In the op-ed piece “Eminently reasonable,” Brooklyn lawprof David Reiss writes that “using the power of eminent domain to restructure underwater mortgages is constitutional, beneficial and administratively feasible.”
Local governments across the country are considering an innovative use of eminent domain. They propose to condemn underwater mortgages (those that exceed the fair-market value of the home) in their communities and restructure them so that homeowners can afford their payments and so that the new mortgage is for less than the fair market value of the property. If this proposal is implemented, the local government will pay the owner of mortgages of “underwater” homes the fair market value for the mortgages. The local government will then restructure each mortgage by reducing the principal amount owed to be in line with a mortgage that would be appropriate for the fair market value of the home. This will result in lower monthly payments. It will also result in a sustainable transaction, one in which homeowners can imagine ultimately paying off their mortgages, the American Dream of owning one’s home free and clear.
Count us as skeptical. Our skepticism is triggered whenever eminent domain is considered “innovative.”
The rule of law must of course be respected, or else lenders will not believe that they can make money and they will flee that particular market. But eminent domain has long been part of the legal framework of the housing market, referenced in standard mortgage documents. While its large-scale use is an unexpected application, we are in extraordinary times. And given the federal government’s failure to implement a solution to the problems communities face, it is utterly appropriate for local governments to use their intrinsic powers to address this crisis. Really, the worst-case scenario for future residential borrowers is that mortgages may be priced slightly higher to address the remote possibility that a government will use its power of eminent domain during some future emergency.
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