A bold idea to rescue underwater homeowners
Officials in San Bernardino County, Calif., touched off a fierce debate in July when they floated a novel idea of how to fix troubled mortgages: Use the power of eminent domain to seize the mortgages and then refinance them for homeowners at lower rates. The finance industry says that is a misuse of eminent domain that would only drive up borrowing costs, but more than a dozen local governments are considering it.
The idea of invoking eminent domain — typically used to acquire private property for public use, like roads or sewers — is born out of desperation. The collapse of the housing market hit local governments hard, because many depend heavily on property taxes. But millions of homeowners are underwater, meaning they owe more on their mortgages than their homes are worth. Many underwater homeowners fall into foreclosure, cutting off property tax revenues for local governments..
“We’ve seen a bailout of the banking industry, but no bailout for homeowners,” San Bernardino resident Arie Giddens said in August during a forum on the housing crisis. County officials called the meeting to get ideas on how to tackle the crisis.
Giddens’ dilemma mirrors that of many other homeowners. Her home in San Bernardino, purchased for $300,000 in 2005, is worth less than half that now.
Proponents of the eminent domain proposal say refinancing homeowners’ mortgages, at rates equal to current market values, would ease the public blight of homes emptied through foreclosure or by homeowners simply walking away. They say it also would boost distressed local economies by giving homeowners more money to spend every month.
The idea is getting a hearing, particularly in areas ravaged by the housing crisis. Local governments considering it include those in Berkeley, Calif., and Suffolk County, N.Y., where an estimated 10 percent of homes are valued at less than their loans. Mortgage Resolution Partners, the San Francisco-based private venture fund behind the proposal, also has pitched it to officials in Chicago, Nevada and Florida.
Officials in San Bernardino County, though, appear to have taken the idea the farthest. The county and two of its largest cities, Ontario and Fontana, formed a local agency, the Joint Powers Authority (JPA), to consider mortgage relief plans, including using eminent domain.
The working-class region east of Los Angeles is an epicenter of the housing crisis. More than half of homeowners in San Bernardino County are underwater on their mortgages, and the foreclosure rate in the county is more than three times the national average.
Under the Mortgage Resolution plan, local governments would condemn those underwater mortgages using eminent domain. Mortgage Resolution would front money from private investors for governments to purchase the mortgages at current market value, in exchange for a fixed fee of $4,500 for each transaction.
San Bernardino officials say they have not settled on any plan yet, including the Mortgage Resolution plan. And they have been warned against proceeding down the eminent domain path. During the August housing forum, a financial industry representative told the JPA that using eminent domain to seize mortgages would “reduce access to credit for borrowers,” and “result in lengthy and costly litigation.”
But San Bernardino officials say they will continue exploring options. “We just have too much pain and misery in this county to call off a public discussion like this,” a county spokesman told reporters.