Local governments consider seizing mortgages
Some local officials in California are considering a novel but controversial way to fix troubled mortgages: Condemn them. The governments would use their power of eminent domain to seize mortgages from private investors and then refinance them for the homeowners at lower rates, according to The Wall Street Journal.
The governments — San Bernardino County and two of its largest cities, Ontario and Fontana — have formed a local agency to consider the plan. Mortgage investors think it’s a terrible idea, saying it would drive up borrowing costs and further depress property values. But officials in the working-class region east of Los Angeles, one of the epicenters of the housing crisis, say using eminent domain is appropriate because the housing bust is a public blight.
That message was driven home last week when another city in the region, San Bernardino, announced it would file for bankruptcy. The city of about 210,000 people, the second largest city in the nation to approve bankruptcy, was battered by financial headwinds, including plummeting tax revenues due to the housing bust.
Governments use eminent domain to acquire private property for public use, typically to clear the way for infrastructure projects like highways or sewers. Owners of the property are compensated at “fair value,” usually determined by a court.
The California governments want to use that authority differently, as a way to keep homeowners with large mortgage payments from sinking into foreclosure. The governments would condemn certain mortgages and their private partner, San Francisco-based Mortgage Resolution Partners, would find private investors to pay “fair value” for the mortgages. The company would receive a fee for its services.
Right now, the governments are just exploring the idea, which would certainly face legal challenges. But officials say they must do something. “We just have too much pain and misery in this county to call off a public discussion like this,” David Wert, a county spokesman, told The Associated Press.