Tuesday, April 16, 2013

Eminent Domain and Underwater Mortgages By: Javier Guzman

          As homeowners, we are entitled to many rights that were established to protect our property and us. We tend to feel like no one can tell us what we can and cant do in the privacy of our home. However, there is a law that gives government the power to take away your property weather you like it or not, and that is called eminent domain. There are some regulations to eminent domain, the government cannot just take any property it pleases. First, the property being seized needs to be used for the benefit of the public and second, the owner needs to receive just compensation which is the value of the property at current market prices. With this in mind, the County of San Bernardino is considering using the power of eminent domain to fix their foreclosure problem, which is being seen as a controversial plan.
            According to county officials, half of all 300,000 mortgages in the San Bernardino County are underwater (npr.org). This means that value of the property is below than that of the original loan. For example, a homeowner may be making payments of on a $300,000 loan, but the property may only be worth $150,000 in today’s market. The firm Mortgage Resolution Partners wants to fix this problem with the enforcement of eminent domain. They want the government to seize the property of a homeowner who is underwater and pay them just compensation, in other words, what the property is worth in today’s market, the government would be acquiring the loans at a discounted rate. This will get the homeowner out of their previous loan that had them underwater. Then Mortgage Resolution Partners will refinance that same property back to the same homeowner but at current market prices, therefore they will not be underwater, and the firm would receive a small fee. No one would be forced into this program, homeowners would have to volunteer, and this service would only be provided to those homeowners that are underwater and still up to date with their payments.
            The positive things about this creative idea is that it would get many homeowners out of their underwater mortgage, and they wouldn’t have to risk losing their home, ruining their credit and potential to buy another property.  The other positive outcome of this proposal is that homeowners who are underwater, making larger payments then someone who just recently purchased a similar house in the current market, tend to not spend as much money in things like, going out, shopping or hiring a local handyman. If homeowners were not underwater, their payments would be smaller and in turn have more disposable income, which in turn will help out the County’s economy.
            On the downside, many are arguing that this idea is simply bad. First, protestors say that it will lead to government exploiting the eminent domain law, as this law can only be enacted when property is seized for the benefit of the public and that in this case, the beneficiary would be a single individual at a time. Second, that this would be cheating the banks of their money, it will rip off mortgage investors. This will create confusion as the message sent out would be, “if you play by the rules, you could get harm” (npr.org). In turn, banks will not want to lend money in this region or will charge a higher percentage to do so. Finally, some argue that this plan will only enrich the Mortgage Resolution Partners firm, as they will be in charge of refinancing the properties and collecting a fee.
            In conclusion, this is a very controversial proposal, and if the County decides to go through with it, it will most likely end up in court.  In one hand, you have a large number of homeowners that like the proposal, and on the other you have bankers and investors that believe that this is simply wrong. The main issue with this proposal would be proving that the seizure of these properties would serve and benefit the public, as that is the only way eminent domain can be enacted. “If San Bernardino County implements the plan, it would become the first local government to use its powers for this purpose, and would quickly become a test case for a novel approach to the mortgage crisis” (npr.org).

Work Cited
Noguchi, Yuki. “County Considers Eminent Domain As Foreclosure Fix” http://www.npr.org/2012/07/13/156683302/county-considers-eminent-domain-as-foreclosure-fix Visited April 15, 2013

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