Another City Looks at Eminent Domain as Solution to Foreclosures

Another city hard hit by the housingrncrisis has proposed exercising its power of eminent domain on behalf of itsrnunderwater homeowners.  The City Councilrnof Brockton, Massachusetts voted this week to commission a study into thernfeasibility of such a move, joining several municipalities in California and thernCity of Chicago which have already taken a look at such an undertaking.</p

Brockton, an old industrial city locatedrnsouth of Boston, has seen the median price of its housing drop from $260,000 tornaround $120,000 since the first quarter of 2007 and home sales during the samernperiod drop by about a third.  Thernproposed plan is designed to stabilize the housing market, curtail blight, andrnreturn homeowners to a positive equity situation.  If adopted, the City would use eminent domainrnto take foreclosed properties (REO) from lenders and sell them to cityrnresidents and non-profit organizations.  Underrnthe plan the City could also seize underwater mortgages from the investors who holdrnthem, restructuring them to reflect the value of the underlying collateral thenrnreselling them to other investors at that new value.  </p

In the middle of this plan is a new firm established for the sole purpose ofrnfacilitating the mortgage purchases.  MortgagernResolution Partners was founded last summer by Phil Angelides, formerly thernchairman of the Financial Crisis Inquiry Commission which investigated andrnissued a lengthy report on the causes of the U.S. housing market collapse and arnformer California state treasurer.  Accordingrnto Reuters, Angelides is seeking financial backers for his company, tellingrnpotential investors his plans to buy mortgages at a deep discount couldrngenerate a 20 percent annual return.  </p

Reuters offered this quote from a letter the company sent to prospectiverninvestors.  “We just might do a goodrnthing for America, and along the way get a great return on investment.  If our hopes do not pan out, the amountrnwagered should be a deductible loss.”</p

When the plan first emerged in San Bernardino County California it got a lotrnof push back.  Objections have increasedrnover time.  Almost immediately twentyrntrade organizations led by SIFMA the lobbing group representing the securitiesrnindustry protested the proposals and made it clear they would litigate anyrneminent domain action.  RepresentativernJohn Campbell (R-CA) introduced a bill titled The Defending American Taxpayers from Abusive Government Takings Act</awhich would prohibit the four major government sponsored mortgage providers fromrnbuying loans in any community and the Federal Housing Finance Agency (FHFA) asrnconservator for GSEs also joined in and conducted a period of public comment onrnthe subject.   All of these opponentsrnargue that the idea of using eminent domain, especially to seize loans, wouldrnconstitute an unconstitutional seizure and an unwarranted abridgement ofrninvestors' property rights and that lenders would effectively boycott anyrncommunity that adopted such a plan.