This knight’s armor is far from shining and is filled with chinks, but nevertheless may function as a champion for underwater homeowners. Eminent Domain is the legal doctrine that gives governments the right to take private property for public use to exercise functions of public character. Further, the U.S. Constitution requires that when the government uses such power the people are fairly compensated.
Perturbed by the slow pace of the recovery, cities are taking matters into their own hands. They are using Eminent Domain to buy mortgages and reduce homeowner debt. In effect, a city would first offer to purchase underwater loans at an estimated fair market value. Once purchased, the city would then reduce the debt and allow the homeowner to refinance the loan, possibly pumping equity into a once underwater home. In the event that a city’s purchase offer is declined, they would then turn to eminent domain to condemn and buy the loan.
Cities from New Jersey to Las Vegas are in the process of passing resolutions built around eminent domain. Recently, Richmond, California gained notability as the first city to attempt to seize homes using eminent domain. Areas such as Newark, Seattle, and numerous cities across the west coast are contemplating using eminent domain as a solution for their drowning housing markets. What is unusual is that the property is not actually being taken, but rather the mortgage on the property is.
Wall Street’s Angst
The trend of using eminent domain to raise housing markets from the depths of underwater disaster is not without heavy opposition. Wall Street is viciously opposed to the idea. Big banks have declared themselves ready for an epic legal battle and have threatened to pinch-off all lines of mortgage lending to any area using eminent domain as a tool to override mortgages.
It remains to be seen whether the White Knight of Eminent Domain will raise underwater housing communities or drown beneath their depths. Regardless of the outcome, the battle is an intriguing one to keep an eye on.
Real estate attorney and foreclosure defense attorney, Roy Oppenheim left Wall Street for Main Street, founding Oppenheim Law along with his wife Ellen in 1989 in Fort Lauderdale, Florida, and is vice president of Weston Title and creator of the South Florida Law Blog, named the best business and technology blog by the South Florida Sun-Sentinel. Follow Roy on Twitter at @OpLaw or like Oppenheim Law on Facebook.