The county of San Bernardino, California, is considering using eminent domain to acquire home mortgages where the principal owed is greater than the current value of the home. Let’s run some numbers to see how this would work. Suppose a home purchased at the height of the real estate boom for $200,000. Today it might be sold for $100,000. Using eminent domain, a local government could pay the market value for the mortgage and resell it to private investors. The bank immediately receives 100,000 rather than waiting for a costly foreclosure process and trying to sell or rent the property when there is a glut of offerings. Homeowners now have a mortgage payment that is affordable and have no fear of being forced from their home. Is this not a win-win outcome?
The Securities Industry and Financial Markets Association objects emphasizing that it would be an abrogation of contract. But, thousands of underwater homeowners are already doing that, walking away from their homes. The only real losers would be those mortgage holders who benefit from the struggles of homeowners to keep their payments current. For a short time the mortgage holders can pretend that their balance sheets contain the full value of the mortgages they have issued, but it is an illusion that can’t be sustained. We need new ideas to deal with an unprecedented problem.