It’s no secret that the U.S. economy remains in critical condition. Florida, along with several other states, suffered more than most during the recession, and Florida continues to suffer. Florida’s economic woes stem, in part, from the “foreclosure crisis” caused by people taking on more debt than they could afford when buying homes. According to the August 9, 2012 edition of Gulfshore Business Daily, Florida had the nation’s third-highest foreclosure rate in July 2012. As reported by CNN, in some California communities, the unusually large number of foreclosures over the last few years has resulted in vacant homes, declining property values, and the corresponding loss of property tax revenues. The same holds true here in Florida and, in the absence of a replacement revenue source, local governments dependent on property tax revenues have had to cut costs and services to try to meet budgets. Faced with this situation, local governments in several parts of the country are considering the use of an unorthodox tool to solve the problems caused by “underwater” mortgages and homes — eminent domain.
It came from California…
Many people are familiar with the use of eminent domain to acquire private property for public use, such as the widening of a public road. The Wall Street Journal reported that San Bernardino County and two other California communities are considering the use of eminent domain to acquire home loans that are current, but “underwater.” (A home or loan is “underwater” if the amount owed exceeds the value of the home serving as collateral.) The City of Chicago, Illinois, and Suffolk County, New York have also considered use of eminent domain in this manner, though on August 14, 2012 Chicago’s mayor, Rahm Emanuel, announced his opposition.
How would it work?
The process of using eminent domain to condemn underwater mortgages would involve several steps:
- Local government files a condemnation lawsuit against the holder of the underwater mortgage.
- A non-governmental financing entity provides funds to local government, which would use that money to pay the mortgage holder the “fair market” value of the loan acquired in the condemnation suit.
- Local government conveys to the non-governmental financing entity the rights associated with the loan acquired in the condemnation suit.
- The homeowner borrows from (in other words, refinances with) the non-governmental financing entity (or other lender who purchases the financing entity’s rights to the acquired underwater loan) in an amount roughly commensurate with the fair market value of the property.
In short, underwater borrowers end up with loans no greater than the fair market value of their homes. On the other hand, holders of underwater mortgages end up with write offs for the difference between the unpaid balances of the original loans and the fair market value amounts received through the eminent domain process.
The process of using eminent domain to condemn underwater homes, rather than underwater mortgages, would also involve a number of steps:
- Local government files a condemnation lawsuit against the owner of an underwater home, acquires the home through the condemnation suit, and pays the fair market value of the home to the homeowner.
- The fair market value payment to the homeowner ends up in the hands of the mortgage holder to pay off the underwater loan.
- Local government sells the unencumbered home back to the homeowner for the fair market value of the property.
- The homeowner obtains a new loan roughly commensurate with the fair market value of the property from a new lender.
As with the use of eminent domain to condemn an underwater mortgage, underwater homeowners would benefit while the holders of underwater mortgages would not, since the underwater properties acquired through eminent domain would involve current, performing loans.
What about Florida?
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.” So…could this happen in Florida?
Florida’s Constitution and Underwater Mortgages and Homes
Florida’s Constitution restricts the use of eminent domain to takings made for a public purpose. While Florida’s Constitution also requires that property owners receive full compensation, the most important question is whether local government can show that an underwater mortgage or home is necessary for a public purpose simply because it’s “underwater.” A legal adviser to the company behind the underwater mortgage condemnation concept has argued that three public purposes exist:
- Economic development.
- Prevention of urban blight.
- Elimination of housing market disruption resulting from lender reluctance to participate in short sales and other means of eliminating debt on underwater properties.
These may be insufficient under Florida law. In 2006, the Florida Legislature enacted several statutes in response to the United States Supreme Court’s 2005 decision in Kelo v. City of New London. In that controversial case, the Supreme Court affirmed the Connecticut Supreme Court’s decision allowing the City of New London to use eminent domain to acquire private property, including homes. The City planned to lease a portion of the private property acquired through condemnation to a private developer as part of an economic development plan. After the U.S. Supreme Court’s decision, there was great public outcry and many states passed legislation to prevent Kelo-like situations.
Florida’s Statutes and Underwater Mortgages and Homes
In order to prevent similar occurrences in Florida, one new statutory section specified that preservation or enhancement of the tax base is not a public use or purpose sufficient for the use of eminent domain. The same statutory section, as well as an entirely new statute, stated there was no public purpose in the use of eminent domain to abate or eliminate a public nuisance or to prevent or eliminate slum or blight conditions. Finally, another new statute restricted the ability of the condemnor to transfer property acquired by eminent domain. This last statute, essentially, prohibits a condemnor from transferring property acquired by eminent domain unless the property would be used by the transferee for a road, a right of way, certain utilities, public infrastructure, or other limited, public purposes. None of the exceptions to this statute would allow for condemnation of an underwater mortgage followed by the immediate resale of that mortgage to a new lender. Similarly, none of the statutory exceptions seem to allow for condemnation of an underwater home followed by an immediate resale of the home back to the former homeowner. In short, the statutes enacted in 2006 impliedly prohibit condemnation based on two of the stated public purposes — economic development and elimination of housing market disruptions (since the purpose of eliminating the disruptions is to improve the local economy) — and expressly prohibit condemnation based upon the other stated public purpos
e — the elimination of urban blight.
The use of eminent domain in Florida in this manner has not been tested in court, so no case law exists. In light of Florida’s Constitution and the statutes enacted by the Florida Legislature in 2006, however, it is difficult to imagine eminent domain being used successfully to acquire underwater mortgages or homes. Given the state of Florida’s economy, though, it remains possible that local governments might try to use eminent domain in order to combat what they perceive to be contributing factors to prolonged economic slowdown within their jurisdictions. It’s important to remember the Florida legislature not only enacts laws, but repeals them. It’s possible, therefore, that the eminent domain statutes enacted in 2006 could be repealed if legislators believe sufficient constituent support for repeal exists. As a result, who knows what the future might bring? Stay tuned to our blog for any developments.
About the author Carlos A. Kelly, Esquire: Carlos is a stockholder with Henderson Franklin and focuses his practice on real estate disputes, title insurance litigation, and business claims, including fraud and contract lawsuits, shareholder disputes, and other claims between business partners. As part of his real estate litigation practice, Carlos handles eminent domain/condemnation matters, which have included numerous order of taking hearings.
Carlos speaks and writes for a variety of audiences. Over the years, he has given seminars on several areas of the law, typically focusing on eminent domain. In 2008, The Florida Bar’s Eminent Domain Committee featured Carlos as a lecturer on the topic of business damages in condemnation.
Carlos moved to Florida in 1988. As an undergraduate at Florida State University, Carlos earned membership in both Phi Beta Kappa and Phi Kappa Phi National Honor Societies. Carlos is AV rated by Martindale-Hubbell. Carlos is a member of Association of Eminent Domain Professionals as well as The Florida Bar’s Eminent Domain Committee. Carlos can be reached at 239.344.1326 or via email at firstname.lastname@example.org.