Cities Want To Use Kelo Eminent Domain Powers To Flip Subprime Houses
The government has always had the power of eminent domain, which is the taking of private property for public purposes. Historically, those public purposes were things like highways and other sorts of infrastructure, but in the infamous Kelo vs. City of New London case the Supreme Court greatly expanded this power by defining as a valid “public purpose” the taking of property for economic development purposes. The Supreme Court, in a majority opinion written by Justice Souter, ruled it legal for a government entity to take private property and give it to another private person/business if the second person/business would use it in a way that would enhance tax revenues.
For instance, if someone wants to build a mall your property, the government could seize your property and give it to a developer because the mall would produce more tax revenue than your farming. Or your living there.
Eminent domain allows a government to forcibly acquire property that is then reused in a way considered good for the public—new housing, roads, shopping centers and the like. Owners of the properties are entitled to compensation, which is usually determined by a court.
But instead of tearing down property, California’s San Bernardino County and two of its largest cities, Ontario and Fontana, want to put eminent domain to a highly unorthodox use to keep people in their homes.
The municipalities, about 45 minutes east of Los Angeles, would acquire underwater mortgages from investors and cut the loan principal to match the current property value. Then, they would resell the reduced mortgages to new investors. …
For a home with an existing $300,000 mortgage that now has a market value of $150,000, Mortgage Resolution Partners might argue the loan is worth only $120,000. If a judge agreed, the program’s private financiers would fund the city’s seizure of the loan, paying the current loan investors that reduced amount. Then, they could offer to help the homeowner refinance into a new $145,000 30-year mortgage backed by the Federal Housing Administration, which has a program allowing borrowers to have as little as 2.25% in equity. That would leave $25,000 in profit, minus the origination costs, to be divided between the city, Mortgage Resolution Partners and its investors.
The obvious problem here is for real estate investors (mortgage lenders and the like) who will be wondering how safe their investments are if the government can come along and, through the eminent domain process, decide for them how much of their investment they’re allowed to keep. That, in turn, will mean higher mortgage rates for borrowers as lenders hedge against this risk by raising the price of credit.
Plus, this will clearly promote irresponsible borrowing on behalf of the public. After all, why not sign up for that mortgage you clearly can’t afford when your friendly county commissioners can come along and, once you’re underwater, make you whole again by sticking it to the banks. And if the government makes a little profit along the way too, that’s just gravy.
This is a bad idea, but the Kelo precedent would seem to make it legal. After all, the government profiting from flipping homes is a public use right?Tags: eminent domain, kelo, subprime mortgages