A Novel Approach to Mortgage Crisis: Take Underwater Homes Through Eminent Domain
Provided by HG.org
Richmond, California has developed a unique solution to the problem with homes that are underwater after the mortgage crisis. It is using the government's authority to take title to property through eminent domain to reduce the underwater mortgage debt in the city.
Richmond, California is one of the hardest hit cities in the housing collapse. The median sale price of housing fell from about $450,000 in January 2006 to $220,000 today. Approximately 51% of mortgages are underwater, and the average underwater homeowner owes 45% more than their home is worth. 16% of homeowners with a mortgage have suffered a foreclosure.
Richmond's method started with offering to purchase 624 mortgages held in private-label securities, offering a price as determined by an independent appraisal. The offer explained that they would attempt to negotiate first, but if they failed they would use their eminent domain powers. At that point, using an interesting twist on eminent domain, rather than seize the actual house itself, the city seizes the mortgage. The mortgage amount is reduced to something closer to current value and then refinanced. That way the homeowner is less likely to default or, at the very least, to sell without having to attempt a short-sale.
The approach has survived several tough legal challenges. Wells Fargo and Deutsche Bank have attempted to have the action shut down even before it properly started, but their attempt was tossed out by a U.S. District Court Judge who said of the novel approach “Isn't this, as we say in the trade, a no-brainer?"
The arguments will now proceed to the two parts of eminent domain law: demonstrating public purpose for the takings and offering fair-value.
Questions have been raised as to whether the government can take something other than property. Interestingly, the very first time the Supreme Court heard a case on eminent domain, in fact, had to do with a state taking an intangible form of property. In the 1848 case of West River Bridge Company v. Dix, the state of Vermont used its eminent domain powers to take a franchise contract. The Court argued that the distinction between property which is “corporeal” (or tangible) and property that is intangible, had “no foundation in reason.” They were “aware of nothing peculiar to a franchise which can class it higher, or render it more sacred, than other property.”
Since then, eminent domain cases have come up in everything from sports franchises to stocks, and every time the fact that the property in question was not a physical thing did not matter for the case.
Unfortunately, the banks argue that this form of eminent domain is unconstitutional, that it does not serve the public purpose, and there is no fair-value offer that would make the plan workable. The banks suggest that eminent domain is not proper because of the nature of the securitized mortgages themselves. Their first, and main, argument, is that the mortgages do not actually exist in Richmond. Since eminent power is only supposed to apply to property within the territorial jurisdiction of the city, this creates a problem.
Of course, as noted, this argument has not gained much traction with the courts. The courts have ruled, thus far, that the property secured by the mortgage is in Richmond, that the contracts that form the basis of the mortgages are formed in Richmond, and that the owners/mortgagors reside in Richmond. As a result, there are enough bases for jurisdiction in Richmond.
The banks also argue that California is trying to usurp the federal power to regulate interstate commerce. The banks also argue that it would violate the Contracts Clause of the Constitution, because the debts of local citizens would be forgiven at the expense of creditors. However, the Supreme Court has consistently argued that eminent domain supersedes the Contracts Clause. Moreover, there is nothing in Richmond's plan that would discriminate against out-of-state creditors versus in-state.
As a result, the remaining challenge is whether this action is truly in the public interest and whether there is sufficient funding. Richmond will argue that preventing blight is a major, legitimate public purpose, and thus far the courts agree. Abandoned homes result in increased crime and significant public costs, in addition to destabilizing neighborhoods. According to the Richmond city manager, the city had to haul 295 tons of trash off of private property, most of it from vacant homes in 2010 alone. And, of course, there are still police and fire services that have had to spend limited resources on vacant homes.
The biggest remaining worry is whether or not the use of eminent domain will have the unintended consequence of harming homebuyers' ability to procure financing in Richmond given the government's ability and policy of seizing underwater mortgages.
While this case is currently limited to Richmond, CA, it has far reaching implications. Should the Richomond approach survive its legal challenges, it will doubtless be the first of many communities to adopt this approach.
Copyright HG.org - Google+
Disclaimer: While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer. For specific technical or legal advice on the information provided and related topics, please contact the author.
Richmond's method started with offering to purchase 624 mortgages held in private-label securities, offering a price as determined by an independent appraisal. The offer explained that they would attempt to negotiate first, but if they failed they would use their eminent domain powers. At that point, using an interesting twist on eminent domain, rather than seize the actual house itself, the city seizes the mortgage. The mortgage amount is reduced to something closer to current value and then refinanced. That way the homeowner is less likely to default or, at the very least, to sell without having to attempt a short-sale.
The approach has survived several tough legal challenges. Wells Fargo and Deutsche Bank have attempted to have the action shut down even before it properly started, but their attempt was tossed out by a U.S. District Court Judge who said of the novel approach “Isn't this, as we say in the trade, a no-brainer?"
The arguments will now proceed to the two parts of eminent domain law: demonstrating public purpose for the takings and offering fair-value.
Questions have been raised as to whether the government can take something other than property. Interestingly, the very first time the Supreme Court heard a case on eminent domain, in fact, had to do with a state taking an intangible form of property. In the 1848 case of West River Bridge Company v. Dix, the state of Vermont used its eminent domain powers to take a franchise contract. The Court argued that the distinction between property which is “corporeal” (or tangible) and property that is intangible, had “no foundation in reason.” They were “aware of nothing peculiar to a franchise which can class it higher, or render it more sacred, than other property.”
Since then, eminent domain cases have come up in everything from sports franchises to stocks, and every time the fact that the property in question was not a physical thing did not matter for the case.
Unfortunately, the banks argue that this form of eminent domain is unconstitutional, that it does not serve the public purpose, and there is no fair-value offer that would make the plan workable. The banks suggest that eminent domain is not proper because of the nature of the securitized mortgages themselves. Their first, and main, argument, is that the mortgages do not actually exist in Richmond. Since eminent power is only supposed to apply to property within the territorial jurisdiction of the city, this creates a problem.
Of course, as noted, this argument has not gained much traction with the courts. The courts have ruled, thus far, that the property secured by the mortgage is in Richmond, that the contracts that form the basis of the mortgages are formed in Richmond, and that the owners/mortgagors reside in Richmond. As a result, there are enough bases for jurisdiction in Richmond.
The banks also argue that California is trying to usurp the federal power to regulate interstate commerce. The banks also argue that it would violate the Contracts Clause of the Constitution, because the debts of local citizens would be forgiven at the expense of creditors. However, the Supreme Court has consistently argued that eminent domain supersedes the Contracts Clause. Moreover, there is nothing in Richmond's plan that would discriminate against out-of-state creditors versus in-state.
As a result, the remaining challenge is whether this action is truly in the public interest and whether there is sufficient funding. Richmond will argue that preventing blight is a major, legitimate public purpose, and thus far the courts agree. Abandoned homes result in increased crime and significant public costs, in addition to destabilizing neighborhoods. According to the Richmond city manager, the city had to haul 295 tons of trash off of private property, most of it from vacant homes in 2010 alone. And, of course, there are still police and fire services that have had to spend limited resources on vacant homes.
The biggest remaining worry is whether or not the use of eminent domain will have the unintended consequence of harming homebuyers' ability to procure financing in Richmond given the government's ability and policy of seizing underwater mortgages.
While this case is currently limited to Richmond, CA, it has far reaching implications. Should the Richomond approach survive its legal challenges, it will doubtless be the first of many communities to adopt this approach.
Copyright HG.org - Google+
Disclaimer: While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer. For specific technical or legal advice on the information provided and related topics, please contact the author.
