and just compensation will be paid. All that is needed is to insure that the proper legislative authority is in place.

This idea seems almost too good to be true, but give that nothing previously tried has been of much help, why not give it a go. The article suggests that cities in Florida and Nevada are considering the concept also. One suspects an avalanche of such efforts would follow once a precedent is set.

Go for it! I am sure the financial types will find a way to regain their "confidence."

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