Update: Here's more from the San Francisco Chronicle. As you read this and other stories on the issue, this begins to take on an "occupy" tone and a let's-stick-it-to-the greedy-lenders flavor. Not a good sign for a considered use of eminent domain.
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Like a visiting relative, the proposal to use eminent domain to condemn underwater mortgages just won't seem to go away. First attempted in large jurisdictions like San Bernardino County, it initially looked like the idea was petering out.
But now it seems like the idea has found traction in smaller municipalities that appear to be equally desperate such as North Las Vegas, and now Richmond, California, which appears on the brink of using its eminent domain power to take mortgages if the lenders don't take the city's offer to purchase. See "A City Works to Save Homes By Invoking Eminent Domain," as reported by the New York Times. As a refresher, here's the plan according to the story:
The city is offering to buy the loans at what it considers the fair market value. In a hypothetical example, a home mortgaged for $400,000 is now worth $200,000. The city plans to buy the loan for $160,000, or about 80 percent of the value of the home, a discount that factors in the risk of default.Then, the city would write down the debt to $190,000 and allow the homeowner to refinance at the new amount, probably through a government program. The $30,000 difference goes to the city, the investors who put up the money to buy the loan, closing costs and M.R.P. The homeowner would go from owing twice what the home is worth to having $10,000 in equity.
Voila, money for nothing! But the rub's right there in the first sentence: "... at what it considers the fair market value." What the city thinks the loans are worth might not be what the loans are really worth, or, most importantly, what a jury might determine the loans are worth. We've always speculated that the undervaluation of these mortgages (remember, the proposal is to take performing mortgages) was the Achilles heel of the whole scheme, and now maybe we will find out. This is one to watch, and may be the test case that we all suspected was coming. And Newark, NJ may be next.
Count us as skeptical. This whole scheme doesn't look good: a private investment outfit has packaged the deal and promises cities they can magically save their residents, and all the city need put into the pot is the power of eminent domain.
As Huey Lewis said, sometimes bad is bad.