Eminent Domain Taking of Mortgages May Face Legal Battle

by 23 Sep 2012

(TheNicheReport) -- The proposed use of eminent domain by some local governments to curb the damaging effects of mortgage default and foreclosure has gotten the attention of industry advocates and legislators who have sworn to vigorously fight against this controversial practice. Legal scholars are now weighing in with their opinions on the matter. Here are two reported viewpoints that are diametrically opposed:

Alfred Pollard, General Counsel, Federal Housing Finance Agency (FHFA)

Speaking at a Mortgage Bankers Association (MBA) conference, Mr. Pollard questioned the effect that eminent domain action on a mortgage would have on mortgage lending in general. It is important to note that Mr. Pollard was a guest of the MBA, a group that is fiercely opposed to the proposed measure, and that he spoke for himself -not on behalf of the FHFA. His main concern is that municipalities and counties taking over mortgages would spook lending institutions and open the door to higher fees and stricter lending requirements. 

The eminent domain proposal would not target loans guaranteed by Fannie Mae or Freddie Mac, the two mortgage investment entities that the FHFA oversees, but it would consider taking over underwater home loans for the benefit of borrowers -even when they are current on their monthly payments.

David Reiss, Professor at Brooklyn Law School

In an article published in the esteemed National Law Journal, Mr. Reiss argues that the use of eminent domain to rescue and restructure negative equity home loans is constitutional and good for economic development. He cites two landmark decisions by the Supreme Court of the United States: Brown v. Legal Foundation of Washington and the 2005 Kelo v. City of New London. The latter case involved eminent domain taking of private property, followed by conveyance to yet another private party in the broad purpose of positive economic development of communities. 

The analysis of Mr. Reiss considers the damages caused to communities by the foreclosure landslide of the last few years: derelict neighborhoods, displaced families and diminished property tax revenues. In the legal opinion of Mr. Reiss, the Supreme Court has already set a precedent for eminent domain to benefit the public interest, and to this extent he cites a post-Great Depression landmark opinion in which the high court determined that the taking of mortgages in order to bring relief on behalf of the public interest was not an unconstitutional action. 

In the end, should legislators pass a law to prevent eminent domain from being a foreclosure prevention tool, their efforts are bound to face legal challenges.

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