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January 16th, 2009 (Modified on January 30th, 2013)

Thoughts on Foreclosure and Eminent Domain

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I was thinking about the plan laid out in Foreclosure Assistance Through Eminent Domain?, in which the National Community Reinvestment Coalition (NCRC) urged Congress to adopt their large-scale loan mod program by seizing mortgages via eminent domain:

…the NCRC believes that by utilizing the government’s power of eminent domain, “legal impediments regarding the complexity of selling loans held in securitized pools” can be avoided. Under the plan, eminent domain eliminates an investor’s say in the loan mod process, since the government would purchase the property directly.

This scheme is so unwieldy, and rests upon so many questionable assumptions, that it’s guaranteed to be all but unworkable.

For starters, a government program that relies upon “compulsory purchases of troubled loans” so that reluctant parties “would not need to be persuaded to participate” — don’t you just love that wording? — is bound to end up in court, and never mind bland assurances that this would “avoid lawsuits from disgruntled investors.” One can infer that the NCRC anticipates lawsuits over the the lowballing of the investments, which is a not uncommon issue with eminent domain cases. There’d be lawsuits a-plenty.

Ms. Olick (the writer of the piece which inspired the original post) notes that “The sticky part is proving that a mortgage is in fact a piece of real estate”. It isn’t, of course; it’s a contract between the lender and the borrower. Eminent domain can be, and has been, used to rewrite contract law — but while most contracts deal with a discrete entity, there are an unknown number of holders of the mortgage contracts in question, since they’ve been sliced and diced into heaven knows how many mortgage-backed securities. There’d be a lot of “disgruntled investors” — more than enough for a class-action suit, I’d guess. In fact, the complexity of such securities is a big reason why the original intent of the TARP program — to buy toxic securities — was deemed unworkable.

The NCRC plan also assures us that once seized, these contracts can be modified to the borrower’s advantage — a dubious proposition given the lack of success which has been already noted in existing loan-mod programs. The NCRC attempts to address this by proposing a low-interest second mortgage to be paid off when the property is sold, but this just ignores the fact that loan mods fail when the property value falls further than it already has — leaving the borrower even more underwater than he already is.

There are other serious flaws as well, but never mind — this won’t fly.

We agree that responsible homeowners who need help should get some — the operative word being responsible. To date, most of the loan-mod programs have been unwilling to sort out the responsible ones from the investors and ‘flippers’ who knew, or should have known, that they couldn’t afford the deal they took. That should change.

And we repeat that we’d like to see some relief for all of the homeowners who aren’t in trouble — yet — but who are struggling with their household budgets. Right now, if they want help, they need to get into trouble. That’s a perverse incentive for those who responsibly took out an affordable mortgage and have been responsibly making their payments all this time. Don’t they deserve something more than the bill for those other borrowers? Maybe the ’stimulus’ package will offer something.

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4 Responses to “Thoughts on Foreclosure and Eminent Domain”

  1. Old Condemnation Lawyer Says: January 17th, 2009 at 3:13 am

    You are mistaken. A mortgage is not just a contract, but also an interest in the real estate that constitutes the security for the loan. Mortgagees are routinely named as parties in eminent domain cases and are paid the value of their interest. Usually, it’s the loan balance, which nobody contests. But if someone were to contest that measure of compensation, I see no reason why the mortgagee would be entitled to more than the fair market value of his security interest, the same as owners of other interests in the subject ptroperty.
    Besides, contractual rights are a species of property, and can be taken by eminent domain. Keep an eye on the Prologis case in which the Illinois Supreme Court just granted review. It raised the issue of compensability of the interest of bondholders where the property used as the source of revenue for the servicing of those bonds is condemned. Analogous to your problem.

    Paul replies: I take your point, but the difficulty lies, as I said, in the fact that “there are an unknown number of holders of the mortgage contracts in question”. There isn’t one mortgagee with an interest in a home; there could be hundreds — and the odds that they’ll agree on what some judge decides is the ‘fair market value’ are slim.

  2. MikeB Says: January 17th, 2009 at 8:24 am

    Speaking as someone actually fighting eminent domain in federal court (Johnstown, PA), I can confirm that the traditional interpretation of eminent domain is shifting. It is supposed to be the “taking” of property or property rights under the badge of government for the “public good,” based on just compensation.

    In too many cases today, however, eminent domain has less to do with projects for the “public good,” and everything to do with the financial good of publicly held corporations.

    Today, eminent domain means someone wants your property, and the government helps them take it.

    In Bedford County, Pennsylvania, property owners are being hauled into federal court by Houston-based Spectra Energy Corporation and backed by the power of the Federal Energy Regulatory Commission (FERC). The landowners’ property is sitting on top of the gas-rich Marcellus Shale; but they can’t develop that because Spectra Energy wants to use the Oriskany sands layer (which is under the Marcellus) for a 12 billion cubic feet underground natural gas storage facility. They say it is critical — even though Pennsylvania has more underground gas storage sites than any other state in the continental US, according to the DOE’s Energy Information Administration.

    Keep in mind that property owners possess the key asset — the land! — but they are not treated as stakeholders in this process. They are mere obstacles to Spectra Energy and FERC.

    For more info: Spectra Energy: using eminent domain to trample private property rights

    Paul replies: This spectacle has been repeated all over the country, and the trend accelerated after the Supreme Court’s Kelo decision. Here in New Jersey, oceanside homes have been declared ‘blighted’ by towns because a developer wants to put up seaside McMansions.

  3. Louie Frias Says: January 19th, 2009 at 1:06 pm

    Homeowners should ask themselves if an attorney is actually working on their case and since its illegal for any attorney to guarantee the outcome of any case, how is it that everyone throws the word guarantee around? (Most likely NOT being said by attorneys, rather those who haven’t a clue of what they’re doing.) More likely they’re NOT involved with an attorney and they use that word to falsely assure the homeowner that their hard earned money will be returned. TIP: Attorneys do not have “money back guarantees.”

    Why not deal with experienced professionals from the very start? An expert will know if the consumer even has a shot at success. Experienced mortgage bankers with underwriting backgrounds are the only way upfront, that you can ever know if your loan will be approved…the same if true for loan modification. Don’t just believe that some intake interviewer will know this. All that persons job is is to gather data, your check and turn your file in to someone who is supposed to be able to determine your chances…the person you initially speak with should be highly qualified to do this and not raise your hope or delay your answer.

    http://www.FederalHomeLoanMods.com

  4. Eminent Domain Could Help Some Areas of the Country Says: July 13th, 2012 at 7:10 pm

    [...] here to read the article in the Sarasota Herald TribuneClick here to read nire in the subjectClick here to read nire in the subjectBlog TagsForeclosures (5)Real Estate (8) Print ShareBe the first to comment on this blog entry!Leave [...]

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