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Seizing Underwater Mortgages Through Eminent Domain
by Morgan Brittany 

Crazy California is at it again.  In another bone-headed attempt at messing up the real estate market instead of letting it reset on its own, officials in San Bernardino County have figured out a way to seize property.  Yes, that’s right; they have come up with a way to “save” homeowners from underwater mortgages by using eminent domain.  They call it the “Home Ownership Protection Plan”.  In order to qualify you have to be current on your mortgage payments and you can’t have a Fannie Mae or Freddie Mac loan. 

Eminent domain, broadly understood, is the power of the state to seize private property without the owner’s consent.  The most common use of property taken by eminent domain is for public facilities, highways and railroads. 

County officials want to seize the “mortgages”, not the real property of underwater homeowners. The way I understand it is that private investors would provide the funds to pay the holders of the mortgages a fair market value for their holdings.  They would then write “new” mortgages based on lower principal amounts which would be in line with the depressed value of the homes.  Yeah, that sounds like a great deal for the original mortgage holders doesn’t it? 

So let me get this straight.  For example, I buy a new car, sign a contract for monthly payments and drive it off the lot.  A week later, the car is “used” and has lost half of its value so now I want them to write down my loan to the new value and credit me the extra.  I don’t want to take the hit on the loss, so let someone else take it!  I also still have the use of the car.  Sweet! 

The local officials think that it would be a great idea.  They could solve their local housing problems and homeowners could stay in their homes with much reduced mortgages.  Brilliant!  Except the holders of the initial mortgages get totally screwed over because they have to give up their assets and take whatever value the government decides their notes are worth.  That seems fair, right?  The insanity is just staggering. 

One of the companies in on the ground floor of this brainchild is Mortgage Resolution Partners.  They stand to make a killing if this thing comes to pass.  I am sure that other companies around the country are looking into doing the same thing in their states if their local governments get onboard.  Beware; this could be coming your way soon. 

If something like this does get the green light, it will turn everything about doing business on its head.  Contracts will mean nothing anymore, which is becoming more obvious everyday with the amount of attorneys and lawsuits filed.  When a person enters into a contract to buy a home, the lender expects to be paid back the amount of money that was agreed upon.  It doesn’t specify that somewhere down the road if things go badly they can just reneg on the deal and let the government renegotiate the contract.  What good is a contract then?  Why even enter into one? 

This will definitely put a stop to people wanting to lend money and further depress the housing market in San Bernardino.  Why would any private investor in their right mind want to loan money at a price that could be randomly changed at the government’s whim? If a private investor did loan, they would definitely increase their cost of lending which would further keep people out of the market.  It then depresses the market even more because lower income people can not qualify. 

This idea has other hidden consequences as well. Many of these mortgages are tied to investor’s 401(K) accounts.  This could jeopardize those accounts putting many people’s retirement or life savings at risk. 

And what of the people who are not underwater and pay their mortgages on time?  For instance, what if you made a loan and put down 30+%?  You may not have any equity, but you are not underwater.  These people won’t get a reduced principal because they aren’t distressed and underwater.  Once again, the people who did things the right way get screwed. 

Unfortunately the door has been opened to these types of schemes due to the 2004 Supreme Court decision Kelo vs City of New London.  This decision set a precedent for property to be transferred to a private owner for the purpose of economic development.  The court found among other things that if an economic project revitalizes a depressed or blighted urban area it qualifies as a public use. 

This expands on Supreme Court decision Berman vs Parker (1954) which argued that land can be confiscated and transferred to a private entity for a clearly defined “public use”.  If this program in San Bernardino is instituted, constitutional issues will undoubtedly arise. 

If you take into consideration what legal fees and challenges will cost if this is implemented it makes no sense.  Who would be on the hook for these costs?  Once again the taxpayers would take the hit. 

Why doesn’t government just get out of the way and let the market find its bottom and adjust?  We have had perilous times in the real estate market in the past and somehow it has always managed to right itself.  This enabling has got to stop.  It is a fact that some people will lose their homes to this problem and others will survive and find a way to work it out.  That is the point, let them work it out.  Use personal responsibility.  Don’t look to the government to pick you up every time you stumble.  The longer they keep propping you up, the harder you will fall.  We can see this coming with our ballooning deficit and it isn’t pretty. 

If you look at the numbers, more people have been responsible in their real estate dealings than not.  Yes, we home owners have all gotten burned, but the vast majority of us are dealing with it and making adjustments to keep our homes. Many cities are even beginning to see a turnaround in the market. When we see programs like this being considered we start to think that maybe we are saps for doing the right thing.  We get ignored while others are rewarded. 

So what’s next?  Will the government soon be able to use eminent domain to confiscate our life savings or 401(K) or who knows what else?  Sounds like it. This is a slippery slope and we are sliding down faster every single day. 

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