Why Robbing Peter to Pay Paul Robs
Us All
By Robert Klein
By Robert Klein
When most Americans hear the words
eminent domain they naturally think of a traditional definition involving
government intervention that ultimately supports the best interest of a
community. Perhaps the county bought a portion of a farm for a major highway or
a blighted house is condemned by a local government for safety purposes or you
are underwater on your mortgage so a third party refinances it. If the third use of eminent domain sounds
questionable to you, that’s because it is.
This concept is currently being debated in the housing industry to allow
for state and municipal governments to exercise eminent domain as a way to
obtain and restructure underwater mortgages.
Some municipalities have already adopted this practice, while others
have taken it under consideration.
The process involves governments
acquiring mortgages from private trusts that have debt greater than the value
of the home, in order to refinance and repackage the mortgages into new
securities for resale to new investors.
This practice is primarily targeted at securitized mortgage loans, due
to the structural challenges in orchestrating write downs.
It goes without saying that the
process is complicated, but what really needs to be articulated are the
consequences associated with excising eminent domain in this manner. The suggested funding source is aimed at federal
programs that lend monies for stabilization purposes or from third party
private investors. In either scenario
the original mortgage investor suffers a loss.
This is antithetical to the traditional use of eminent domain where
private parties are remunerated for the use or loss of an asset.
Worse, this practice will
undoubtedly have a negative effect on future interest rates as lenders will be
forced to calculate the eminent domain factor into mortgage contracts. That is if lenders will even do business in
communities who utilize this practice. This means that future home buyers
ultimately bear the burden of a past foreclosure crisis and the dream of home
ownership becomes even more unattainable.
As the federal government takes one
step forward, easing out of the GSE role, governments around the country take
two steps back when they look to eminent domain to solve their housing
problems. The only individuals likely to
benefit here are third party investors who prey on local governments as a tool
of implementation. This is neither a
fair, nor equitable way to address the problems of the housing crisis.
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