When we began posting about the possible use of eminent domain to acquire underwater mortgages in August 2012, we pointed out that “The Chicago City Council’s resolution calling for a hearing on the use of eminent domain to condemn underwater mortgages noted that officials in three states, including Florida, are ‘being persuaded to try the idea.'” Since then, we have seen no new reports about the potential use of eminent domain to acquire underwater mortgages here in Florida.
The threat may also be receding in California, the birthplace of the idea. As reported in the May 19, 2013 online edition of The Sacramento Bee, “with home prices rising again and facing fierce opposition from the financial industry, Mortgage Resolution Partners [the company behind the concept of using eminent domain to acquire underwater mortgages] has seen some of its first and best prospects back off. Sacramento, San Bernardino County and Chicago are among the localities that took a look and passed — at least for now.” According to the article, Mortgage Resolution Partners “is focusing instead on a handful of smaller cities with which it has signed advisory agreements.”
One of those smaller cities is Richmond, California, where the City Council voted in March 2013 to work with Mortgage Resolution Partners to address underwater mortgages. An article from the Contra Costa Times posted on the San Jose Mercury News website says Mortgage Resolution Partners will lay out the details in the coming months.
The chairman of Mortgage Resolution Partners provided an example to The Sacramento Bee of how eminent domain would be used to acquire a hypothetical underwater mortgage. In the example, local government uses eminent domain to acquire the mortgage on an “underwater” home purchased for $300,000 and worth $200,000 today. (Remember — “underwater” means the home’s value is less than the mortgage balance.) In the example, the mortgage holder would only receive $160,000. The rest of the loan balance of at least $200,000 is wiped out. So, the mortgage holder would receive at least $40,000 less than the amount owed on the mortgage. If the mortgage balance were $230,000, but the mortgage holder only receives $160,000 as a result of local government use of eminent domain, the mortgage holder loses $70,000. A lender sustaining a series of losses like this on a widespread basis would have to consolidate its own losses by reducing its workforce and taking other cost-saving measures. As a result, one of the goals of the use of eminent domain to acquire underwater mortgages — economic development — can’t be met since serious financial loss is just being moved from one party (the borrower) to another (the lender). In the case of the borrower, the loss may not be permanent, since real estate values are rising again.
According to The Sacramento Bee, Elk Grove, California mayor Gary Davis decided the use of eminent domain to acquire underwater mortgages was not the way to go.
It just seemed that the risks outweighed the benefits. You’re taking a tool . . . designed for public works projects and using heavy-handed measures to weigh in on the free market.”
Well said, Mr. Mayor. Stay tuned to our blog for further updates!