Legislative Opposition to Eminent Domain Foreclosure Rescue

by 14 Sep 2012

(TheNicheReport) -- During the ongoing presidential electoral campaign, the two candidates have mostly refrained from discussing the delicate issue of housing. On Capitol Hill, however, the statutory role of county and municipal governments with regard to disrupting the housing market in favor of homeowners is being hotly debated. The current issue is over eminent domain and distressed mortgages. 

Eminent domain is usually defined as the right of a government to take privately-owned land for public use. At the federal level, eminent domain is used to build highways, national parks, government installations, etc. In the United States, the Fifth Amendment to the Constitution guarantees fair compensation for the property owners who must relinquish their land for the public good.

A controversial proposal to use eminent domain to rescue American homeowners from foreclosure, conceptualized by private investors and sanctioned by some local governments in California, is facing legislative opposition in the House of Representatives. A Republican Member of Congress plans to introduce a bill to prevent eminent domain from being used as a weapon against foreclosure. 

A Unique Concept

The proposed foreclosure rescue by eminent domain would involve a municipal or county government forcing the sale of a distressed property at a fair price. Lenders who are holding defaulted or underwater mortgages are not likely to get a better price on these properties, which would eventually end up in a bank's Real Estate Owned (REO) portfolio and wait until market conditions favor a sale. 

Instead of an eviction taking place, the government would allow the tenants to occupy the property and would grant private financiers to issue a new mortgage with terms conducive to the borrower's ability to repay. The principle of public good in such transactions would be that families will not be uprooted from their homes. 

Defending American Taxpayers from Abusive Government Takings

Representative John Campbell, a Republican from California, labeled the eminent domain foreclosure rescue as an abusive, banana republic measure that threatens commerce and hurts taxpayers. His bill would direct government housing and mortgage entities like the Veterans Administration, Fannie Mae, Freddie Mac, and the Federal Housing Administration from operating in the counties where eminent domain transactions have saved borrowers from foreclosure.

Prior to the bill's introduction in Congress, the Lieutenant Governor of California sent a letter to the U.S. Attorney General with his concerns over the involvement of mortgage investors in trying to derail this unique use of eminent domain. Mortgage-backed securities investors are calling for an end to mortgage origination in the counties where governments are bailing out homeowners. 

The capital investors that will essentially carry the new loans in their portfolios, Mortgage Resolution Partners and Westwood Capital, have already visited Capitol Hill to make friends with key players.

COMMENTS

  • by William Matz | 9/14/2012 3:17:50 PM

    However, emotionally appealing this strategy is, given the widespread illegal foreclosure conduct of lenders, it appears poorly-conceived because "taking" a note and deed of trust may well not be a legitimate target for eminent domain (notwithstanding the recent expansion by the Supreme Court).

    However, MR Partners is having some success negotitaing these voluntarily with lenders. By buying the note and allowing a discounted payoff to the owner, it is equivalent to what 2008 Hope for Homeowners hoped but failed to do because of lender refusal. Lenders/investors are finally realizing that a short payoff or refi nets much more than a foreclosure.

Poll

Is TILA-RESPA a good or bad thing long term?